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Solar federal tax credit & NEM 3.0 – Updates, Timeline and Impact

Published Sep. 08, 2022

Big news for people considering installing a solar energy system on their homes, for people who recently installed solar on their residential roof or land, and even for people who have older systems and are considering adding energy storage: The U.S. solar tax credit has been increased and extended under the recently signed Inflation Reduction Act. Meanwhile, work to adjust the program known as “net metering” in California continues.

Let us update you on both programs, and what they mean to you.

U.S. Solar Investment Tax Credit Extended

The federal Investment Tax Credit (ITC) has long been considered a major motivation for homeowners and businesses to go solar. The ITC pays back a large portion of the cost of installing solar, in the form of a tax credit that reduces your tax payments.

In 2022, the percentage of your solar energy system paid for by the U.S. government was scheduled to be 26%, down from the original figure of 30%. That percentage was scheduled to drop to 22% next year, and to go away completely the year after that, for residential solar systems. In other words, the ITC was on its way out.

But the Inflation Reduction Act has strengthened and extended the ITC, so American taxpayers can continue to benefit from this generous incentive for years to come.

Changes to the ITC under the Inflation Reduction Act include:

  1. The amount of the ITC has been increased, putting it back at 30% immediately (for homeowners and business owners).
  2. For homeowners, the ITC will remain at 30% for 10 years, through the end of 2032. After that it will drop to 26% for a year, 22% the year after, and 0% in 2035.
  3. The 30% tax credit applies retroactively to systems installed in all of 2022. So, if you had solar installed earlier this year and paid cash or financed it with a loan, your financials just got even better. Instead of getting a 26% tax credit when you file your tax return, you’ll get 30%. That lowers your solar investment and means your system will pay itself off even faster than originally predicted.
  4. The 30% tax credit also applies to energy storage systems. You can have batteries installed in conjunction with a new solar system, added to an existing solar system, or even installed on a “standalone” basis. If you’ve been considering energy storage to provide power outage protection or to further lower your energy bills, the federal government will now foot 30% of the bill.

Contact Citadel Roofing & Solar today for a free estimate of how much you could save with the U.S. Investment Tax Credit.

California Net Metering Update

While the ITC is perhaps the most important solar incentive, net metering is a close second.

Just over a year ago, we posted about the potential changes coming to California’s net metering program. The state’s Public Utilities Commission (PUC) recently delayed its final decision about “NEM 3.0”. Here’s the latest on this controversial topic and why it matters to you.

What is Net Metering?

Net metering is an approach to crediting homeowners for solar electricity they produce but don’t use, instead sending it into the utility’s grid for use by others.

Under net metering, the utilities “pay” homeowners for that electricity in the form of credits that are applied to your bill.

In essence, this allows you, the solar owner, to get the benefit of that extra solar energy. Without net metering, you would simply lose that electricity to the grid and the utility would get all the benefits.

Net metering has been a huge factor in making solar economical and attractive to California homeowners (and businesses).

What is NEM 3.0?

NEM 2.0 is today’s version of net metering. NEM 3.0 refers to the new version that is coming.

How Does NEM 3.0 Differ from NEM 2.0?

First, we need to explain what today’s NEM 2.0 offers homeowners who install solar energy systems on their properties.

California’s current net energy metering program has been in place since 2016. It applies to customers of California’s big investor-owned utilities: PG&E, SDG&E, and Southern California Edison. It entails the following.

  1. Solar owners including homeowners earn credits for solar they produce but don’t use. The credit nearly equals the “retail” price you pay the utility when you buy electricity from them. Credits carry over month-to-month for a year. Then, you lose any remaining credits and a new tally starts.
  2. The credits are 2-3 cents per kilowatt-hour (kWh) lower than the utility’s retail rate. At least the difference—the money you don’t get back—goes to a good cause, helping to fund utility low-income assistance and energy-efficiency programs.
  3. Solar owners are put on the utility’s time-of-use (TOU) rates, meaning the price you pay for electricity fluctuates in the course of the day. Rates are highest during the late afternoon and early evening when overall electricity usage is highest. Rates are lowest late at night and in the early morning. TOU rates can have a positive effect on the solar credits you earn. Solar you send into the grid during those higher-use periods is more valuable to the utility, so you get a higher credit for that.
  4. You receive net metering benefits for 20 years from the day your solar is “interconnected” to the utility grid and turned on.
  5. Depending on which utility you have, you’ll pay a one-time interconnection fee of at least $150. For example, the Sacramento Municipal Utility District (SMUD) charges residential customers interconnection fees of $475 for systems under 10 kilowatts and $900 for systems larger than 10 kilowatts. (Citadel pays this fee on your behalf as part of our service.)

What Changes with NEM 3.0?

We don’t know, because the changes aren’t yet final. However, the PUC has been collecting input from interested parties and that input gives us some idea what to expect.iStock-849487006

On one side, you have the utilities who want to decrease net metering benefits. On the other, you have environmental groups and consumer advocates who want solar to be as cost-effective as possible so that as many people as possible can install systems and lower their electric bills while helping the planet.

The ideas with the most traction are:

  1. Net metering credits would be significantly lower, potentially as low as one-quarter of today’s level. Utilities have proposed paying solar owners the utility’s “avoided cost”—meaning the cost of the electricity they avoid buying because they can use your solar instead. In other words, your extra solar would only be valued at the wholesale rate at which your utility buys power from other sources. (Some proposals have suggested the credit be slightly higher than wholesale.)
  2. Your credits would no longer carry over month-to-month for a year. Any credits you earn must be used the following month or you would lose them. This greatly reduces your ability to use credits you earned during peak solar production season later in the year, during lower-production seasons.
  3. New charges would be added to your monthly electric bills if you own solar. For example, according to this San Diego Union-Tribune article, SDG&E customers could be hit with a $24/month “distributed generation successor tariff” and a “residential grid benefits charge” of $66/month for a homeowner with a typically sized, 6-kilowatt (kW) solar energy system. That’s $90 in new monthly charges!
    Another estimate says PG&E customers who own solar would see on average a $54/month new charge for a 5-kW system.
  4. Net metering under NEM 3.0 would only be available for 10 years, instead of 20 as it is today.

What is the Timeline for NEM 3.0?

Typical of government initiatives, the timeline has slipped a few times. But in this case, the delay was a good thing.

When we posted about the status of NEM 3.0 in June 2021, the PUC’s decision was expected by the end of September that year.

In February 2022, the PUC said it was delaying its decision to allow time to collect more input. This was largely the result of the outcry from the public, environmental organizations, consumer advocates and the solar industry.

In May 2022, the PUC re-started its public process, stating the earliest it would issue a draft decision was July, and setting August 22 as the proceeding’s end date.iStock-174803226

On August 25, the PUC extended that end date a year. Despite that, a revised decision is still expected on or before September 29 of this year, according to the California Solar & Storage Association (CALSSA). The solar advocacy association notes, however, that the decision could come sooner or later than that.

Citadel will continue to keep you informed via our blog, about when NEM 3.0 is approved, what it looks like, and when it takes effect.

How Does NEM 3.0 Impact Homeowners?

While the details aren’t yet known, based on the above list of changes under consideration, the overall picture for solar energy in California will be worse than it is today. If net metering benefits go down, the cost of going solar goes up. And the financial benefits created by the federal government’s ITC extension will be offset to some extent by reduced net metering benefits in California.

We expect solar economics will still be strong—the cost of solar panels has gone down considerably in the past 10 years. And solar does pay for itself over time. But solar economics won’t be as strong as they are today.

It is generally expected that existing NEM 2.0 benefits will be grandfathered in, meaning people who already have solar energy systems will continue to get those terms, versus being subject to the new terms. But we don’t know how long those greater benefits will be available.

What’s Next?

Until a decision is made by the PUC, clean energy advocates continue to make our voices known. For example, CALSSA organized two weeks of protests against a watered-down net metering program at the big utilities’ headquarters in late July.

Meanwhile, California homeowners continue to install solar and storage systems as they strive for greater energy independence and a better quality of life.

Even though we don’t know what form NEM 3.0 will take, we do know this: Solar is here to stay.

We’ll be sure to keep you posted on the status of NEM 3.0 via this blog.

Meanwhile, learn more here: