No, the rooftop solar market isn't dying
2019 was a good year for residential solar in California. Households served by the three large investor-owned utilities — Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric — installed 14% more electricity generation capacity than the prior year. The California Solar & Storage Association celebrated hitting 1 million solar rooftops in the state and its annual report gleamed with optimism.
Fast forward to today and the news media is filled with articles about catastrophic market decline. The industry association and many legislators blame a change implemented last April by the California Public Utilities Commission that lowered the compensation solar homes receive for selling electricity to the state's power grid.
But a careful examination of the change shows that's not what is depressing solar panel sales. The rooftop solar market isn't dying. It is adapting to the end of the 2021-23 rush that produced growth that wasn't sustainable.
CPUC change
The CPUC made the compensation change to reduce the burden on households without solar. Under the old policy, known as Net Energy Metering 2.0, the utilities had to pay residential solar owners for their excess electricity many times more than if they had purchased that clean energy from mediumand large-scale solar and wind farms.
The higher cost to the utilities was passed on to consumers, driving up the price of electricity for all households. It was particularly inequitable because the average income of solar households is much greater than for those without solar.
Households that signed up for solar prior to April 15, 2023, are still under NEM 2.0. However, systems permitted since then are covered under the new policy, “NEM 3.0.” They receive a much lower rate for their exports, but these households still save the full retail rate when they use their solar power onsite.
That last detail is important. It's why, when you do a little math, it turns out that the billsavings incentive to install solar today under NEM 3.0 is about the same as it was for most households in 2019, during the halcyon days under NEM 2.0.
How could that be? Well, the typical solar household uses about 50% of its rooftop output. So, while the new policy cuts the value of exports, the escalating retail rates — since 2019, up 80% at PG&E, 91% at SCE and 33% at SDG&E — greatly increase the value of solar-generated electricity used on site.
By my calculation, the increased value of using onsite solar offset by the reduced price for exported electricity still nets a slightly higher incentive to go solar today than in 2019 for PG&E and SCE customers. The incentive is 38% lower for customers of SDG&E, though SDG&E is about 80% smaller than the other two and it already had by far the highest electricity rates and solar penetration in 2019.
To put this in perspective, from 2014 to 2019, when electricity rate increases were much more gradual, the residential solar business in California had grown at a 14% annual average. Then, after a flat solar market during the 2020 pandemic disruption, electricity rates and the solar market exploded, more than doubling annual sales by 2022. The CPUC's policy change last year has just tempered the recent exponential growth in new systems.
Why sales slowed
But if the incentive is still as robust as 2019, why did new sales drop off so much in the last 8½ months of 2023?
First, anticipation of the CPUC policy change drove a gold rush during the first 3½ months of 2023. Many of those early 2023 buyers would have been later-2023 buyers were it not for the push to install before April 15. In fact, total 2023 residential sales were 12% higher than 2022.
Still, a few other factors are also slowing solar panel sales:
• Rising interest rates: For a new solar system financed at mortgage interest rates over 15 years, a buyer in 2023 would face a 21% higher monthly payment compared to 2021, even though there was a slight decline in the price of installing rooftop solar over the period.
• The big winners have already gone solar: The customers who jumped at residential solar over the last decade had the best roofs, the highest electricity usage, access to low-cost financing and the most commitment to fighting climate change. A rooftop solar system lasts decades, so companies must constantly convert new customers who were not that interested a couple of years ago. That makes it hard to keep growing.
• Reduced power shutoffs: In its 2019 “Year in Review” report, the Solar Energy Industries Association reported that a crucial driver of residential solar growth in California had been the state's public-safety power shutoffs, which “provided a key incentive for homeowners to purchase solar, increasingly paired with storage.”
Through luck and improved technology, those shutoffs have faded in the last couple years. Memories are short, so fewer homes are now adopting solar (plus a battery) to minimize the disruption of blackouts.
It's tough to unwind inequitable policy like NEM 2.0 when it creates outsize benefits for a small group of consumers and investors, paid for by everyone else.
But if we don't do it now, it will be even tougher to address in the future. It is vital for California to chart a path that is sustainable and equitable so it can be an example for other regions to follow.
The industry `is adapting to the end of the 2021-23 rush that produced growth that wasn't sustainable.'
Severin Borenstein is professor of the graduate school at UC Berkeley's Haas School of Business and faculty director of the Energy Institute at Haas. He is also a member of the Board of Governors of the California Independent System Operator.