What is net metering and how does it work?

Updated

Thanks to net metering, your solar panels can save you - and help you make - a lot of money.
Thanks to net metering, your solar panels can save you - and help you make - a lot of money.

There are many advantages to using solar energy to power your home, from its cleanliness to providing independence from the electric grid. But one of the sweetest benefits of solar energy is the big financial savings. 

What makes installing solar panels such a great way to save money? The answer to that is simple: net metering. In fact, the best states for installing solar aren’t necessarily the ones that get the most sunshine - instead, it’s the ones with the best net metering policies. 

Let’s take a closer look at what net metering is and how it can easily put money back in your pocket.

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    What is net metering?

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

    This means when your solar energy system produces more electricity than your home needs, the excess electricity is sent to the power grid and your utility will pay you for it.

    In fact, if you have the right size rooftop solar system, you could make enough solar power to cover all of your energy usage for the year and wipe out your utility bill entirely! 

    See how many solar panels you would need to offset your electricity bill

    How does net metering work?

    If you think about it, your home doesn’t use that much electricity during the day, which is when your solar panels are the most productive. From 7 AM to 5 PM, you’re at work, the kids are probably at school, not much is going on in the house - so there isn’t a whole lot of electricity being used. So, your solar panels will be making a lot of electricity at a time you don’t really need it. 

    Without net metering, all of that extra solar energy your panels produced would be sent to the grid, and you wouldn’t get anything for it! 

    On the other hand, with net metering, your utility company will pay you for that solar electricity you send to the grid. Usually, utilities pay you back by applying an energy credit to your electric bill for each kilowatt-hour (kWh) of solar power you’ve sent to the grid. 

    You can watch our video on grid-tied solar installations to get a better understanding of how a solar panel system powers a home during the day: 

    Those net metering credits can then be used to offset any energy you take from the grid when your solar panels aren’t producing electricity - like after the sun goes down. This allows you to get the full economic value of all of the solar energy your panels produce.

    In other words, you don’t have to pay for all of the electricity you use from the grid because your net metering credits will cancel out your future grid usage, which is what makes net metering so valuable! 

    What are the benefits of net metering?

    Utility bill savings

    The greatest benefit of net metering to solar homeowners are the utility bill savings. Net metering can result in tens of thousands of dollars in savings over the lifetime of your solar panel system.

    If your solar system is sized correctly, you can potentially wipe out all of your energy use costs in a billing cycle. Keep in mind though, your electricity bill probably includes some fixed charges that net metering will not eliminate. 

    Shorter payback periods

    Areas that offer full retail net metering will have much shorter payback periods than places that don’t. This is because solar homeowners will be saving more on their electricity bills, and thus recouping their investment costs faster. 

    For example, a solar power system in New Jersey would have a payback period of between 4 to 5 years, thanks in large part to net metering. A system in South Dakota, on the other hand, could take up to 12 years to pay off because the state has no form of net metering in place. 

    Net metering isn’t the only thing that impacts your solar payback period. Things like the size of your photovoltaic system, the amount of electricity you use, the cost of your installation, and the solar incentives and rebates in your area will all play a role in how long it will take to pay back your solar panels. 

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

    No need for expensive battery storage

    Net metering ensures 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 net metering, you would have to install a solar battery to store and use your excess generation, which will cost you a couple thousand dollars. Without net metering or energy storage, all of the extra power would get sent to the grid and you wouldn’t get any value from it. 

    Reduces pressure on the grid

    Residential solar panels provide a big benefit to utilities and their customers because they help reduce the amount of stress on the electric grid distribution system. Because solar homeowners aren’t using power from the grid but using their own electricity instead, there are less people drawing power from the grid directly. 

    Plus, when a solar system sends excess energy to the grid, that electricity is used by other non-solar utility customers so they can meet their own energy demands. This takes even more pressure off of utility power plants. 

    Relieving some of the stress from the electric grid is especially important now in places like California, as heat waves become more common and utilities can’t meet energy demands.

    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 through this article - when you receive the full retail rate of electricity for each kWh of power you send to the grid

    More and more states are switching to alternative net metering programs which don’t give homeowners the full retail rate of electricity for excess solar energy sent to the grid. Why? Because utility companies claim net metering causes electric prices to rise for non-solar customers. 

    This issue, called cost-shifting, does occur when there is a substantial amount of solar installed on the grid. However, very few states are close to reaching this threshold, so it seems the war that’s being waged on net metering is more about protecting utility profit margins and political agendas than it is about rate hikes for customers. 

    When a state doesn’t have full retail net metering in place, it will often either have what is called “avoided-cost net metering” or some other alternative net metering program. With avoid cost rate net metering, utilities compensate customers at the avoided cost rate of electricity, which is substantially lower than the retail rate. Other states have alternative programs, which don’t quite fall into full-retail net metering or alternative-cost rate net metering.

    You can read our official ranking of net metering policies in the United States to get a better idea of what kinds of net metering rules are out there and what they mean for solar in your state.

    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 specific home
     

    Key takeaways

    • Net metering is a utility rate structure that allows you to sell the excess solar electricity that your home doesn’t use back to the grid.
    • Solar panels produce the most electricity in the afternoon, which is also when your home consumes the least amount of energy. Net metering lets you sell that excess afternoon production to your utility and offset the cost of your electricity consumption later in the day when the sun goes down.
    • The biggest benefits of net metering to homeowners is increased utility bill savings and a shorter solar payback period.
    • Net metering is often used as an umbrella term for all kinds of solar utility rate structures, including avoided-cost rate net metering, gross metering, and feed-in-tariffs.
    • 29 states offer full retail net metering, 6 offer avoided-cost rate net metering, and 11 states offer some form of alternative net metering program.
     - Author of Solar Reviews

    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.

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