Navigating NEM 3.0: Improve solar ROI with the Inflation Reduction Act

In California, Net Energy Metering (NEM) has been a vital policy for customers who generate their own power through renewable sources like solar. However, with the recent implementation of NEM 3.0 by the California Public Utilities Commission (CPUC), significant changes are now in effect. Customers opting into this program will receive a reduction in net metering credits for their renewable energy generation compared to NEM 2.0 customers. A potential solution to offset this credit reduction is through new provisions in the Inflation Reduction Act. In this blog post, we will explore how updates to the Investment Tax Credit and Production Tax Credit can help mitigate the impact of program reductions under NEM 3.0.

NEM 3.0 Credit Reduction 

The value of net metering credits has decreased by nearly 75% under NEM 3.0 compared to its predecessor, resulting in lower compensation for the excess electricity generated by customer-owned renewable energy systems. These changes pose a challenge for prospective customers looking to install solar panels as the lifetime savings may be significantly reduced without pursuing other available incentives.

Role of the Inflation Reduction Act 

As of January 1, 2023, the Inflation Reduction Act (IRA) has extended federal incentives under the Investment Tax Credit (ITC) and Production Tax Credit (PTC), providing taxable and non-taxable entities with the opportunity to receive a percentage of the cost of their renewable energy systems as a credit on their federal taxes or through a direct payment. For projects under 5 MW, the ITC can now cover up to 70%, a significant increase compared to the previous 26% coverage. The PTC has been enhanced to offer up to $30 per MWh for utility-scale projects, up from the previous $26 per MWh. The list of qualifying technologies for both the ITC and PTC has also been expanded by the IRA.

Stacking value of the ITC and PTC

To maximize the value of the ITC and PTC, customers must meet certain criteria, such as prevailing wage and domestic content standards. Implementing a project in an energy or low-income community can further improve your incentive value.

Offsetting NEM 3.0 Credit Reduction 

While the implementation of NEM 3.0 has reduced net metering credits for customers, qualifying your project for incentives like the ITC or PTC can help offset the upfront costs, enabling customers to recover a significant portion of their investment. This combination allows customers to save on their electricity bills, achieve a reasonable payback period, and maximize the financial benefits of their solar installations.