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California’s New Solar Rules Aren’t a Disaster. They’re Going According to Plan.
Earnings calls by rooftop solar companies reveal that the battery business is booming.
May 17, 2023
<p>Heatmap Illustration/Getty Images</p>
The solar industry has been sounding the alarm about California’s new rooftop solar billing rules basically since the day they were first proposed in late 2021. The market for residential solar panels in the state — the country’s largest — could contract by 40 percent in 2024, the industry warned, if rules governing the price of energy generated by those panels were changed. A coalition of environmental groups even sued the state earlier this month to stop the changes.
But now that the new billing rules are in effect, it’s becoming clear they may actually open up new opportunities for the solar industry, shifting its business away from trying to throw up as many panels on as many rooftops as possible to selling more complex and dynamic solar-and-storage systems that fluidly work with the state’s whole grid. While the industry at times has marketed residential solar as a way to escape the grid, the new rules recognize that every panel affects everyone else who uses electricity in California, and that for decarbonization to work, more than solar panels are needed.
That being said, the logic of the industry and the environmental groups is pretty straightforward. The old rules, which still apply to existing solar systems as well as those that applied for interconnection before the April 15 deadline, were deliberately generous to encourage mass adoption. The new system has changed how utilities pay for electricity that rooftop solar users sell back to the grid. Instead of paying (California’s quite high) retail price of electricity, the payments are now based on a formula that’s supposed to reflect how much electricity generation the utilities can avoid by buying up rooftop solar supply. While overall payments would be cut by around three quarters for many of those who install rooftop solar after the deadline, the value of energy that could be sold back to the grid when it’s most needed — like on a hot summer evening — could go up.
These rules are then naturally meant to encourage the installation of batteries along with solar panels. If Californians can store the energy they generate, they can functionally shift some of the sunshine from the middle of the day, when demand is low, to the end of it, when demand spikes.
“Battery storage is now a required component for rooftop solar economics in [California],” Morgan Stanley analysts wrote in note to clients.
The industry is putting a brave face on the changes, noting in some cases that they were able to sell a bunch of systems before the April 15 changes as customers presumably raced to lock in the old rules. But now that the new rules are in effect, companies are more than happy to include a battery with a residential solar system. And Californians at least seem to be taking them up on the offer.
“While still early, we are seeing signs of a meaningful acceleration in battery storage adoption in California. This is not too surprising, in our view, given the need for battery storage to arbitrage the varying power prices and export rate differentials under NEM 3.0,” the Morgan Stanley analysts wrote.
Peter Faricy, the chief executive of SunPower, one of the country's largest residential solar companies, told analysts on a May 3 earnings call that business notably picked up in anticipation of the April 15 changes. He also noted how the rules have changed the game for batteries: “For customers in California, I think [batteries will] almost be a standard part of the package now. It just makes a lot of sense to include a battery in the system." Faricy also said about half of SunPower’s direct California customers have bought batteries in recent weeks, up from about 20 percent earlier this year.
For another solar giant, Sunrun, California sales jumped 80 percent in the first quarter in anticipation of the new rules going into effect in April. The company also said it launched a new program called Shift, which allows its customers to store solar power generated in the middle of the day for use during peak cost hours when utility rates are higher. “We are seeing over 85 percent of customers select Shift or battery backup since launch,” the company’s chief revenue officer Paul Dickson said in its May earnings call.
William Berger, chief executive of Sunnova, another big solar company, told analysts in late April there was “a fairly steep drop” following the changes on April 15, but that the portion of new customers getting batteries was “something like north of 60, 70 percent.”
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“So I know some others have talked about, hey, as NEM 3.0 goes, it's going to be great for storage, equipment sales, and, obviously, our service,” Berger said. “I wouldn't extrapolate too much on this, but very early days shows that that's proving itself out very quickly. So we do expect to see a very high attachment rate in California.”
In other words, despite the grousing of the industry, NEM 3.0 may very well be working as it’s intended to.
It’s all part of California’s overall shift in how it thinks about its electricity generation, moving beyond simply deploying as much renewable energy as possible to crafting a renewable-heavy system that actually keeps the lights on 24 hours a day, 365 days a year and serves everyone who needs electricity, not just those who have the financial wherewithal or hobbyist interest to install solar panels. (The old net metering system, the California Public Utilities Commission said, led to $67 to $128 in higher utility costs for low-income households.)
While California is by no means decarbonized — about a third of its electricity comes from renewables, less than what it gets from natural gas — it is the state that has most aggressively attempted to transform how it powers itself, and could thus be a model for what a more mature energy transition looks like in the United States.
Precisely because California has so much solar already installed, the solution’s predictable intermittency issues are an increasing challenge for the grid as a whole. With almost 25 gigawatts of solar installed, the so-called “duck curve” — the graphical representation of the mismatch between solar generation’s daytime peak with demand later in the early evening — has become a “canyon curve,” with net demand crashing quickly sometimes to zero and then rising again at the end of the day.
This means that California needs to figure out how to make its non-carbon generation more flexible, through some combination of storage, demand management, and flexible non-carbon generation like hydrogen.
The California Public Utilities Commission was very explicit about this when they laid out the rationale for the rule changes. “By modernizing NEM, California can incentivize distributed storage and promote electrification, which will provide more value to the electric grid and help California meet its ambitious climate goals even faster,” the Commission said.
And while that may not help solar companies sell as many panels as they like, it sure will help their battery business.
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Politics
The Supreme Court Is Living Rent-Free in the EPA’s Head
A desire to please the Court may have rendered the EPA’s new power plant rule a little too ineffectual.
May 16, 2023
<p>Heatmap Illustration/Getty Images</p>
If nothing else, give the Environmental Protection Agency credit for this: They seem to understand the assignment.
Last year, the Supreme Court struck down the Clean Power Plan, President Barack Obama’s ambitious attempt to restrict carbon pollution from power plants. That proposal never carried the force of law, and it had been held in suspended animation by the Court — and later the Trump administration — since 2016. But after President Joe Biden took office, Chief Justice John Roberts and the Court’s conservative majority revived it seemingly entirely for the sake of deeming it illegal.
The proposal went far beyond what was allowed by Congress, Roberts ruled. Normally, an EPA standard would require that power plants or factories install some kind of equipment on their smoke stacks to meet a pollution cap. “By contrast, and by design,” the Obama proposal could only be satisfied by burning less coal, the chief justice wrote. It required “generation shifting,” forcing states to get more of their power from renewable, nuclear, or natural-gas plants.
That overreached the EPA’s authority under the Clean Air Act, Roberts declared. If the EPA wanted to regulate greenhouse gases, then it needed to treat them like a normal air pollutant — and it needed to act like a normal technocratic agency. Above all, it had to keep its regulations to those that could be accomplished “inside the fenceline” of each power plant.
So last week, when the Biden administration finally unveiled its own draft attempt at regulating carbon pollution from power plants, it knew it was playing on the Court’s, well, court. And it behaved accordingly. The best thing you can say about the EPA’s new power-plant proposal — which will be one of the Biden era’s most important climate regulations — is that it was meticulously, painstakingly tailored to the Court’s demands. If Chief Justice Roberts asked for a normal rule, then the EPA has delivered one so awkwardly, self-consciously normal that it seems a little like a narc. The worst thing about the new rule is that this desire to please the Court may have rendered the rule a little too ineffectual.
If America wants to fight climate change, it must clean up its power plants. Generating abundant, cheap, zero-carbon electricity is the key to the country’s decarbonization strategy.
“If you clean up the power sector, it enables you to clean up other sectors of the economy too, through electrification,” Leah Stokes, an environmental-science professor at the University of California, Santa Barbara, told me. “Electric cars, heat pumps, induction stoves — all these machines can be fueled with clean power.”
Biden’s climate law, the Inflation Reduction Act, will slash emissions from the sector over the next decade, according to federal and independent modeling efforts. But it won’t get the sector all the way there. That’s where the new proposal is supposed to step in.
As per the Supreme Court’s request, the proposal details how every kind of power plant — even those that burn coal or natural gas — can meet their climate requirements for decades to come. It mandates a buildout of carbon capture and storage infrastructure, or CCS, for most coal and some natural-gas plants that plan to stay open long-term.
“The EPA rule makes sure everyone is on the same level-playing field. If the Inflation Reduction Act is enough to incentivize CCS in some places, the EPA is gonna make sure everyone is gonna do it,” Nick Bryner, a law professor at Louisiana State University, told me. “I think it’s designed very, very well to work in tandem with the IRA tax credits.”
If the IRA is the regulatory-friendly angel on its shoulder, then the Supreme Court’s decision last year — called West Virginia v. EPA — is the devil. The EPA’s desire to stay on the Court’s good side is even visible in the proposal’s name. Previous administrations have tried to give their power-plant rules a memorable name — Obama had the Clean Power Plan, of course, and the Trump administration christened its effort the “Affordable Clean Energy Rule,” or ACE. The Biden administration, by comparison, named the new proposal:
New Source Performance Standards for Greenhouse Gas Emissions from New, Modified, and Reconstructed Fossil Fuel-Fired Electric Generating Units; Emission Guidelines for Greenhouse Gas Emissions from Existing Fossil Fuel-Fired Electric Generating Units; and Repeal of the Affordable Clean Energy Rule
That’s the NSPSGHGNMRFFFEGU; EGGGEEFFFGU; RACE Rule for short.
I would say that the agency couldn’t have given it a more technocratic name if it tried, except that it obviously tried very hard. “Traditional approach, traditional name,” the EPA’s press office chirped when the Politico reporter Alex Guillén first noted the name. Just what the Supreme Court asked for!, they all but added. The agency is so desperate to look obedient and demure that even its social-media team has been briefed on current federal doctrine.
At the same time, the rule does “a tremendous amount to make the rule as flexible as possible given the constraints they’re working with in West Virginia v. EPA,” Bryner said. Under the proposal, some natural-gas plants can choose between installing carbon-capture equipment or burning low-carbon hydrogen.
But the rules may have erred on the side of too much flexibility, says Charles Harper, a policy analyst at Evergreen, a climate advocacy group and think tank. Evergreen and other environmental groups are worried that the rules might be too generous to fossil fuel companies. They’re focusing their criticism on two elements of the draft: its handling of natural-gas plants and coal retirements.
First, the EPA rule as proposed would not apply to an overwhelming majority of the country’s natural-gas plants.
A large share of carbon emissions from natural-gas plants come from so-called “baseload” plants that generate many hundreds of megawatts of electricity at all hours of the day. The rule focuses on these facilities, and it requires them either to install CCS equipment or to burn hydrogen fuel.
But the rule is not nearly so strict about small or medium-sized natural-gas plants. Natural-gas plants that generate less than 300 megawatts of electricity — or that run less than half the time — are essentially exempt from the rule. This excludes 77% of the country’s natural-gas plants from the new EPA proposal, requiring them to make no changes through 2040.
It is unclear what share of carbon emissions these natural-gas plants represent. The EPA did not provide an estimate of their carbon emissions before the deadline for this story.
As a whole, natural-gas power plants emit 43% of the U.S. electricity sector’s carbon pollution, despite producing nearly twice as much power as coal.
Environmental groups say the proposal’s coal problem is simpler to fix. In the draft, the EPA puts coal-fired power plants in different categories depending on when they’re slated to retire. Plants that have no retirement date — or that will remain open after 2040 — must install equipment to capture 90% of their emissions by the year 2030. Plants shutting down after 2035 must make a cheaper set of changes. And plants due to close by 2032 don’t have to make any changes at all, so long as they don’t increase their emissions over the next decade.
Those deadlines are too long from now, and the EPA should bring them forward in time when it issues a final version of the rule, Harper said. “2040 is pretty far out and would entail a lot of unabated emissions hitting the climate and human health,” he told me.
The EPA still has time to edit this proposal; it will hear public comment over the next few months and probably issue a final version of the rule next year. With the procedural issues resolved, the Supreme Court’s ability to object to that rule is limited to whether carbon capture is feasible and affordable enough to be used under the Clean Air Act.
If there is a bright spot for climate advocates in the new rule, it’s that the Biden administration — and last year’s Democratic majority in Congress — seem to have anticipated that move.
As the House was voting on the IRA last year, Representative Frank Pallone, the chair of the House Energy and Commerce Committee, put a statement in the congressional record saying that the EPA should take the IRA’s generous tax credits into account when proposing power-plant rules. The subsidies should be considered when the agency is deciding whether CCS is feasible and affordable, he said. The EPA cites Pallone’s statement in its new draft.
But ultimately it is Chief Justice John Roberts who will get to decide. Almost a decade ago, a set of conservative states sued the EPA to block it from requiring CCS. That issue has since been held in its own state of suspended animation. It may soon breathe again.
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