By Austin Young, marketing director, Ivy Energy
California utility regulators have a decision to make about the financing of solar projects, and so do multifamily housing property owners.
Regulators are considering greatly reduced rates for utility customers who feed solar energy to the grid. A December 2021 proposed decision by the California Public Utilities Commission would erode long-term solar cost savings and the timeline for return on investment. The timeline for approving new rates, known as net energy metering (NEM) rates, is unclear.
If approved, the scheme known as NEM 3.0 would introduce California’s biggest change to the economics of solar in more than 20 years.
The net-metering transition leaves property owners at a fork in the road — go solar now and lock in today’s favorable compensation for excess solar power or adjust to the new realities of NEM 3.0 and the companion virtual net energy metering tariff, VNEM 3.0, for multifamily properties.
Data from Ivy Energy, a shared solar billing platform provider for multifamily properties, shows that owners should lock in solar rates now to maximize value and achieve the quickest solar payback period.
Solar rate cuts
California’s new home solar mandate authorized under the Title 24 building code has accelerated market growth for solar on multifamily properties. So has the emergence of technology solutions like Ivy Energy’s Virtual Grid, making it easy for property owners to generate income while delivering energy cost savings to residents.
California multifamily property owners currently can achieve a 23 to 28% internal rate of return (IRR) on shared solar investments. The average payback period for solar on multifamily properties ranges from three to five years. Solar projects use net-metering to obtain utility bill credits by exporting 50 to 55% of solar production to the grid.
Today’s solar rates make clean energy available to renters who have thus far been underserved by residential solar. They also help achieve energy equity and environmental justice by reaching communities that have been left out of the clean energy transition.
Ivy Energy data suggests the NEM 3.0 proposal will cut IRR down to 17 to 22%. One reason: projects will require a higher upfront investment by adding batteries to solar installations to store energy onsite instead of feeding it to the grid. The added cost will reduce the return on investment. Due to reduced rates for solar energy exports to the grid, projects will increase energy storage during the day and offset building energy consumption in the evening.
New monthly fees for utility customers with solar and a requirement to adopt less favorable time-of-use rates will also undermine the return on investment.
All in all, NEM 3.0 could increase payback time for an average multifamily property to six to 10 years. Financial estimates vary based on tax incentive eligibility, project cost variables and system performance.
How to lock in today’s solar rates
The last time California regulators changed net-metering rates, they included a grandfather clause protecting utility customers who were already in the process of contracting for new solar projects. Once regulators approve new net-metering rates, property owners can expect to have 120 days of eligibility left to claim the current, more favorable rates.
If regulators follow the same timeline, new projects that submit an application to interconnect with the utility grid within 120 days from the approval of new net-metering rates should remain eligible for today’s more favorable rates.
Time is of the essence. Expect solar contractors to see a surge of activity as the deadline to lock in today’s solar rates draws near. It’s also important to start planning as soon as possible, because contractors may need about 45 days to design a new solar system and prepare an application to interconnect the system to the grid.
California has set considerable clean energy goals, even mandating that new multifamily housing cover 50 to 70% of electricity load with onsite solar. Real estate investors have a golden opportunity to secure the most favorable terms before California enters a brave new world of solar project financing.
The economics of solar will never be the same.
For a revenue forecast on your multifamily solar project, visit www.ivy-energy.com or call (858) 682-3489.
Ivy Energy developed the first solar billing program that lets property owners deliver clean energy at a cost savings to residents in apartment buildings and townhomes. In 2020, the California Energy Commission recognized Ivy Energy as California Energy Visionary of the Year. The team is based in San Diego.