Net billing: Meaning, Criticisms & Real-World Uses

What Is Net Billing?

Net billing is a utility billing mechanism that compensates customers who generate their own renewable energy, typically through rooftop solar power systems, for the excess electricity they export to the electricity grid. Unlike traditional net metering, which often credits exported energy at the full retail price of electricity, net billing provides compensation based on a lower rate, frequently tied to the utility's "avoided cost" of generating or purchasing that power in the wholesale market. This approach falls under the broader category of renewable energy policy and utility billing, influencing customer incentives for distributed generation. Net billing aims to more accurately reflect the utility's cost savings from distributed generation while balancing grid costs and responsibilities.

History and Origin

The concept of compensating customers for self-generated electricity evolved significantly with the growth of rooftop solar. Early policies, often referred to as Net Energy Metering (NEM 1.0), provided a one-for-one credit for each kilowatt-hour (kWh) of excess electricity exported to the grid, effectively running the meter backward²³. This simplified billing encouraged rapid adoption of solar technologies by making the financial benefits clear and predictable²².

However, as solar adoption increased, utilities and some regulators began to argue that net metering policies created a cost shift, where non-solar customers effectively subsidized solar customers by bearing a disproportionate share of fixed grid infrastructure costs²¹. The Solar Energy Industries Association (SEIA) has actively engaged in these debates, advocating for policies that support distributed solar while utilities contend with perceived revenue losses¹⁸, ¹⁹, ²⁰.

This ongoing debate led to transitional models (NEM 2.0) that introduced additional fees or mandatory time-of-use rates¹⁷. More recently, states like California transitioned to net billing (often referred to as NEM 3.0), which represents a significant departure from the original full retail rate credit. This shift aims to compensate for exported power at a rate closer to what the utility would pay for wholesale power, rather than the retail rate customers pay¹⁶. Such changes reflect an effort by state regulatory bodies, like the Public Utility Commission of Texas, to review and adapt policies for integrating distributed energy resources into the market¹⁴, ¹⁵.

Key Takeaways

Net billing compensates customers for excess electricity exported to the grid at a rate lower than the retail price.
The compensation rate under net billing is often based on the utility's avoided cost of generating or procuring power.
This mechanism is a response to concerns about cost shifts associated with traditional net metering.
Net billing policies can impact the economic viability and payback period for new solar investment for customers.
It encourages consumers to maximize self-consumption of their generated power rather than exporting excess to the grid.

Formula and Calculation

Net billing does not involve a single, universally applied formula like a financial ratio. Instead, the calculation of a customer's bill under a net billing scheme involves two primary components:

Electricity Consumed from the Grid: This is calculated by multiplying the amount of electricity imported from the utility by the prevailing retail rate (which may include different tiers or time-of-use rates).
Credits for Exported Electricity: This is calculated by multiplying the amount of excess electricity exported to the grid by the specific export compensation rate, which is typically lower than the retail rate. This export rate is often based on the utility's avoided cost, which is what the utility avoids paying to generate or purchase electricity from other sources.

The final bill reflects the total cost of consumed energy minus the monetary credit for exported energy.

The net amount owed by or credited to the customer can be summarized as:

\text{Net Bill} = (\text{Consumed Energy} \times \text{Retail Rate}) - (\text{Exported Energy} \times \text{Export Rate})

Where:

(\text{Consumed Energy}) is the amount of electricity a customer draws from the grid.
(\text{Retail Rate}) is the price per kilowatt-hour the customer pays for electricity.
(\text{Exported Energy}) is the amount of excess electricity a customer's system sends back to the grid.
(\text{Export Rate}) is the compensation rate per kilowatt-hour for exported electricity, typically lower than the retail rate.

Interpreting Net Billing

Interpreting net billing policies primarily involves understanding the economic incentives for solar system owners and the implications for their energy consumption patterns. A lower export rate under net billing means that the financial benefit of sending excess electricity back to the grid is diminished compared to traditional net metering. This encourages customers to optimize their self-consumption. For instance, customers might invest in battery storage systems to store excess daytime solar production for use during evening hours, rather than exporting it for a lower credit¹³.

The specific export rate can vary significantly by utility and regulatory jurisdiction, often fluctuating based on market conditions or the time of day the power is exported. Evaluating the net billing structure involves assessing the difference between the retail rate and the export rate, as this gap directly impacts the payback period for a solar installation. Financial planning for solar energy systems under net billing necessitates a detailed analysis of consumption profiles, generation patterns, and the specific terms offered by the local utility.

Hypothetical Example

Consider a residential customer, Jane, who installs a solar panel system on her home. Her utility operates under a net billing scheme.

Scenario:

Retail Rate: $0.25 per kWh
Export Rate (Avoided Cost Rate): $0.05 per kWh
Monthly Consumption from Grid: 300 kWh (energy drawn from the grid when her solar panels aren't producing enough)
Monthly Exported Energy to Grid: 200 kWh (excess energy her panels produced and sent back)

Calculation:

Cost of Consumed Energy:
(300 \text{ kWh} \times $0.25/\text{kWh} = $75.00)
Credit for Exported Energy:
(200 \text{ kWh} \times $0.05/\text{kWh} = $10.00)
Net Bill:
($75.00 - $10.00 = $65.00)

In this hypothetical example, Jane would owe the utility $65.00 for the month. If her system had operated under a traditional net metering policy with a 1:1 retail rate credit, her credit for exported energy would have been (200 \text{ kWh} \times $0.25/\text{kWh} = $50.00), resulting in a net bill of ($75.00 - $50.00 = $25.00). This illustrates how net billing can reduce the monetary credit for excess generation compared to net metering.

Practical Applications

Net billing policies primarily show up in the regulation and planning of energy markets, particularly as jurisdictions seek to manage the growth of distributed generation. Regulatory bodies, such as the Public Utility Commission of Texas, actively review and adapt rules to accommodate these resources¹¹, ¹².

One key application is in incentivizing smart demand response and energy storage solutions. Since exporting power yields less value under net billing, customers are encouraged to consume their self-generated electricity or store it for later use, potentially reducing peak demand on the grid¹⁰. This can lead to a more efficient use of the local electricity network and defer costly infrastructure upgrades.

Utilities and policymakers use net billing to influence the economic viability of rooftop solar installations versus larger, centralized utility-scale solar projects. Economic studies, such as those conducted by The Brattle Group, analyze the varied value streams that different types of solar and storage projects provide to the electrical grid, influencing policy decisions around compensation mechanisms like net billing⁷, ⁸, ⁹. Net billing also plays a role in the broader debate about how the costs of maintaining and upgrading the grid are recovered from all ratepayers⁶.

Limitations and Criticisms

One of the primary limitations of net billing, particularly with low export rates, is its potential to significantly reduce the financial attractiveness of new rooftop solar installations for consumers. This can slow the adoption of distributed generation, even in areas with high solar potential⁵. Critics argue that very low export compensation rates do not adequately reflect the full value that distributed solar provides to the grid, such as reducing transmission losses, deferring infrastructure investments, and enhancing grid resilience⁴. A study by The Brattle Group notes that rooftop projects in urban areas can provide significant value in terms of energy, capacity, and avoided transmission and distribution infrastructure³.

Another criticism revolves around the fairness of the "avoided cost" rate. Defining this rate can be complex and contentious, with solar advocates often arguing that utilities undervalue the benefits of distributed energy². Furthermore, the lack of a standardized approach to net billing across different states or regions creates complexity and uncertainty for solar developers and homeowners alike, potentially hindering long-term investment and financial planning in distributed energy resources.

Net Billing vs. Net Metering

The core difference between net billing and net metering lies in how excess electricity exported to the grid is valued and credited.

Feature	Net Metering	Net Billing
Credit for Exported Energy	Typically at the full retail rate of electricity	At a lower rate, often based on avoided cost or wholesale price
Economic Incentive	Maximizes bill savings, encourages exporting excess	Encourages self-consumption, may incentivize storage
Meter Behavior	"Runs backward" to credit kWh against future use	Tracks imported and exported kWh separately, applies monetary credit for exports
Impact on Solar ROI	Generally leads to faster payback periods	May extend payback periods, requiring more nuanced financial analysis
Policy Evolution	Earlier, simpler policy	Newer, more complex policy, often a transition from net metering

While net metering provided a straightforward, one-to-one exchange for energy, simplifying customer understanding and rapidly accelerating solar adoption, net billing introduces a bifurcated pricing structure. This distinction is crucial for understanding the evolving landscape of renewable energy policy and the varying economic incentives for consumers to adopt distributed energy systems. The confusion often arises because both mechanisms involve sending excess power to the grid, but the financial terms of that exchange are fundamentally different.

FAQs

How does net billing affect my electricity bill?

Under net billing, your electricity bill will reflect the difference between the power you consume from the grid (billed at the retail price) and the monetary credit you receive for any excess power your solar system sends back to the grid (credited at a lower, usually avoided cost, rate). This means your bill reduction from solar might be less than under a traditional net metering scheme.

Do I need a battery with net billing?

While not always mandatory, a battery storage system can become significantly more financially beneficial under net billing policies. Since the compensation for exported energy is lower, storing your excess solar power for your own evening use can be more economical than selling it back to the grid for a reduced credit¹.

Why are utilities shifting to net billing?

Utilities often advocate for net billing to address concerns about the recovery of fixed grid costs and to ensure that all customers contribute equitably to the maintenance and operation of the electricity grid. They argue that the lower export rate more accurately reflects the utility's avoided cost of procuring that electricity, rather than the higher retail price which includes delivery and other service charges.