What is net metering and how does it work?

Updated October 23, 2020

There are many advantages to using solar energy to power your home in 2020. Some of the benefits of installing solar panels include the use of clean energy, greater independence from the electric grid, and most importantly, big financial savings.

So what makes installing solar panels such a great way to save money? The answer to that is simple: net metering. Let’s take a closer look at what net metering is and how it can easily put money back in your pocket.

What is net metering?

Net metering, also called net energy metering or NEM, is a utility rate structure that requires your utility to purchase the excess solar energy that your solar panels produce at the full retail rate of electricity.

Other renewable energy sources, like wind power, geothermal, hydropower, and fuel cells may also qualify for net metering, however, it is mainly used for solar power systems.

In other words, when your solar energy system produces more electricity than your home needs, the excess power will be sent to the power grid. Your utility will pay you for each kilowatt hour (kWh) of solar electricity you send to the grid, usually in the form of a net metering credit on your electricity bill. The credit will be equal to the full retail price of electricity.

If you have the right size rooftop solar system, you could make enough solar power to cover all energy usage for the year. This would wipe out your utility bill entirely!

How does net metering work?

Solar panel systems usually produce the most electricity during the middle of the day, which also happens to be when homes use the least amount of energy.

Homes use the most amount of electricity in the morning and the evening, when solar panel production is lower.

This video explains how a grid-connected solar system works to power a home during the day:

If it wasn’t for net metering, you wouldn’t get any value out of all of that extra energy you produced during the day. However, because net metering credits you for that extra energy, you get the value of it later, when your solar panels aren’t producing any electricity.

Let’s take a look at an example to get a better idea of how net metering works. Between 12:00 PM and 1:00 PM, your solar panels produced 10 kWh of electricity. During that same time period, your home only consumed 2 kWh of electricity.

Those extra 8 kWh of excess generation are sent to the grid, and you get 8 kWh energy credits that can offset your energy use later in the day. So, you won’t have to pay for 8 kWh that you take from the grid later in the evening when your panels aren’t generating electricity.

In other words, you don’t pay for all of the electricity you use from the grid because your net metering credits cancel out some of your grid usage!

What are the benefits of net metering?

Utility bill savings

The biggest benefit of net metering to solar homeowners is the utility bill savings, as net metering can greatly reduce your monthly power bills. Net metering can significantly reduce your monthly power bills.

This results in tens of thousands of dollars in savings over the life of your solar system, and your panels can quickly pay for themselves.

Calculate your payback period when you install solar panels on your home

Expands the solar industry

Net metering is one of the most influential pieces of energy policy for the solar industry. When you look at the Solar Energy Industries Association’s (SEIA) list of the top states for solar, all of the major utility companies in these states offer some form of net metering.

Without net metering, solar projects aren’t as attractive for homeowners. When there is some form of net metering in place, more people will install solar power systems, creating a healthier solar market.

Plus, a booming solar market isn’t just good news for the solar industry, but it’s also great for the local economy. More solar projects means there will be a higher demand for solar installers, increasing the number of good-paying jobs in the area.

No need for expensive battery storage

Net metering also ensures that you get the most out of your solar panels. When your utility offers net metering, it allows you to use the grid as a ‘virtual’ battery to store the economic value of your excess solar power.

Without it, you would need to install energy storage to store your excess electricity, which can run you thousands of dollars. Otherwise, your excess power would just get sent to the grid, without you getting any value from it.

Removes pressure from the grid

Residential solar panels help reduce the amount of stress on the distribution systems of the electrical grid, which is a big benefit to utilities and all utility customers.

Because solar homeowners aren’t using power from the grid, and are instead using their own solar electricity generation to power their home, there are less people taking from the grid directly.

Plus, when a solar system sends energy to the grid, that electricity is used by other non-solar customers to meet their energy needs, which takes even more pressure off of the utility’s power plants.

Taking stress off the electricity grid is especially important now as heat waves become more common and utilities in places like California can’t meet energy demands.

How does net metering affect your solar payback period?

Areas that offer full retail net metering will have shorter payback periods than areas that do not offer net metering. On average, solar panel systems have a payback period between four and nine years.

For example, let’s say you installed solar panels on your roof in New Jersey, where utilities offer full retail net metering. You install a 5.7 kW system that will produce 8,758.91 kWh of electricity per year, enough to cover your home’s yearly energy usage. That’s about $1,413 worth of electricity.

With the average cost of solar in New Jersey being about $2.77 per watt, this system would cost $15,789 to install. After the 26% federal tax credit, that price drops down to $11,683.86. If the system is producing $1,413 worth of electricity per year, it would take just 8.3 years for your solar panels to save you as much as you spent on the system.

Keep in mind, your actual solar payback period will vary depending on a number of factors, such as:

The size of your system
The amount of electricity your home consumes
The price of electricity in your area
The cost of installation
Applicable tax credits or rebates

Not all net metering policies are created equal

Net metering has come to be a catch-all phrase that is used to describe any method that utilities use to purchase solar power from homeowners. True net metering is what we have described throughout this article - where you receive the full retail rate of electricity for each kWh of power you send to the grid.

Some states, like Georgia, only require utilities to compensate customers at the avoided cost rate of electricity, which is substantially lower than the full retail rate, and thereby decreases your solar savings. Other states have alternative net metering programs, like gross metering in Louisiana and feed-in-tariffs in Hawaii.

Many states are starting to consider moving towards alternative net metering programs. They claim full retail net metering causes utilities to raise electric prices for non-solar customers.

Net metering is under threat throughout the United States, from New York to Kentucky to California. This war on net metering is a great reason to go solar now, while full retail net metering is still widely available.

Is net metering available in all states and cities?

Net metering is technically mandated in 38 states, and Washington D.C. 29 states require full retail net metering, six offer avoided cost rate net metering, and 11 states have some sort of alternative net metering program.

In addition, major utility companies in Idaho and Texas offer net metering to their residential customers without being mandated to do so. South Dakota and Tennessee are the only states that do not have any form of net metering in place at all.

You can find out specific information about programs in your area by selecting your state from the below table, which shows each state and the various types of net metering as of September 2020:

State	Full-retail net metering	Avoided cost net metering	Alternative program
Alabama	No	No	Yes
Alaska	Yes	No	No
Arizona	No	No	Yes
Arkansas	Yes	No	No
California	Yes	No	No
Colorado	Yes	No	No
Connecticut	Yes	No	No
Delaware	Yes	No	No
Florida	Yes	No	No
Georgia	No	Yes	No
Hawaii	No	No	Yes
Idaho	Yes*	No	No
Illinois	Yes	No	No
Indiana	Yes	No	No
Iowa	Yes	No	No
Kansas	Yes	No	No
Kentucky	No	No	Yes
Louisiana	No	No	Yes
Maine	Yes	No	No
Maryland	Yes	No	No
Massachusetts	Yes	No	No
Michigan	No	No	Yes
Minnesota	Yes	No	No
Mississippi	No	Yes	No
Missouri	No	Yes	No
Montana	Yes	No	No
Nebraska	No	Yes	No
Nevada	No	No	Yes
New Hampshire	Yes	No	No
New Jersey	Yes	No	No
New Mexico	Yes	No	No
New York	Yes	No	No
North Carolina	Yes	No	No
North Dakota	No	Yes	No
Ohio	Yes	No	No
Oklahoma	No	No	Yes
Oregon	Yes	No	No
Pennsylvania	Yes	No	No
Rhode Island	No	Yes	No
South Carolina	No	No	Yes
South Dakota	No	No	No
Tennessee	No	No	No
Texas	Yes*	No	No
Utah	Yes	No	No
Vermont	Yes	No	No
Virginia	Yes	No	No
Washington	Yes	No	No
Wisconsin	No	No	Yes
West Virginia	Yes	No	No
Wyoming	No	No	Yes

*Major investor-owned utilities in these states offer full retail net metering even though there is no state mandate requiring them to do so.

We recommend consulting with local solar installers for the most accurate and up-to-date information on net metering in your area, as policies are always changing and can vary between utilities.

If your state allows it, having a net metered solar system is the best way for you to take advantage of renewable energy while saving thousands of dollars over the lifetime of the system.

See how much net metering can save you when you install solar on your home

Author: Catherine Lane | SolarReviews Blog Author

Catherine is a researcher and content specialist at SolarReviews. She has strong interests in issues related to climate and sustainability which led her to pursue a degree in environmental science at Ramapo College of New Jersey.