Matthew is a correspondent at Heatmap. Previously he was an economics reporter at Grid, where he covered macroeconomics and energy, and a business reporter at BuzzFeed News, where he covered finance. He has written for The New York Times, the Guardian, Barron's, and New York Magazine. Read MoreRead More
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.
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.