Solar electricity production in California falls into two categories – solar thermal, using the concentrated heat of sunlight to heat a fluid to make steam to show a conventional turbine and generator making electricity; and solar photovoltaic (PV), the direct conversion of sunlight into electricity.

California’s newly proposed net energy metering tariffs (NEM 3.0) would severely reduce residential solar’s value proposition, in keeping with Wood Mackenzie’s latest forecast scenario. The evaluation shows that the California residential market could be cut in half by 2024.

The ultimate changes to the state’s net energy metering tariffs (NEM 3.0) are very much in flux – an alternate Proposed Decision (PD) could possibly be recommend, and implementation timelines remain uncertain. But the ultimate regulations may have major implications for the US distributed solar industry.

Bryan White, research analyst and co-author of the report, said: “Under the terms of the newest PD, NEM 3.0 rates would greater than double solar project payback periods. Each the brand new monthly fixed charges and the lower export rates will reduce economic attractiveness.

“Our evaluation for the 2 largest utilities – Pacific Gas & Electric (PG&E) and Southern California Edison (SCE) – reveals payback periods for typical residential solar projects built this yr will increase from five to 6 years under current net metering to 14-15 years, depending on the utility.

“For each utilities, the payback periods under NEM 3.0 go way beyond the 10-year threshold. Beyond this threshold, customers are less inclined to take a position in solar projects and installers are less motivated to sell them.”

White added that the present PD would end in greater than 2.4 GWdc of demand destruction in California’s residential solar market through 2026.

This represents a 36% reduction in comparison with Wood Mackenzie’s forecast within the US Solar Market Insight Q4 2021 report, which had already taken modest impacts from NEM 3.0 into consideration. Ultimately, the residential market shrinks to half its current size by 2024.

White said: “The provisions of the PD are more drastic than the industry anticipated. Less attractive project economics will certainly discourage some homeowners from investing in solar.

“Energy storage and financial products offer modest hedges against NEM 3.0 but won’t yield sufficiently attractive economics to take care of residential solar market growth in California. Installers will most certainly have to sell much smaller solar projects to attain savings for purchasers. This may put immense pressure on project margins as installers collect less revenue to cover fixed costs.”

Near-term deployments will depend partly on when the California Public Utilities Commission involves a final decision and implements NEM 3.0. Wood Mackenzie currently assumes that the PD, if approved, will start impacting installations in July or August of this yr.

In consequence, installers will spend the primary half of the yr selling as many residential solar systems as possible, rushing to submit interconnection applications under NEM 2.0 rates. This may result in record quarters of capability additions for the California market before activity drops within the second half of the yr.

White said: “Next yr’s deployments will likely be hit by the stepdown of the investment tax credit (ITC). Wood Mackenzie expects modest demand pull-in at the top of 2023 before the credit fully expires for customer-owned systems and falls to 10% for TPO systems in 2024 (under current law).

“Despite this, installed capability for your complete state will decline by 42% year-on-year in 2023 – the primary full yr of NEM 3.0. This will likely be driven by a 53% decline in installed capability in investor-owned utility territories impacted by the brand new program.”

Market decline will proceed in 2024, with annual residential installed capability in 2024 expected to fall to simply over 700 MWdc – roughly half of 2021 volumes, and the bottom annual output for California since 2014. The market will return to single digit growth in 2025 and 2026 because it begins a modest recovery. Solar and storage system price declines will provide some relief to industry players after a couple of tough years.

White added: “Ultimately, the NEM 3.0 PD and the ITC stepdown will create a difficult business environment within the near- to mid-term. Many solar corporations won’t survive this double whammy of policy headwinds, leading to significant consolidation in a contracting California residential solar market.”

Comment by Wood Mackenzie, a Verisk business, based on its latest forecast scenario for the California residential market.


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