What is net metering and how does it work?

Updated December 30, 2020

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. Some of the benefits of installing solar panels include the use of clean energy, greater independence from the 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. 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.

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 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 power is sent to the power grid.

Your utility will then apply a credit to your electric bill for each kilowatt-hour (kWh) of solar electricity you send to the grid. You can then use that credit to offset any energy you take from the grid when your solar panels aren’t producing electricity. This lowers the overall cost of your electricity bill.

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?

Homes use the most electricity in the morning and in the evening, which also happens to be when solar panels produce the least amount of power. During the middle of the afternoon, when homes are using less electricity, solar panels are producing the most.

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 the excess electricity your panels produced during the middle of the day. But when you do have net metering, that extra electricity gets sent to your utility and they reimburse you with a net metering credit. The net metering energy credits can then be used to offset your electricity usage later.

So, if you produce 5 kWh of excess solar power during the day, you will have 5 kWh worth of net metering credits. The credits will be used at night, when your home is using electricity but your solar panels aren’t producing any.

Not only do your solar panels produce more electricity during the afternoon, they produce more electricity in the summer, too. Luckily, with net metering, all of that excess summer production can help offset your future electricity bills in the winter months!

In other words, you don’t have to pay for all of the electricity you use from the gird, because your net metering credits will cancel out your future 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; net metering can significantly reduce your monthly power bills. If your solar panel system is sized correctly, you can potentially wipe out all of your energy use costs.

This results in tens of thousands of dollars in savings over the life of your system. For example, if your monthly electricity bill was $100, and your solar panels covered all of your electricity usage, you could save $1,200 in just one year!

It is important to keep in mind that your electricity bill likely includes fixed costs 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 they have no form of net metering in place.

It’s no coincidence that the Solar Energy Industries Association’s (SEIA) top states for installing solar systems all have some sort of net metering program in place.

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

The size of your system
Your electricity usage
The price of electricity in your area
The cost of installation
Tax credits and rebates

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.

Lessens pressure on the grid

Residential solar panels are 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 - where you receive the full retail rate of electricity for each kWh of power you send to the grid.

Some states only require utilities to compensate customers at the avoided-cost rate of electricity for excess solar energy, which is substantially lower than the retail rate of electricity. Despite this, it’s still classified as net metering.

Other states have alternative net metering programs, such as gross metering, which requires you to purchase all of your electricity from your utility and sell all of your solar production for a lower rate.

More and more states are starting to switch to alternative net metering programs, as they claim net metering causes utilities to raise electric prices for non-solar customers. With net metering coming under threat throughout the country, the best time to go solar is 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 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: 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.