What Is Net Metering?
Net metering is an electricity billing mechanism that allows consumers who generate their own electricity, typically from renewable energy sources like rooftop solar panels, to receive credit for any surplus electricity they feed back into the local electricity grid. This system falls under the broader category of public policy designed to promote distributed generation and reduce reliance on traditional power sources. When a customer's on-site generation exceeds their immediate energy consumption, the excess electricity flows to the grid, and their electric meter effectively runs backward, crediting their account. Customers are then billed only for their "net" energy use, which is the difference between the electricity consumed from the grid and the electricity sent back to it over a billing period17.
History and Origin
The concept of net metering emerged in the United States as a means to encourage the adoption of renewable energy technologies. Utilities in Idaho began to adopt net metering in 1980, followed by Arizona in 1981, and Minnesota passed the first state net metering law in 1983. By 2015, the practice had spread, with 44 states and Washington, D.C., developing mandatory net metering rules for at least some utility companies. A significant federal push came with the Energy Policy Act of 2005 (EPACT05), which required state electricity regulators to consider, though not necessarily implement, rules mandating public electric utilities to offer net metering to their customers upon request16. This legislative encouragement played a role in the policy's widespread adoption, transforming how consumers interact with the grid and receive financial compensation for their excess power generation.15
Key Takeaways
- Net metering credits customers for surplus electricity they generate and feed back into the grid.
- It primarily benefits residential and commercial customers with on-site renewable energy systems, such as solar.
- The mechanism typically involves a single, bi-directional meter that tracks both energy consumption from and export to the grid.
- Customers are billed only for their "net" energy usage, reducing their overall electricity costs.
- Net metering policies vary significantly by state and utility, impacting credit rates and treatment of excess generation.
Formula and Calculation
While net metering is a billing mechanism rather than a complex financial formula, its core calculation revolves around the difference between a customer's energy imported from the grid and energy exported to it. The "net" energy usage for which a customer is billed can be simplified as:
Here:
- Total Energy Consumed from Grid (kWh) refers to the total kilowatt-hour units of electricity drawn by the customer from the utility grid during a billing period.
- Total Excess Energy Sent to Grid (kWh) refers to the total kilowatt-hour units of surplus electricity generated by the customer's on-site system and exported to the utility grid during the same billing period.
The utility then applies its standard rates to this net energy usage. If the exported energy exceeds the consumed energy, the customer typically receives a credit on their next bill.
Interpreting Net Metering
Interpreting net metering involves understanding how it impacts electricity bills and the economic viability of on-site power generation. For customers, net metering generally means lower monthly electricity bills, as they offset their consumption with their own generation. The value of the credits received for exported energy can vary; in some cases, it's at the full retail rate, meaning each kilowatt-hour exported is worth the same as a kilowatt-hour consumed14. In other scenarios, compensation for excess generation might be at a lower, wholesale, or "avoided cost" rate13. Understanding the specific net metering policy in one's area is crucial for assessing the financial benefits of adopting renewable energy and making informed investment decisions.
Hypothetical Example
Consider a homeowner, Ms. Chen, who installed a rooftop solar system on her home. Her monthly billing cycle is from the 1st to the 30th.
- Energy Consumed from Grid: During the night and on cloudy days, Ms. Chen's home uses 400 kWh of electricity from the electricity grid.
- Excess Energy Sent to Grid: On sunny days, her solar panels generate more electricity than her home needs. She sends 250 kWh of surplus electricity back to the grid.
Under a typical net metering arrangement, her net energy usage for the month would be:
If her utility charges $0.20 per kilowatt-hour, her bill for the month would be:
Without net metering, Ms. Chen would have paid for the full 400 kWh consumed from the grid, plus she wouldn't have received credit for the 250 kWh she exported. Net metering significantly reduces her overall electricity costs.
Practical Applications
Net metering is a fundamental policy enabling the growth of distributed generation in various sectors. Its primary application is in residential and commercial settings, allowing property owners to offset their energy consumption with self-generated renewable power. This mechanism encourages individuals and businesses to make an investment in systems like solar photovoltaic (PV) installations, knowing they can receive credit for excess production. Beyond individual buildings, net metering supports the broader adoption of clean energy by simplifying the financial transaction between customer-generators and utility companies. It also contributes to grid stability by promoting local power sources, which can reduce strain on transmission infrastructure and mitigate peak demand12. The U.S. Energy Information Administration (EIA) collects data on net metering installations, highlighting its prevalence across different states and technology types, predominantly solar11.
Limitations and Criticisms
Despite its role in promoting renewable energy, net metering faces several limitations and criticisms, primarily from utility companies and non-participating ratepayers. A common critique is that net metering customers, especially those compensated at full retail rates, do not pay their fair share for maintaining the electricity grid infrastructure, which they still rely on for backup power and at night10. This can lead to a cost shift where non-solar customers subsidize grid maintenance.
Another limitation arises from the varying policies and compensation structures across different jurisdictions. Policies can change, sometimes reducing the value of exported energy credits. For example, in California, the Public Utilities Commission (CPUC) introduced a new "net billing tariff" (NBT), also known as NEM 3.0, which significantly reduced the export credits for new solar customers compared to previous net metering tariffs8, 9. This shift aims to better align compensation with the actual avoided cost of energy for the utility, but it has led to concerns about the economic viability of new solar investment for some customers7. The ongoing debate often centers on balancing the incentives for renewable energy adoption with the equitable distribution of grid costs. Advances in energy storage technologies may also influence future net metering policies, as consumers could store more of their self-generated power rather than exporting it.
Net Metering vs. Net Billing
While often used interchangeably or confused, net metering and net billing represent distinct approaches to compensating customers for their self-generated electricity.
Net Metering
Under traditional net metering, customers receive a one-to-one credit for each kilowatt-hour of excess electricity they send back to the grid. This means the value of the exported energy directly offsets the value of the energy consumed from the grid, typically at the full retail rate. The customer is billed only for the "net" difference in energy flow over a billing period, effectively making their meter "run backward"6.
Net Billing
Net billing, or a "net billing tariff," is a newer approach that separates the value of exported electricity from the retail rate of consumed electricity. With net billing, customers still use their on-site generation to offset their immediate energy consumption, but any excess energy exported to the grid is compensated at a different, often lower, rate. This rate is typically based on the utility's "avoided cost" of generating or procuring that power, rather than the full retail price that includes transmission, distribution, and other charges4, 5. This can result in lower financial compensation for exported power compared to traditional net metering.
The key difference lies in the compensation rate for exported energy: retail rate for net metering versus an avoided cost or wholesale rate for net billing. The shift towards net billing reflects a reevaluation of how distributed generation impacts grid costs and benefits.
FAQs
How does net metering affect my electricity bill?
Net metering significantly reduces your electricity bill by crediting you for any excess electricity your on-site system, such as solar panels, sends back to the electricity grid. You only pay for the "net" amount of electricity you consume from the utility after these credits are applied.
Is net metering available everywhere?
No, net metering policies vary by state and even by individual utility companies. While most U.S. states have some form of net metering or similar compensation, the specific rules, credit rates, and eligibility criteria can differ widely. Resources like the Database of State Incentives for Renewables & Efficiency (DSIRE) provide detailed information on policies by location.3
What happens if my solar panels generate more electricity than I use in a year?
If your system generates more electricity than you consume over an entire year, the treatment of this "net excess generation" (NEG) depends on your specific net metering policy. Some policies allow for indefinite rollover of credits, while others may provide a payout for the surplus at a wholesale or avoided cost rate at the end of an annual billing cycle1, 2.
Do I still need to be connected to the grid with net metering?
Yes, net metering requires you to remain connected to the electricity grid. Your on-site system provides power, but the grid acts as a large battery, supplying electricity when your generation is insufficient (e.g., at night) and absorbing excess power when your system produces more than you need. This connection ensures reliability and allows for the exchange of energy tracked by your metering system.
What is the difference between net metering and a feed-in tariff?
Net metering involves crediting customers for excess electricity exported to the grid, typically offsetting their consumption at a retail or near-retail rate. A feed-in tariff, on the other hand, is a policy that pays generators a guaranteed, often above-market, price for all the electricity they produce, whether consumed on-site or exported. The primary goal of a feed-in tariff is usually to accelerate renewable energy deployment by offering a stable and attractive return on investment.