Over the last 22 years the solar industry benefited from three conditions.
(1) Favorable net metering incentives from the Utilities, (2) Tax credits from the Federal Government and (3) Low interest rates from lenders.
We have seen all of these disappear over the last 4 years. In 2021 we started to see interest rates climb substantially for unsecured loans. In April of 2023 we went through the transition from NEM2.0 to NEM3.0. and the Federal Incentive Tax Credit (FITC) expired for residential homeowners.
NEM stands for Net Energy Metering.
NEM describes the interconnection relationship between the Utility Grid and a solar system located on a house or commercial building. Net Metering measures and values the energy consumed from the grid or the excess energy sent back to the grid from a solar system. This relationship was a retail value net transaction. Energy usage from the grid was charged at the retail value. If the solar system produced enough energy to cover the building’s load, any excess or overproduction registered at the meter generated credits at the retail value. These credits were applied to future usage charges resulting in a “net zero” energy bill if the system was sized accurately based on prior usage data. As smart meters were rolled out across both residential and commercial customers, the utilities were able to identify where each demographic showed high demand or lower demand profiles, respectively. This insight gave the utilities the information they needed to evolve the billing rate schedules, which would further affect consumer usage habits and how they implement solar systems going forward. This change in Net Metering above the other changes most significantly impacted a solar system’s financial performance and the equipment needed for effective operation. The utilities recognized they no longer needed to incentivize homeowners with retail value credits during the middle of the day because they don’t need to meet high residential demand between the hours of 10am to 4pm. Residential demand typically spikes between 6-9 a.m., and again between 4-9 p.m. So, the utilities altered rate schedules to encourage consumers to use less electricity from 4-9pm by drastically increasing the cost during that time period, similar to a toll road with heavy traffic. This change to NEM 3.0, coupled with rate schedule changes has driven the need to install batteries along with the solar systems.
The solar system produces enough energy to meet the homeowner’s daytime demand, and the batteries store excess energy during the day for discharge during the 4–9 p.m. peak time zone and/or later throughout the evening until sunrise. By changing the Net Metering import / export values from a 1:1 retail value to a retail import value and a wholesale export value, an entirely new dynamic has been created for sizing solar with battery systems. From the homeowner’s perspective, this can be quite frustrating because it increases system equipment cost by requiring additional hardware. However, it also offers backup power during an outage and much more control and freedom over power usage.
From the grid manager’s perspective, this helps level out the Peak spikes on the grid caused by both demand and the impact of renewable energy variables. The grid manager’s goal is to level out the peaks in order to provide stable “firm” energy.
You may be asking yourself: So, where does this leave the typical homeowner now?
That answer is less about the technology and advancements in solar or battery efficiency than many people may think. Although sizing the system’s production and storage components is important, the greater area of hidden risk lies in what isn’t being described or stated in the method of finance. Many companies aim to reduce complexity and distill their messaging to a simple “cost per kWh and we’ll handle the rest” by proposing long-term Power Purchase Agreements (PPAs) or Leases. The details of long-term agreements often hide pitfalls. They may seem like the cheapest or lowest risk entry point but often turn out to be just the opposite. Many people who sign 25 Year PPAs often regret that decision when they try to re-finance the mortgage, sell the property or realize afterward that they could have used other financing options to own the system at far lower cost with no downsides. The system equipment itself is quite robust and typically lasts much longer than its warranty period.
Alternative financing options exist. Since the tax credit expired for homeowners but remains for financial institutions, some lenders can monetize the tax credit and allow the borrower to have a loan value equal to the net value minus the tax credit, essentially extending the tax credit to the borrower. This will be the strongest financing option for solar loan borrowers who do not want to enter into a long term PPA through 2027 when the tax credit will sunset for everyone.
What’s on the horizon for energy costs in the next 25 years?
Utility rates have continued to increase exponentially for the past 25 years and bills have been proposed that will further burden utilities with the cost of growth, repair and improvement of the aging transmission and distribution system of the electrical grid. Increased demand for EVs and AI will further drive-up costs, which will be passed directly to the rate payer in one form or another.
If you have been sitting on the fence debating whether solar & batteries are just a passing fad or waiting for technology improvements or lower pricing, that thinking is outdated. Every electric bill you pay from this point forward will cost more with a less valuable dollar, but you do have options! You don’t have to be subjected to constant rate increases; you can take control of your energy costs without being locked into long-term agreements with no real exit. Great options allow homeowners to control and predict energy costs while offering flexibility for expansion related to changing lifestyles or energy environments. If this article has piqued your interest or clarified any questions you may have had and you would like to find a solution that fits your situation, please visit peakpowerus.com.
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