Is California Multifamily Housing Ready for the New Economics of Solar?

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 homes 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 percent internal rate of
return (IRR) on shared solar investments. The average payback period for solar on multifamily
properties ranges from 3 to 5 years. Solar projects use net energy metering to obtain utility bill
credits by exporting 50 to 55 percent 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 percent. 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 6 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 percent of electricity load with on-site 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. Or to visit our explainer page on this topic visit https://www.ivy-energy.com/california-best-solar-rates-apartments

About Ivy Energy
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.

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