Spwr Residential Close Up

Image: SunPower.

Subsidies, such as the federal investment tax credit or renewable portfolio standards in the states, have gotten a lot of credit for helping grow the solar industry. But on the residential side of the business, arguably the most important factor driving growth is the regulatory policies that determine how a utility compensates rooftop solar.

Net energy metering -- in reference to customers who pay only for the net energy they use -- effectively compensates rooftop solar at the customer's retail rate, a far higher rate than wholesale electricity prices, and it helps make rooftop solar economical. Remember just last month that when Nevada eliminated net metering in favor of paying wholesale rates for solar energy exported to the grid, solar companies packed up and left

Utilities have been trying to bridge the gap between full net metering and paying wholesale prices for electricity and have had success in those efforts in Hawaii, Wisconsin, and, most recently, Nevada. But California is where around half of the rooftop solar systems have been installed in the U.S., and major changes to net metering could have been a huge detriment to SolarCity (NASDAQ:SCTY), Vivint Solar (NYSE:VSLR), Sunrun (NASDAQ:RUN), and even SunPower (NASDAQ:SPWR). But the NEM 2.0 ruling from regulators came down in favor of solar and gives the industry a few more years to lower costs for both solar systems and energy storage. Here's what you need to know. 

Solarcity Rooftop Solar Installers

Image: SolarCity.

The new net metering scheme
California's Public Utilities Commission ruling on Thursday doesn't give net metering a free pass, but it does keep changes to net metering to a minimum. The first change is that new solar customers will be moved to time-of-use rates. This will be a dynamic pricing mechanism that's still not completely defined, but economically it makes sense for utilities and the solar industry. And it could eventually pave the way for customers using energy storage to use grid electricity when it's cheapest and sell electricity to the grid when it's most expensive.  

Another change is what's known as "non-bypassable charges." These are costs a utility incurs for things such as low-income subsidies and efficiency programs that customers will now have to pay for. The new structure means these costs won't be included in the net metering structure, effectively lowering the compensation exported electricity gets by 2 to 3 cents per watt. That's a small hit to net metering, but it's becoming an accepted cost for solar companies these days to acknowledge that there are grid costs net metering doesn't cover.

What this means for residential solar companies
The California ruling is arguably even more important than the ITC extension for residential solar companies. We saw that when Nevada eliminated net metering and added fees to solar installations: Companies left the state as fast as they could.

What this does is give a few more years of stability and a slightly lower net metered rate. That could mean slightly lower margins than installers could get in the past, or slightly fewer customers where solar is economical, but it doesn't shut down the solar industry.

California is the most important state for solar in the U.S., and it'll continue to be a leader with NEM 2.0. The move to time-of-use rates will also start laying the groundwork for a future where solar plus storage is commonplace. SolarCity, Vivint Solar, Sunrun, and SunPower executives have to be breathing a sigh of relief that they won this battle against utilities, because a loss in California could have been devastating.

Travis Hoium owns shares of SunPower. The Motley Fool owns shares of and recommends SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.