NEM 2.0 vs NEM 3.0 | NEM1–2–3: The Vanishing Solar Incentives in California

maktinta
Nov 6
4 min read

Net Energy Metering (NEM) is the policy framework that determines how homeowners are credited for the excess solar energy they send back to the grid. It’s the foundation of how solar incentives work in California, and it has changed significantly over time.

The shift from NEM 1.0 and NEM 2.0 vs NEM 3.0 California, has impacted the financial returns of going solar, especially for homes without battery storage.

This blog will break down what changed between each version, NEM 1.0, NEM 2.0 vs NEM 3.0 and explain how these changes influence system payback, rates, credits, and long-term savings.

The goal is simple: understand where solar incentives began, what they look like now, and what that means for homeowners today.

NEM 1.0: The "Gold Standard"

This was the original policy, designed to make solar adoption simple and highly attractive, especially when paired with early solar incentives and the federal solar tax credit.

Export Rate (Payback): A true 1-to-1 kilowatt-hour (kWh) swap. For every 1 kWh you exported to the grid, you received a credit for 1 kWh to be used at any other time.
Rate Plan: No mandatory Time-of-Use (TOU) plan. This is its most "coveted" feature. Customers could stay on flat-rate tiered plans, meaning the 1 kWh they exported at noon was worth the same as the 1 kWh they imported at 8 p.m.
Charges: Solar credits could offset all charges on a bill, including delivery and generation. This made it possible to have a $0 or even negative annual bill.
Annual Payback Limit: If you produced more energy than you used over the entire year (a "net surplus"), the utility paid you for that excess energy at a wholesale rate.

NEM 2.0: The "Great Compromise"

This policy was an update to ensure solar customers paid a small amount for grid maintenance. It’s still considered a fantastic policy and is often compared today in discussions around NEM 2.0 vs NEM 3.0.

Export Rate (Payback): An almost 1-to-1 monetary swap. Instead of kWh credits, you received a bill credit for the full retail dollar value of the energy you exported.
Rate Plan: Mandatory Time-of-Use (TOU) plan. This was the biggest change from 1.0. The value of your exported energy and the cost of your imported energy now depended on the time of day (e.g., "Peak" vs. "Off-Peak").
Charges: This is the other key difference. NEM 2.0 introduced Non-Bypassable Charges (NBCs). These are small charges (approx. 2-3 cents/kWh) on all energy imported from the grid. Your solar credits cannot be used to offset NBCs, meaning you will always have a small minimum bill.
Annual Payback Limit: The same as NEM 1.0. Any net surplus energy at the end of the year is paid out at the low NSCR rate.

NEM 3.0: The "Net Billing Tariff" (The Battery Incentive)

Also referred to as NEM 3.0 California, this policy took effect in April 2023 and completely changed solar economics to favor self-consumption and battery storage. This is the current phase in the evolution of California solar incentives.

Export Rate (Payback): Drastically reduced by ~75%. The export credit is no longer tied to the retail price. Instead, you are paid based on the utility's "Avoided Cost," which is a complex wholesale rate.
- Example: You might import (buy) power at $0.45/kWh during peak hours, but if you export (sell) power during sunny off-peak hours, you may only get $0.05/kWh.
Rate Plan: Mandatory "electrification" TOU plans. These plans are designed with a massive difference between what you pay for power and what you get paid for exporting it.
Charges: You still pay NBCs, plus new monthly fixed charges (e.g., ~$15) that solar credits cannot offset.
Annual Payback Limit: This is the harshest limit. At the end of your 12-month billing cycle, any remaining dollar credits in your account expire and are zeroed out. You are not paid for them.

At-a-Glance Comparison of NEM 1.0 and NEM 2.0 vs NEM 3.0

Feature	NEM 1.0 (The Original)	NEM 2.0 (The Compromise)	NEM 3.0 (The "Net Billing" Tariff)
Export Rate	1-to-1 kWh Credit	~1-to-1 Dollar Credit (Retail Rate)	~75% Lower Dollar Credit (Wholesale Rate)
Mandatory TOU Plan?	No	Yes	Yes (Special "electrification" rates)
Key Charges	None. Solar could offset everything.	Non-Bypassable Charges (NBCs) that solar cannot offset.	NBCs + New monthly fixed charges that solar cannot offset.
Annual True-Up	Excess energy paid at low wholesale rate.	Excess energy paid at low wholesale rate.	All remaining dollar credits expire and are worthless.
Main Incentive	Produce as much as possible.	Produce as much as possible, especially during "peak" hours.	Store your own power. Avoid exporting at all costs and use a battery to avoid

As California continues to shift from NEM 1.0 to NEM 2.0 and now NEM 3.0, the structure of solar incentives has moved away from rewarding energy export and toward rewarding self-consumption.

The bottom line: solar still works but the strategy has changed. Under NEM 3.0, pairing solar with battery storage is now the most effective way to maximize savings, avoid high peak rates, and protect yourself from ongoing utility price increases.

Understanding where these policies started and where they stand today helps homeowners make smarter, future-proof decisions about going solar in California.