Solar under NEM 3.0: why the battery now matters as much as the panels

California's third-generation net metering policy, NEM 3.0, took effect April 15, 2023, for solar customers who applied for interconnection after April 14, 2023. The policy dramatically restructured how utilities compensate rooftop solar for excess power sent to the grid, replacing a one-to-one retail-rate credit with a complex time-varying 'avoided cost' calculation. For new solar customers, this meant export rates fell by roughly 75 percent on average—from about 30 cents per kilowatt-hour to 8 cents per kilowatt-hour.

The reduced export rates shifted economics in a way that made battery storage not a luxury add-on but a practical necessity for homeowners seeking the same financial returns that previous solar customers enjoyed. Understanding how NEM 3.0 works with batteries requires learning three key pieces: how export rates are set, why batteries create economic value, and which time-of-use rates customers must use.

How export rates work under NEM 3.0

NEM 3.0 uses California's Avoided Cost Calculator, which sets export rates based on what utilities would pay for electricity from other sources at any given time. Rather than a single rate year-round, the system creates 576 different export rates—one for each combination of month, hour, and weekday or weekend. Evening rates, when solar production declines, can be significantly higher during summer months.

The precise rates vary by utility territory and season, but the pattern is consistent: utilities pay the least when solar production is highest (midday, spring and early summer) and somewhat more when solar production is lower but grid demand is high (late afternoon and early evening, particularly in late summer and early fall). Southern California Edison customers, for example, saw export rates ranging from $3.36 to $3.78 per kilowatt-hour during peak summer evenings in 2024, but those high rates apply only during specific evening hours when solar production has dropped.

Why batteries create financial value

The gap between daytime export rates (roughly $0.08/kWh) and evening peak electricity prices (roughly $0.80/kWh or higher for time-of-use customers) creates a financial incentive for battery storage. Instead of exporting solar power generated at midday for $0.08 per kilowatt-hour, a homeowner with a battery can store that power and either use it themselves when grid prices spike at 7 or 8 p.m. or export it to the grid during those higher-rate windows.

This strategy, sometimes called 'peak shaving' or 'solar arbitrage,' inverts the economics of batteries. Under NEM 2.0, batteries were valuable mainly for backup power and grid resilience. Under NEM 3.0, a battery can recoup its investment faster than solar alone, because storing and strategically using or exporting solar energy during peak hours provides more financial benefit than exporting cheap midday solar. Some analysis suggests homeowners with solar and battery storage can offset 70 to 90 percent of electricity bills with payback periods of 5 to 7 years—faster than the payback for solar-only systems.

The time-of-use rate requirement

All NEM 3.0 customers must enroll in time-of-use (TOU) rates rather than standard residential rates. These rates reflect grid demand patterns, with peak charges during evening hours when most people use electricity and solar production has ended. Peak hours typically run from 4 p.m. to 9 p.m., with peak rates significantly higher than off-peak rates. For example, peak charges reach around $0.82 per kilowatt-hour compared to lower off-peak rates.

Customers also pay a fixed monthly charge (typically $15 or more) regardless of usage. The mandatory TOU rates structure means that the exact timing of when a household consumes electricity—or when a battery discharges stored solar—directly affects the monthly bill. A home that uses most electricity during off-peak hours benefits most; a home with consumption concentrated during peak hours faces the highest costs. This timing sensitivity is why battery storage, which can shift energy use away from peak hours, becomes more economically compelling than it was under previous rate structures.

Payback periods and financial returns

The financial equation for solar-plus-battery systems under NEM 3.0 depends on three variables: the system size, battery capacity, and the household's peak consumption. Because peak-hour rates are so much higher than daytime export rates, systems optimized to store solar and discharge during evening hours can generate more value than they would under NEM 2.0. A household that shifts peak usage to off-peak hours (via battery discharge, time-of-use management, or both) further improves its financial position.

For comparison, solar-only systems under NEM 3.0 face headwinds: the 75 percent reduction in export rates lengthens payback periods and reduces lifetime bill savings. This reversed a long-standing pattern. Under NEM 2.0, solar without batteries remained economically attractive. Under NEM 3.0, customers exploring solar increasingly find that adding battery storage improves their financial return enough to justify the additional upfront cost.

Grandfathered customers and special programs

Customers who submitted complete solar interconnection applications on or before April 14, 2023, can opt to be grandfathered into NEM 2.0 rates for 20 years, provided their system connects by April 14, 2026. These customers keep the old retail-rate compensation for exports, avoiding the shift to avoided-cost rates. Significantly, some grandfathered NEM 2.0 customers can add battery storage later without losing their favorable rates, which means early solar adopters retain a financial advantage.

The CPUC also approved rate adders for certain customers. In Pacific Gas & Electric (PG&E) and Southern California Edison (SCE) territory, residential customers receive a higher avoided-cost rate adder (between 2.2 and 9 cents per kWh depending on location) if they install batteries. Disadvantaged community residents in some areas receive even larger rate adders and discounts on fixed monthly charges. These programs aim to ensure that lower-income customers can still benefit from solar investment despite the policy shift.