Monday Study – Will California’s New Net Metering Plan Kill Rooftop Solar?
Is NEM 3.0 the End of rooftop solar? Unlikely. Customer Economics Deep Dive
19 January 2022 (Bank of America Global Research)
We provide our latest 'mini-model' on resi solar economics in California premised upon earlier PD: see a path forward
We see trend towards smaller systems, substantial battery integration & dynamic load mgmt as all substantively minimizing NEM
Buys on RUN and NOVA. We breakdown in detail impacts of a shift in resi solar rates.
Load mgmt will be novel piece to puzzle.
CA Net Metering: We present a simplified customer model
We think that CA NEM 3.0 remains the near term wild card for resi solar investors; oral arguments were cancelled last week while the latest published CPUC agenda for Jan 27th now shows that the NEM 3.0 Proposal Decision has been removed (see key takes).
As investors try to make sense of these moving parts, we present for the first time, a detailed, yet simplified customer economic model that attempts to demystify the array of inbound questions we've fielded over the last month. Specifically, we quantify the impact of fixed charges and lower export rates against realistic cost assumptions for rooftop solar and solar + storage in the lens of simple payback on a cash sale - directly mirroring the CPUC but in a more "real world" lens. With our model completely dynamic in nature - outputs below are just one scenario with the full model available upon request.
Glide path works: Fixed charge $3/kW or less initially
More so than anything else, the debate around NEM 3.0 has centered on the inclusion of a fixed charge, proposed at $8/KW-mo based on system size or equivalent to ~$670/yr vs a 7KW average system. Targeting a 10 year payback, the PD includes a "Market Transition Credit" or more simply a net fixed charge that balances payback targets with dynamic cost inputs. The problem, however, is that by any account, the costs used for solar and storage look aggressively low within the PD - so much so that even the NRDC, a strong utility side advocate, has suggested this needs revisiting in recent written commentary. All that said, we calculate that under a realistic scenario of $3.9/W solar (v CPUC at $2.34) and $1000/KW-hr for fully installed paired storage (v CPUC at ~$700/KW-hr), 10 year payback can be achieved If the Transition Credit is >$5/KW-mo initially implying a net fixed charge of ~$3/KW-mo. The output, we think there are some tweaks needed, but a better glide path can achieve a 10 yr payback.
…but NEM 3.0 is more so an optimization game
Incorporating our more realistic cost inputs we suggest payback of 13 years for solar and 12 years for solar + storage before adjusting glide path. As a critical note, this includes an assumption of optimized load management - without it, solar only payback rises to 16 years. We emphasize that NEM 3.0 presents an optimization issue on smaller sizes & shifting load to align with solar output midday. We estimate payback can be cut in half by simply under-sizing solar by -20% - expect smaller systems in CA as a major consequence alongside ramp in storage. Further, we highlight limited marginal impact on payback as supportive of larger battery installs. Finally, load management to clip evenings & align usage during peak solar presents a material uplift - we estimate 30% higher savings over 25 yrs for solar only installs. Expect solar co's to take a huge focus on these dynamic controls on behalf of customers.
Is NEM 3.0 the death of CA rooftop solar? Unlikely.
Despite political, media and investor sentiment suggest it may be, our hard look at the economics says otherwise. Glide path and optimization potential leaves clear routes to maintain a compelling payback. We stress that co's have already calibrated their guidance to accommodate NEM 3.0 outcomes and see shares as likely approaching a low point on this debate in the near-term. Maintain Buy on RUN and NOVA.
Customer Economics in a NEM 3.0 California
With the confluence of debates surrounding NEM 3.0, we present for the first time a model aligned with the Proposed Decision released by the CPUC including detailed analysis of the puts and takes on customer economics. As a disclaimer, we acknowledge that this analysis is in and of itself, illustrative in nature, and intended as a simplification of highly complex and multivariate modeling done to determine payback periods within the Proposed Decision released on Dec 13th. But given broad based industry pushback on some of the base level assumptions used to calculate payback - most notably solar capex indicated at $2.34/W fully installed - we suggest this analysis as a sense check on what the PD really means for solar installs in CA going forward, but extrapolated to "real world" economics. Further, we use this modeling as a means to determine optimized installations under a NEM 3.0 world.
We summarize 5 key takeaways that are well supported by our analysis:
Solar + storage presents a more compelling economic incentive vs solar only, even given current battery costs. We highlight prospective catalyst from permissible system oversizing and deflationary pressures on battery costs in the coming years as being incremental for paired storage economics.
Under-sizing solar only systems presents a material benefit from a payback lens: Net of storage, overall weak export rates and fixed grid charges clearly incentivize minimizing overall system size for solar only installs. Lower system size = lower fixed costs while limited midday export incentive means that solar generation should ideally match closely to midday consumption. We calculate that under-sizing systems by 20% as compared to daily load could cut payback time in half vs current upfront costs. Expect under-sizing could be a very real trend in CA going forward; the question is how much scale is lost. On balance the new 'optimal' is likely well below the more massive historic 10kW systems.
For solar only installs, load management is critical: By our analysis, managing residential load to clip evening peak use in favor of higher midday consumption presents a material uplift on economics. We emphasize 16 year payback under a scenario where load is not managed in this manner vs the 13 years without. This suggest relative economics on CA resi solar will increasingly be as much of a software function as they are improving hardware. For solar + storage, we see load shifting as less incremental to economics. Expect resi installers and component providers to increasingly lean into this theme. Dynamic load control midday is a real and new dynamic to watch; will customers 'sign on' remains an open question.
For solar + storage, TOU export rates are trivial - batteries are now optimized to avoid peak rates. It's worth noting that under the example rate structure presented by the CPUC, export rates are, at their best, half of the retail import rate. By consequence, the incentive on storage is firmly geared towards self-consumption which still presents a partial benefit to CAISO by reducing peak evening load. We see relatively balanced puts and takes by adjusting battery sizing from a payback lens though with enhanced resiliency coming at limited marginal cost. Expect larger battery attachment could be a theme in CA, albeit not dramatically so if aligned with load mgmt (10KWhs could help plenty for instance). NEM 3.0 is not a death sentence to CA Solar: Glide path and better system optimization both present real opportunities to target a <10 year payback. Higher utility rate inflation keeps an upward moving baseline for CA solar while we expect labor cost compression under a NEM 3.0 world - given, its dealings with third party dealers, NOVA in particular has suggested this as an output. While we believe that tweaks are necessary to align the outputs within the PD to real world economics, we see a payback in all key scenarios considered with clear routes to optimize.
What role SHOULD rooftop solar play? … Designing our 'mock' rooftop system…Load Management is no longer a 'nice to have'…What about paired storage? Oh, yes, this is the 'new thing'…So what does all this mean for payback?...So where's the point of compromise?
Is NEM 3.0 the death of rooftop solar in CA? Hardly
So is NEM 3.0 the death of rooftop solar in CA? Despite political, media and investor sentiment that may suggest it is, our hard look at the economics seems to suggest otherwise. We suggest that the balance between fixed charges, reasonable cost assumptions and deflationary expectations on storage in particular do in fact leave a glide path for the CPUC to target a still competitive 10 year payback without a more extensive overhaul entailed in an alternate decision. All that said, we think there are still further ways to make the economics more attractive beyond any adjustments to fixed charges by the CPUC.
NEM 3.0 is now an optimization game:
As mentioned earlier we have further considered optimization parameters particularly when it comes to relative sizing of solar and paired storage. For solar only installs, we see real economic incentive to go smaller - specifically to undersize daily output vs daily load. We highlight what we calculate as a 7 year payback (assuming fixed charge of ~$6/kW) at 80% system sizing at $3.75-4/W vs 13-14 years at 1:1 sizing.
Logically, this should not surprise - the midday export rate provides little incentive to solar only installations and is far more than offset by punitive fixed charges associated with a larger system. We expect a real trend in California could be to undersize systems going forward.
For storage the results are more nuanced representing more balanced puts and takes as compared to solar only. To be clear, this does not mean that there's no benefit to adjusting sizing, but rather suggests that the trade in upfront cost looks largely balanced by capacities to further modulate self-consumption. That said, we emphasize real intangible benefits from larger a larger battery packs during an outage as presumably accompanying limited increase in payback. As a consequence we expect that larger battery installs may be another trend to watch as the marginal cost is minimal relative to the upsized resiliency benefit.
The long and short is that NEM 3.0 likely needs some tweaking to appease both parties, though significant overhaul may not be necessary in our view. We see opportunity for a glide path that meets the targeted 10 year payback even with higher cost assumptions albeit also assuming load management as an offset, particularly for solar only installs. We emphasize that rooftop system sizing and load management are material considerations for solar only installs - we perceive that optimizing both leaves sub 10 year paybacks firmly on the table even with full fixed charges as proposed. On 1:1 sizing, paired storage does present a stronger economic proposition while we see incentives for larger battery capacities alongside cost deflation at limited marginal cost.
We look for still to be rescheduled oral arguments as the next data point to determine the latest sentiment on NEM 3.0 from stakeholders while timing on a final decision now looks up in the air. On balance, the pushback in timing, while not at all unexpected based on our recent investor surveys, presents yet another volatile data point for resi solar names into year-end earnings announcements - watch this space… click here for more