TL;DR
- NEM 3.0 (April 2023) cut SDG&E export credits by roughly 75%. Solar still pencils in San Diego, but the payback math is no longer about exporting to the grid.
- The new math rewards self-consumption. Run high-draw loads (AC, EV, pool pump, heat pump water heater) during solar production hours, 10am to 3pm.
- A typical SDG&E home with 4kW of solar and a properly matched variable-speed AC saves $1,400 to $2,800/year on cooling. Add a battery and that climbs to $2,200 to $4,200/year.
- Battery storage went from “nice to have” under NEM 2.0 to “the thing that makes new solar worth it” under NEM 3.0.
- Right-sizing your AC and matching it to your solar production curve is now a real-money decision. Oversized single-stage units are the worst pairing.
Most national articles about solar and AC are written by solar installers who want to sell you panels. This one is written from the HVAC side. The honest answer in San Diego in 2026 is that solar still works, but the way it pays you back has flipped. Under NEM 2.0, you exported excess energy at near-retail rates and the utility was, in effect, paying you to act as a battery. Under NEM 3.0, SDG&E pays you a fraction of that, sometimes as low as $0.05 to $0.08/kWh during off-peak export hours, while charging you $0.45 to $0.65/kWh during peak import hours.
That gap is where the new payback lives. And your AC is the single biggest lever you have to close it.
What NEM 3.0 actually changed
The California Public Utilities Commission approved the Net Billing Tariff (NEM 3.0) in December 2022, with new applications switching to it as of April 15, 2023. Anything installed before that date stays on NEM 2.0 for 20 years from interconnection. Anything new in 2026 is on NEM 3.0.
The headline change: export credits dropped from roughly the retail rate (around $0.30 to $0.40/kWh on SDG&E’s TOU-DR1) to an “avoided cost calculator” rate that averages $0.05 to $0.09/kWh across most hours, with brief peaks of $0.20 to $2.00+/kWh on a handful of late-summer evenings.
What that means in practice:
- Exporting solar at noon in July earns about $0.06/kWh.
- Buying grid power at 6pm in July costs about $0.55/kWh.
- Every kWh you can shift from grid purchase to direct solar self-consumption is worth 8 to 10x more than the export credit.
This is why AC strategy matters. AC is the highest-draw appliance in most San Diego homes, and it runs during the exact hours solar is producing. If you set up your system right, the AC eats your solar at $0.06 “lost export value” instead of the home pulling $0.55 grid power four hours later when the panels are dark.
The 2026 SDG&E rate picture
SDG&E’s default residential time-of-use plan (TOU-DR1) for 2026 looks roughly like this:
| Period | Hours | Approximate rate (summer) |
|---|---|---|
| Off-peak | Midnight to 6am, 10am to 4pm weekdays | $0.36 to $0.42/kWh |
| Peak | 4pm to 9pm every day | $0.55 to $0.65/kWh |
| Super off-peak | 10am to 2pm March through May | $0.30 to $0.36/kWh |
The 4pm to 9pm peak window is the killer. Solar production drops sharply after 3pm and is effectively done by 6pm in summer. That’s exactly when SDG&E charges its top rate. Without storage, every AC cycle from 4pm onward is paid for at peak rates.
How AC choices change the payback
This is where the HVAC side gets specific. The same 4kW solar array produces very different annual savings depending on what AC is downstream of it.
| AC type | Annual cooling cost (no solar) | Annual cooling cost (with 4kW solar, no battery) | Annual cooling cost (with 4kW solar + 10kWh battery) |
|---|---|---|---|
| Oversized single-stage (3.5 ton, 14 SEER2) | $1,400 to $1,800 | $900 to $1,200 | $400 to $700 |
| Right-sized two-stage (2.5 ton, 16 SEER2) | $1,000 to $1,300 | $500 to $750 | $150 to $400 |
| Right-sized variable-speed (2.5 ton, 18+ SEER2) | $700 to $950 | $250 to $500 | $50 to $250 |
Three things stand out. First, an oversized single-stage AC wastes solar. It cycles hard, pulling 4 to 5 kW for short bursts, often exceeding what the panels are producing in any given minute, which means the rest comes from the grid. Second, a variable-speed unit modulates down to 30 to 40% of capacity and matches the solar production curve almost line for line. Third, a battery is what closes the peak-hours gap. Without one, you pay SDG&E peak rates from 4pm to 9pm no matter what AC you have.
The new “right move” for a San Diego home in 2026
If you’re starting from scratch (new construction, full system replacement, or a major remodel), the order of operations changed under NEM 3.0:
- Right-size the AC first. A Manual J load calculation, done properly, almost always shows San Diego homes need 15 to 30% less cooling tonnage than what’s currently installed. Smaller, modulating equipment makes everything downstream cheaper.
- Pick variable-speed. Inverter-driven condensers ramp up and down to match load. They run more total hours but at much lower wattage, which lines up with how solar produces energy across the day.
- Add smart thermostat scheduling. Pre-cool the house to 70 to 72°F between noon and 3pm using solar, then let it drift up to 76 to 78°F during the 4pm to 9pm peak window. The thermal mass of the building carries the comfort.
- Add battery storage if the math works. A 10 to 13.5 kWh battery typically adds $9,000 to $14,000 net of the federal 30% ITC. Payback in NEM 3.0 territory is usually 7 to 10 years for a household running AC heavily June through September.
- Consider electrifying other loads. Heat pump water heaters and EVs both benefit from the same solar-self-consumption logic. Each one you add increases the rate of return on the solar you already have.
Where solar still doesn’t pencil
Honest math goes both ways. There are San Diego homes where new solar in 2026 still doesn’t pay back inside 12 years:
- Coastal homes with marine layer through July (Imperial Beach, Coronado, parts of La Jolla and Encinitas). Solar production is 15 to 25% lower annually than inland San Diego, and AC runtime is also low. The numerator and denominator both shrink.
- Homes with shaded south-facing roofs (mature trees, neighbor structures, complex rooflines). South-facing shading kills production more than any other variable.
- Renters or homeowners planning to sell within 4 years. Even with the increased home-value bump from solar, you won’t capture enough of the payback.
- Households that already use very little electricity (under 400 kWh/month). The savings ceiling is too low.
Everywhere else, solar still works. It just works differently than it did 3 years ago.
What this means for an AC replacement decision right now
If your current AC is failing and you’re weighing whether to replace it now or wait until you also add solar, the answer in 2026 is usually: replace the AC now with variable-speed, then add solar later sized to the new (lower) load. The reasons:
- Variable-speed AC saves money even without solar, $300 to $600/year in San Diego summers vs. an old single-stage unit.
- Solar sized to an inefficient AC is solar wasted. The right sequence is efficiency first, generation second.
- Heat pump rebates (SDG&E, TECH Clean California, federal 25C, HEEHRA for income-qualified) can cover 40 to 70% of the install cost on a high-efficiency variable-speed system, putting it inside reach for households that thought it was out of budget.
For more on the right tonnage for your home, see our Manual J sizing post. For the heat pump rebate stack, see the SDG&E heat pump rebate data post. For variable-speed vs. single-stage payback, see heat pump vs AC for San Diego.
FAQ
Does solar still pay back AC in San Diego under NEM 3.0? Yes, but slower than it used to and only if you use the energy yourself. Typical payback on solar alone moved from 5 to 7 years (NEM 2.0) to 9 to 13 years (NEM 3.0). Adding a battery and right-sizing the AC pulls that back toward 7 to 9 years for most San Diego homes that run AC heavily.
Do I need a battery to make solar worth it on NEM 3.0? Not strictly, but the math is much weaker without one. Without a battery, you give up most evening peak savings. With one, you cover the 4pm to 9pm peak window from stored solar instead of $0.55/kWh grid power. Most San Diego homes adding solar in 2026 add storage at the same time.
Should I install solar before or after replacing my AC? Replace the AC first if it’s near end of life, then size solar to the new, lower cooling load. Solar sized to an oversized, inefficient AC means you’re paying for panels you don’t need.
What size battery do I need to cover AC at peak hours? For a typical San Diego 2.5 ton variable-speed AC running 4pm to 9pm in summer, plan for about 8 to 10 kWh of usable battery capacity dedicated to cooling. Combined with fridge, lighting, and miscellaneous evening loads, most households end up with a 10 to 13.5 kWh battery (one Tesla Powerwall 3 or two LG ResuPrime units).
Does NEM 3.0 affect existing solar customers? No. If your solar was interconnected on or before April 14, 2023, you stay on NEM 2.0 for 20 years from your original interconnection date. Don’t switch your system, don’t expand it without checking the grandfathering rules carefully, and don’t let an installer talk you into a “system upgrade” that flips you to NEM 3.0 without understanding the tradeoff.
What about backup power during outages? A battery sized for AC time-shifting will also carry essential loads (fridge, lights, internet, a few outlets) for 12 to 24 hours during a grid outage. Running AC on battery during an outage is possible but burns through capacity fast, typically 4 to 8 hours per full battery for a 2.5 ton system.
Bottom line
NEM 3.0 didn’t kill solar in San Diego. It killed lazy solar. The math used to forgive an oversized AC, an old single-stage compressor, and zero scheduling. It doesn’t anymore. The homes getting the best returns in 2026 are the ones treating cooling efficiency, solar production, and battery storage as one connected system instead of three separate decisions.
If you’re weighing an AC upgrade and want to know how it fits with current or future solar, call (442) 777-6440 for a free assessment. We’ll look at your existing equipment, your SDG&E usage pattern, and what makes sense given your roof, your shading, and your household load.