Solar energy generation has grown exponentially over the past few years, a trend that shows no signs of slowing anytime soon. This is particularly true for states with strong renewables generation and emission reduction policies, like California, Arizona, Massachusetts, and Hawaii.

This is good news for climate and environmental protection, but along with success comes new challenges.

The U.S. Energy Information Administration (EIA) reported that in March 2017 utility-scale solar briefly served 40 percent of California’s electricity demand. Along with rooftop generation, EIA estimated that more than 50 percent of mid-day electricity demand was met with solar (3). That’s a big accomplishment for a state committed to 50 percent renewable generation by 2030.

During that same period, wholesale electricity prices in California dropped below zero. Negative pricing sounds like a positive thing for consumers, but it points to two major obstacles facing solar growth in California and other states with relatively high renewables penetration: oversupply and value deflation.

Oversupply can happen when intermittent solar and wind produce enough electricity to push demand for traditional baseload generation below forecasts. For the electric grid to function properly, energy supply must be kept in constant balance with energy demand. Both an oversupply and undersupply of energy can result in serious problems, like widespread outages. When production by inflexible traditional generators, like coal and nuclear plants, can’t be pushed any lower, negative pricing and renewable generation curtailment occur.

Curtailment means that some portion of the solar energy generation gets cut off, essentially wasting free, clean energy. In 2017, the president of the California Independent System Operator, which manages the state’s electric grid, warned that the grid operator may be forced to curtail as much as 8 gigawatts of power at certain times during the spring season, mostly solar (4). That’s a lot of lost clean energy.

Oversupply and curtailment are big factors in the second major issue facing renewables growth, value deflation. The fact is, that as more and more solar comes online, producing energy at the same time, the value of that generation to utilities and the grid declines.

This is most evident when curtailment occurs. With high enough levels of curtailment, the value of solar could decline to the point where additional installations are no longer worth the investment.

Until recently, the sunny daytime hours were when the California grid experienced much of its highest demand for electricity. Now, as solar production has carved out the net-daytime load, that peak demand for electricity has largely shifted to the evening hours.

This peak transition is illustrated by California’s infamous “duck curve.” It shows a steep decline in net energy demand as solar production ramps up in the morning, and an even steeper increase in energy demand in the early evening as solar production winds down and people return home from work (5). Similar trends have been seen in Arizona, Hawaii, and even the northeast, where solar expansion in Massachusetts is pushing down mid-day electricity demand throughout the region (6).

These large fluctuations in demand create balancing concerns for grid operators, which are often solved by inefficiently ramping expensive natural gas “peaker” generation up and down. But ironically and troubling, these trends are likely to intensify in states that have made the most progress on solar policy, leading them to reevaluate these policies.

States and utilities are responding to declines in the grid value of solar by adjusting net metering policies and imposing new rate tariff designs, leading to solar value deflation for homeowners and businesses as well.

California is responding by shifting most of its utility customers to time-of-use utility rates, where the highest prices for electricity occur when the sun isn’t shining. The state has also applied small charges to solar energy that is exported to the grid and allowed utilities to increase the demand charges applied to commercial customers.

As noted in Clean Energy Group’s May 2017 report, Solar Risk: How Energy Storage Can Preserve Solar Savings in California Affordable Housing, the combination of these measures could result in more than a 50 percent drop in solar savings for some California utility customers who have invested in solar (7). (See Figure 8.)

Hawaii, with the highest rooftop solar penetration in the country, has taken similar steps. In 2015, Hawaii became the first state to dismantle its solar net metering program. The following year, the Hawaii Public Utilities Commission approved a pilot time-of-use rate program where electricity prices can jump by a factor of more than four times higher as the sun begins to set (8). Today, with limited solar exports allowed, most Hawaiian customers must invest in energy storage if they want to install a solar system.

This might be the most important issue in solar policy in a decade —without storage, the future economic value of solar is at risk.