Net Energy Metering (NEM) policies have played a central role in making rooftop solar affordable and attractive to homeowners across the United States. For many years, California’s NEM programs enabled solar customers to export excess electricity generated by their solar panels back to the grid and receive credits at the full retail price of electricity. These credits were used to offset their utility bills when solar production was lower than consumption.
In April 2023, California adopted a new version of this policy, called NEM 3.0. This updated program has major implications for solar economics, payback periods, system design strategies, and the broader rooftop solar market across the state. Understanding the changes under NEM 3.0 is vital for anyone planning a solar installation or trying to evaluate the financial return of an existing or future solar system in California.
What Is NEM 3.0?
NEM 3.0 stands for Net Energy Metering 3.0, a revised utility billing structure approved by the California Public Utilities Commission (CPUC) and implemented for new solar customers after April 15, 2023. Unlike previous policies (NEM 1.0 and NEM 2.0), which credited solar homeowners at or near full retail rates for the excess power they exported to the grid, NEM 3.0 shifts to a net billing model that uses what is known as avoided cost rates. Under this model, utilities credit solar exports at rates that reflect the actual wholesale cost they avoid by using solar energy, not the full retail value that consumers pay for electricity. This results in significantly lower compensation for exported energy.
How NEM 3.0 Works
Under NEM 3.0, solar owners are compensated for excess electricity sent back to the grid based on avoided cost rates that vary with the time of day, day of the week, and utility demand conditions. This pricing structure assigns different values to solar exports depending on when the energy is exported. Compensation is typically higher during peak demand periods and lower during other times, reflecting the actual value to the grid rather than retail utility prices.
The formula used under NEM 3.0 is more complex than a simple 1-to-1 retail credit system. In fact, there may be hundreds of potential export rates throughout the year. With this approach, homeowner credits may average about 25 percent of typical retail electricity rates, which is a significant drop compared to previous net metering structures.
Key Differences Between NEM 2.0 and NEM 3.0
Reduced Export Credits
Under NEM 2.0, solar customers received credits for excess electricity at the same retail rate they were charged for energy from the grid. This effectively allowed most solar homeowners to “bank” surplus solar production and use it later without financial loss.
NEM 3.0 changes this by compensating excess solar energy at much lower avoided cost rates. Homeowners installing solar after April 15, 2023 generally see roughly a 75 percent reduction in export value compared to NEM 2.0.
Instantaneous Netting
NEM 3.0 also uses interval netting where utilities measure solar production and consumption on a short interval basis (often every 15 minutes), rather than using annual or monthly netting. This can result in a larger portion of solar output being classified as exported energy at lower credit rates.
Time-of-Use Emphasis
NEM 3.0 further emphasizes time-of-use pricing, where solar generation and export values differ by hour of the day. Producing and exporting power during high-demand peak periods can yield better credits than exporting during low demand.
Grandfathering of Older Systems
Systems that were installed and interconnected under NEM 1.0 or NEM 2.0 before the cut-off date will generally remain under their original net metering terms for a 20-year grandfather period. This provides financial certainty for existing solar owners and a strong incentive for homeowners to complete interconnection before the deadline.
How NEM 3.0 Affects California Solar Homeowners
Lower Solar Savings
One of the most noticeable impacts of NEM 3.0 is the reduction in savings from solar exports. With export credits reduced to a fraction of retail electricity prices, solar homeowners will generally see lower annual utility bill savings compared to under the older NEM 2.0 structure. Over the lifetime of a typical solar system, this can reduce total savings by roughly 60 percent if a system is installed without energy storage.
Longer Payback Periods
Because export compensation is lower, the time it takes for a homeowner’s solar investment to pay itself back may increase. Whereas previously solar systems in California might pay for themselves in approximately five years, new systems under NEM 3.0 may take closer to nine to ten years to reach payback.
Stronger Incentive for Battery Storage
NEM 3.0 was designed to encourage pairing solar panels with energy storage. Batteries allow homeowners to store excess solar energy on site and use it later rather than exporting it at low utility credit rates. Solar-plus-storage systems can significantly improve value by reducing reliance on export credits and maximizing self-consumption. Under NEM 3.0, solar systems with battery storage often have more attractive economics than solar alone.
What This Means for Solar System Design
Under NEM 3.0, adding battery storage is becoming increasingly common among California homeowners. Energy storage lets homeowners:
- Store excess solar production instead of exporting at low rates.
- Use stored energy during high time-of-use periods to avoid purchasing expensive grid electricity.
- Improve overall energy independence and resilience.
Because battery technology has become more affordable and incentives like the Self-Generation Incentive Program (SGIP) provide rebates, many solar designers now recommend including storage in new rooftop solar systems.
Is Solar Still Worth It Under NEM 3.0?
Despite the lower export rates, solar is still a financially sound investment in California for many homeowners. Electricity costs in the state remain among the highest in the country, and solar systems continue to provide long-term energy savings. Federal tax incentives and local rebates can further improve financial returns.
For homeowners who focus on self-consumption and pair their solar system with battery storage, the return on investment under NEM 3.0 can still be attractive. Because batteries allow you to avoid exporting at low credit rates and instead use your own solar energy when utility rates are highest, solar-plus-storage systems are now among the most compelling residential energy investments under the new policy.
Conclusion
NEM 3.0 represents a major shift in California’s approach to compensating rooftop solar owners. While it reduces the value of exporting excess energy compared with previous net metering programs, it also encourages smarter system design that emphasizes on-site energy use and storage. Solar power remains a viable option for California homeowners, especially when paired with battery systems that maximize the self-use of solar energy. Understanding these changes helps homeowners plan appropriately and make informed decisions about solar investments under the new net billing rules.