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.

Net metering, also called net energy metering or NEM, is a utility rate program that requires your electric 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 pays you for it. Net metering is what makes rooftop solar panels such a great way to save money! In fact, the best states for installing solar aren’t the ones that get the most sunshine - it’s the ones with the best net metering policies.

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

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

    How does net metering work?

    In short, net metering gives you credit for returning solar electricity to the grid, and it offsets electricity you take from the utility in the future -- giving you the full economic value of all the solar energy your solar panels produce. If your solar system is sized properly, you can potentially eliminate all of your monthly electric costs.

    Solar panels generate the most electricity during the middle of the day when the sun is shining. The problem is that the middle of the day also happens to be when you use the least amount of electricity. So your panels are generating way more electricity than your home needs at that time. 

    When solar panels produce more electricity than a home uses, the excess generation is sent to the grid. This is where net metering comes into play. When a net metered system sends solar energy to the grid, your electric meter spins backwards and your utility applies a credit for the full retail value of electricity to your account. 

    Then at night, when your solar panels aren’t producing, you take electricity from the grid, spinning your electric meter forward again. At the end of the billing period, the utility nets how much electricity you sent to the grid versus how much you used to determine your final bill - hence the name net metering. 

    Do net metering credits carry over from month to month?

    It depends on the utility, but most full-retail net metering programs allow energy credits to carry over from month to month. So, if you generate more electricity than you used in a month, the excess net metering credits can be used to offset electricity you take from the grid the next month. 

    Usually you’ll have excess credits in the summer months, when the days are long and sunny. You can bank up these summer credits to cut down your electric bills in the dark winter months. 

    How and if credits actually can carry over from month to month depends on your utility’s true-up policy, AKA how often they buy out credits, which you can usually find within their net metering policy.

    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.

    As we said earlier, solar panel systems can be designed to offset all of a solar customers’ energy use costs within a billing cycle. However, most electric bills include some fixed charges that net metering can’t 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

    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.

    Is net metering available in all states and cities?

    Net metering is technically mandated in 38 states and Washington D.C. Out of all 50 states, 29 require full-retail net metering, and 17 offer some kind of alternative net metering program or tariff. In addition, some major utility companies in Idaho and Texas offer net metering to their residential solar customers, even though they are not mandated to do so. 

    South Dakota and Tennessee are the only states that do not have any form of net metering or alternative net metering rules in place. But, these states might not be alone for long. Throughout the U.S., utility companies have been fighting to cut net metering programs to reduce residential customers' solar savings and increase the companies’ profit margins. Utilities have succeeded in states like Louisiana and South Carolina, and net metering changes are even slated to happen in California, the most solar-friendly state. 

    You can also 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. 

    Go solar now while net metering is still available for the best savings

    We’re going to be honest - the best days of net metering are behind us. And the future of net metering doesn’t look good. Despite being the driving force behind the solar industry, net metering is under attack by greedy electric utility companies looking to save their profit margins. 

    In order to guarantee that you’ll get the best savings through net metering, you should consider going solar sooner rather than later. If you wait, you run the risk of your utility cutting the program, which means you’ll save less in the long run. 

    You can find out more about how much solar panels can save on your electricity bill by using our solar panel calculator. By using information from installers in your area, we can provide you a personalized estimate for your specific home of not just your solar savings, but also how much a solar installation will cost, so you can determine if solar is a worthwhile investment for your home. 

    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 excess solar electricity that your home doesn’t use back to the grid.
    • The biggest benefits of net metering to homeowners are increased utility bill savings and a shorter solar payback period.
    • Despite being the reason that solar is such a great investment, utility companies are cutting net metering programs throughout the United States, making now the time to install solar panels so you can save the most.
    • Full-retail net metering is offered in 29 states, while 17 states offer some other solar billing structure.
     

     - 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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