California Net Metering Explained: NEM 1.0, NEM 2.0, and NEM 3.0

Net metering is a billing arrangement between a solar homeowner and their electric utility. When your solar panels produce more electricity than your home is using at that moment, the excess flows onto the grid. Under a net metering agreement, the utility credits your bill for that exported electricity. At night or during cloudy periods, you draw power from the grid and those credits offset what you owe.

Without net metering, excess solar production is simply given to the grid with no compensation. Your system would need to be sized exactly to your minute-by-minute load, which is impractical and would make solar economically unworkable for most homes.

California pioneered net metering in 1995. The state was already a national leader in renewable energy policy, and the legislature recognized that residential solar would not be financially viable without a clear billing framework. Net metering created the conditions for a solar market by answering the fundamental question: what happens to power I generate but do not immediately use?

The answer that question gets shapes the entire economics of going solar. A high credit rate makes solar pencil out without a battery. A low credit rate shifts the math toward using more of what you generate on-site, which is exactly the shift NEM 3.0 was designed to produce.

NEM 1.0 was straightforward. Every kilowatt-hour of solar you exported to the grid earned a credit equal to the full retail rate you would have paid to import that same kilowatt-hour. In the mid-2010s, residential retail rates in SCE territory were roughly 18-24 cents per kWh, and NEM 1.0 customers received that full amount as a credit.

There were no interconnection fees, no mandatory time-of-use rate requirements, and no caps on system size beyond 1 megawatt (a limit that never applied to residential installations). Unused annual credits carried forward month to month. At the end of the 12-month true-up period, any remaining credits were settled at a low avoided cost rate, but in practice, a well-sized system would draw those credits down through the winter months when solar production drops.

The grandfathering provision under NEM 1.0 was indefinite for systems installed before the program closed. The California Public Utilities Commission eventually set a cap: once each utility reached 5 percent of peak demand from net metering customers, the CPUC would revisit the program. SCE, PG&E, and SDG&E all approached that threshold by 2016, which triggered the transition to NEM 2.0.

Homeowners who installed solar under NEM 1.0 in the early 2010s and before locked in one of the best billing arrangements in the country. Many of those systems are still generating credits at the full retail rate today, a decade later. The economic return on those systems has been exceptional.

In January 2016, the CPUC issued a decision establishing NEM 2.0. The core credit mechanism stayed the same: exported solar continued to earn credit at the full retail rate. But the program added two significant changes for new customers.

First, a one-time non-bypassable charge. This interconnection fee ranged from roughly $75 to $150 depending on the utility, covering administrative costs of connecting the customer to the bidirectional metering system. It was a minor upfront cost but marked a philosophical shift, acknowledging that net metering customers use grid infrastructure even when generating their own power.

Second, mandatory time-of-use rates. NEM 2.0 required customers to move from flat-rate billing to a time-of-use structure, where the rate you pay (and the credit you earn for exports) varies by time of day. This was a bigger change than it first appeared. Under TOU rates, solar exports during peak afternoon hours earned higher credits, but exports during super off-peak hours earned lower credits. Systems that produced a lot in the early morning or late afternoon captured less value than systems with peak production right at the midday price peak.

In practice, the TOU rate shift was manageable for most homeowners because south-facing panels in California produce heavily around solar noon, which aligned reasonably well with high-price periods. The full retail rate credit mechanism still made NEM 2.0 a strong deal, and solar adoption accelerated rapidly through 2016 to 2022.

The 20-year grandfathering provision in NEM 2.0 was written explicitly into the CPUC order. A customer who received permission to operate in 2022 stays on NEM 2.0 terms through 2042. This is not a policy hope or an assumption. It is a CPUC commitment that carries legal weight.

The California Public Utilities Commission issued its NEM 3.0 decision in December 2022 after years of proceedings. The new rules took effect for new interconnection applications submitted on or after April 15, 2023.

The decision was contentious. The solar industry, consumer advocates, and environmental groups objected to the scale of the export rate reduction. The investor-owned utilities (SCE, PG&E, SDG&E) argued that existing net metering was a cost-shifting problem, where solar customers avoided grid costs that then fell on non-solar customers, including lower-income households who could not afford solar.

The CPUC's stated rationale had several components. Grid operators were dealing with a "duck curve" problem: solar panels produced heavily at midday, then abruptly stopped in the evening when demand peaks. This required expensive natural gas peaker plants to ramp up rapidly every afternoon. By paying less for midday solar exports and more for evening energy through battery discharge, the CPUC hoped to shift the solar industry toward storage-integrated systems that would better match grid needs.

The decision also introduced a net billing structure. Instead of a monthly true-up, NEM 3.0 uses a shorter settlement period. Credits for exports are calculated in real time based on the avoided cost value of that electricity to the utility at that exact hour, rather than applying a flat retail rate.

Under NEM 3.0, your exported solar electricity does not earn a simple retail credit. Instead, it earns whatever that electricity is worth to the utility at the precise hour it was exported, using a tool called the Avoided Cost Calculator (ACC). The CPUC's Energy Division maintains the ACC and updates it periodically.

The ACC calculates what the utility avoids spending when it receives your solar export. At 11am on a sunny April day, when thousands of solar systems are producing, the grid has abundant cheap electricity and the avoided cost is low, typically 3-6 cents per kWh. At 7pm on a hot August evening, when air conditioners are running and solar panels have stopped producing, the avoided cost of not having to dispatch a peaker plant is much higher, sometimes 15-25 cents or more.

The blended average for daytime solar exports in SCE territory falls in the range of 4-9 cents per kWh. Compare this to the retail rate an SCE customer pays to import electricity, which ranges from roughly 28 cents in off-peak hours to 47-55 cents during on-peak summer afternoons. The gap between the sell rate and the buy rate is the fundamental economic tension under NEM 3.0.

There is one hour-type where the avoided cost rises meaningfully: the evening peak window roughly corresponding to 4pm-9pm. During summer, when grid stress is highest, ACC values during this window can reach 15-25 cents or more. A battery that charges from solar during midday and discharges during the evening peak captures much higher export credits than a system exporting directly during solar production hours. This is by design: the CPUC structured NEM 3.0 to reward storage-coupled systems.

The California Solar and Storage Association (CALSSA) published an analysis shortly after the NEM 3.0 decision showing that simple payback periods would extend from an average of 5-7 years under NEM 2.0 to an average of 9-10 years under NEM 3.0 for a solar-only system without battery storage.

This calculation held the following constant: a 6 kW system on a Temecula-area home, the 30% federal Investment Tax Credit, and SCE's electricity rates. The only variable was whether the export credit was the full retail rate or the avoided cost rate.

The payback extension sounds discouraging, but context matters. The panels themselves carry 25-30 year production warranties. A system with a 9-year payback still delivers 15-20 years of essentially free electricity after payback. The internal rate of return on a NEM 3.0 system without storage is still competitive with most home improvements and significantly better than keeping money in a savings account.

When battery storage is added, the picture changes again. A system optimized for self-consumption, using a battery to shift production to consumption hours and capture high-value peak credits, can approach the payback economics of a NEM 2.0-era solar-only system. The federal tax credit applies to batteries too, as long as the battery charges at least 80% from solar.

Under NEM 2.0, a solar system that produced more than you needed and exported heavily was a winning financial strategy. You were essentially selling electricity to the utility at retail price, which is a favorable arrangement. Oversizing the system to maximize export was rational.

Under NEM 3.0, that math inverts. Exporting 10 kWh at 6 cents earns 60 cents. Storing those same 10 kWh in a battery and using them at night instead of importing from the grid at 35 cents saves $3.50. The self-consumption path is roughly six times more valuable than the export path for the same kilowatt-hours.

Battery storage also captures the evening peak credit opportunity. A battery charged from solar during midday can export to the grid during the 4pm-9pm window when avoided costs are highest, earning 15-25 cents per kWh instead of the 4-6 cents midday export would have earned. In SCE territory, some programs allow batteries to participate in demand response events where the per-kWh value is even higher.

The CPUC was explicit that this was the intent. The decision includes language encouraging storage adoption as a way to shift solar production value to the hours when the grid needs it most. NEM 3.0 is, in a real sense, a battery mandate by price signal rather than regulation.

For Temecula and Murrieta homeowners going solar under NEM 3.0, the standard recommendation from most reputable installers is to pair every new system with at least one battery, and to right-size the solar array for consumption rather than maximum export. This is a significant change from the pre-2023 playbook.

Self-consumption means using the electricity your panels generate at the moment of generation, rather than exporting it. Under NEM 3.0, maximizing self-consumption is the single most important variable in your system's financial performance.

Several practical strategies move the needle on self-consumption:

• Schedule high-load appliances during peak solar hours. Your dishwasher, washing machine, dryer, and EV charger all consume significant power. Running them between 10am and 3pm, when solar production peaks, consumes solar electricity that would otherwise be exported at 4-6 cents. Instead, that electricity displaces grid imports that would cost 30-45 cents.
• Precool your home during solar hours. Set your thermostat to cool the house to 68-70 degrees before the 4pm-9pm peak window. The thermal mass of the home holds that temperature, reducing the need for AC during the expensive peak hours.
• Use a smart battery inverter. Modern battery inverters from Tesla, Enphase, SolarEdge, and others include self-consumption modes that automatically route solar production to direct home use first, then charge the battery, then export only what cannot be consumed or stored.
• Time your EV charging. An electric vehicle is the single largest load most homes can shift. A 40 kWh battery in your garage, charged entirely from solar, represents a massive reduction in grid imports. Many EV chargers now integrate with solar inverters to prioritize solar charging.
• Hot water pre-heating. A heat pump water heater or a timer-controlled resistive water heater set to run during solar hours can absorb 2-4 kWh of solar production that would otherwise be exported.

These strategies require some lifestyle adaptation but no major additional investment. Combined with a battery, they can push self-consumption rates above 85-90% for many homes.

The most important date in California solar history for homeowners who installed between 2020 and 2023 is April 15, 2023. Applications for utility interconnection submitted before that date stay on NEM 2.0. Applications submitted on or after that date fall under NEM 3.0.

The key clarification: the cutoff applies to the interconnection application date, not the installation completion date or the permission-to-operate date. Many homeowners who signed contracts and had systems installed in early 2023 were racing to get their interconnection applications submitted before April 15. Installers filed applications as early as possible in the process to protect their customers' NEM 2.0 status.

If you are unsure which program you are on, the simplest check is your utility bill. NEM 2.0 customers will see a bill structure showing monthly credit accumulation toward an annual true-up. NEM 3.0 customers see a net billing structure with different settlement periods and typically lower credit amounts. You can also call your utility or log into your account online to see your interconnection agreement type.

Homeowners on NEM 2.0 have no financial reason to change programs voluntarily. If you are adding battery storage to an existing NEM 2.0 solar system, your installer should ensure the modification does not trigger a new interconnection application that would reclassify you to NEM 3.0. This is a real risk that requires attention during the battery addition process.

Southern California Edison's TOU-D-PRIME rate is the default rate structure for most NEM 3.0 customers in SCE territory, which includes Temecula, Murrieta, Menifee, Lake Elsinore, and the surrounding Inland Empire and Coachella Valley areas.

TOU-D-PRIME divides the day into three price tiers:

The optimization strategy under TOU-D-PRIME is straightforward: maximize solar self-consumption during mid-peak hours, store surplus solar in the battery, and discharge the battery during the 4pm-9pm on-peak window when each kWh of avoided import saves 47-55 cents rather than 30-40 cents. This time-shifting strategy is the highest-value use of battery storage in SCE territory.

Rate schedules change periodically. SCE's current TOU-D-PRIME rate details are available on the SCE website. It is worth reviewing your actual rate structure annually because rate adjustments can shift the optimal battery dispatch strategy.

Under NEM 2.0, a common and rational approach was to size your solar system at 100-120% of your annual electricity consumption. The logic: any excess production exported at the full retail rate contributed meaningful credits that reduced your annual true-up to near zero. Oversizing also provided a buffer for future consumption increases from an EV or pool addition.

Under NEM 3.0, oversizing for export does not make financial sense. If you size at 130% of consumption and export that extra 30% at 5 cents per kWh, you are selling electricity for much less than it costs to generate. The capital cost of those additional panels does not pay back through export credits at NEM 3.0 rates.

The new sizing principle under NEM 3.0 is to target consumption, not to generate excess. Analyze your actual 12-month electricity usage in kWh, size the solar array to cover roughly 100% of that consumption on an annual production basis, and put any additional budget toward battery storage. The battery then handles the peak-shifting work that generates the most value.

There is one exception: if you know you will be adding significant new load within the next 1-2 years, specifically an EV or a pool, it can make sense to size for anticipated future consumption rather than current consumption. Adding panels later requires another interconnection process, which adds cost and delay.

The interaction with how many solar panels you actually need has changed under NEM 3.0. The answer is fewer panels than NEM 2.0 customers often installed, paired with more storage capacity.

The CPUC established the NEM 3.0 framework and the Avoided Cost Calculator methodology, but each of California's three investor-owned utilities implements the program within their own rate structure and operational systems. There are real differences in how NEM 3.0 plays out depending on which utility serves your home.

For Temecula and Murrieta homeowners, SCE is the relevant utility. The strategies in this guide are calibrated for SCE rates and programs. If you are in a Community Choice Aggregation (CCA) territory that overlays the SCE service area, your energy supply rates may differ but your NEM 3.0 structure and export credits follow the same CPUC rules.

A virtual power plant (VPP) aggregates the batteries of many homes and dispatches them as a coordinated resource when the grid needs help. Instead of the utility building a new peaker plant, it pays enrolled homeowners to discharge their batteries into the grid during demand peaks. From the homeowner's perspective, the battery gets used for grid services and the homeowner receives additional compensation beyond standard NEM 3.0 credits.

SCE operates the Bring Your Own Device (BYOD) program, which pays qualified battery owners a monthly capacity payment for being available to dispatch and an energy payment when actually discharged. Compatible batteries include Tesla Powerwall, Enphase IQ Battery, LG RESU, and others on SCE's approved list.

SCE has also partnered with third-party aggregators including Tesla Energy, Sunrun, Swell Energy, and AutoGrid. These companies handle the enrollment and dispatch logistics, passing a portion of the grid services revenue to the homeowner. Annual earnings from VPP participation vary but have ranged from $150 to $500 or more depending on battery size and how often dispatch events occur.

VPP earnings do not replace the base NEM 3.0 self-consumption strategy. They are additive. The battery still performs its primary job of shifting your own solar production to cover evening loads. VPP events are infrequent enough, typically 10-40 times per year, that they do not significantly compromise self-consumption performance.

If you are sizing a battery in Temecula and want to participate in VPP programs, confirm with your installer that the battery and inverter you select are on SCE's approved equipment list. Not every battery on the market qualifies for every program.

For a detailed look at battery options for Temecula homeowners, the battery storage and NEM 3.0 decision guide covers specific hardware options, costs, and payback calculations in detail.

Both NEM 2.0 and NEM 3.0 agreements include a defined term. For NEM 2.0 customers, the grandfathering period is 20 years from the permission-to-operate date. For NEM 3.0 customers, the NEM 3.0 framework itself will presumably be revisited in CPUC proceedings before 20 years have passed.

At the end of the grandfathering period, the customer transitions to whatever net metering or net billing program is in effect at that time. The CPUC has not pre-committed to what successor programs will look like beyond the current NEM 3.0 rules.

For a homeowner who interconnected in 2022 under NEM 2.0, the transition happens around 2042. Several things are likely to be true by then: solar panels installed in 2022 will still be producing at 80-85% of their original capacity (most manufacturers warrant 80% output at 25 years). Battery storage technology will be dramatically cheaper and more capable. Grid management infrastructure will be far more sophisticated. The regulatory landscape for distributed energy resources will have evolved multiple times.

The practical takeaway: the 20-year grandfathering period covers most of the productive life of your solar system. The uncertainty about what comes after year 20 is real but not a reason to avoid solar. The panels will still be generating electricity regardless of what billing program is in place. The question at year 20 is what credit rate applies to any excess, not whether the system still saves money.

If you are on NEM 2.0 and concerned about maximizing value before the grandfathering period ends, the best strategy is to maintain the system well, keep the panels clean and producing efficiently, and consider battery storage additions before year 20 to maximize self-consumption as NEM 2.0 export credits eventually go away.

NEM 3.0 included a formal requirement for the CPUC to review and potentially revise the program within five years. That review process is expected to begin in 2027-2028. Whether the result will be labeled NEM 4.0, a successor tariff, or something else entirely depends on how the CPUC frames the proceeding.

Several factors will shape any future changes:

• Battery storage penetration rates. If NEM 3.0 successfully drives battery adoption, the grid duck curve problem will partially solve itself. That success could argue for restoring some export credit value in a NEM 4.0 context.
• Grid modernization progress. As California builds out transmission, grid-scale storage, and demand response infrastructure, the cost structure that justified the NEM 3.0 export rate cuts may shift.
• Political and advocacy dynamics. The solar industry, utilities, low-income advocates, and environmental groups all have seats at the CPUC table. The same tensions that shaped NEM 2.0 to NEM 3.0 will shape whatever comes next.
• Technology costs. If battery storage reaches price points below $100 per kWh at scale, the economics of storage-coupled solar shift dramatically, potentially reducing the need for high export credits as the primary solar incentive mechanism.

No credible analyst is predicting a return to NEM 2.0-style retail rate credits. The direction of travel is toward greater integration of storage, demand response, and real-time pricing. Future programs will likely pay more for storage dispatch during peak hours and less for daytime export of solar production, reinforcing the current NEM 3.0 logic.

For homeowners making decisions today, the practical advice is: do not wait for NEM 4.0 to arrive before going solar. Electricity rates continue to rise. The federal 30% tax credit runs through 2032. California's SGIP battery rebates have limited funding that depletes in steps. The economics of solar plus storage in Temecula under NEM 3.0 in 2026 are positive. Waiting for an unknown future program means years of paying high utility bills instead of building equity in your own energy system.

Want to understand what a system would look like for your specific home? Use the solar savings calculator to get an estimate based on your current SCE bill, roof orientation, and usage pattern.