Solar panels often generate surplus electricity that cannot be consumed by your home right away. This generally happens around noon, when solar panels are at full power and many homes are empty. There are two main ways to manage this surplus production:

  • Storing energy in a solar battery and using it later.
  • Net metering: Sending unused energy to the local grid in exchange for power bill credits. In other words, your electricity provider buys excess production from your photovoltaic (PV) system.

A residential energy storage system can cost upwards of $10,000. With net metering, the power grid acts as a large-scale “solar battery” that absorbs your surplus production. You can accumulate bill credits when your solar panels generate excess power, and these credits are subtracted from your consumption. Purchasing your own battery becomes optional with net metering, and your go solar at a much lower cost.

Government agencies and electric utility companies use different names to describe net metering and similar programs. The following are some terms you may find on official websites and documents:

  • Net energy metering (NEM)
  • Net billing
  • Solar buyback programs
  • Feed-in tariffs
  • Value-of-Solar (VOS) tariffs
  • Distributed Generation (DG) tariffs

In this article, we will discuss the basic principles of net metering and how it benefits homeowners who install solar panels.

How Does Net Metering Work?

To offer net metering, the local power company must be capable of measuring electricity flows in two directions: from the grid to your home, and viceversa. There are two main ways to accomplish this:

  • Modern power meters are bidirectional, which means they can detect if your home is consuming or supplying electric power. At the end of each billing period, surplus solar production is simply subtracted from your consumption.
  • Net metering is also possible with traditional power meters, but you need two of them. The first one measures your consumption, the second measures only your solar generation, and both amounts are subtracted on the next power bill. This configuration was more common in the early days of the solar industry, before bidirectional power meters were developed.

True net metering gives you full credit for excess solar energy sent to the grid. For example, if the retail tariff is 20 cents/kWh and you export 300 kWh in a month, you get a $60 bill credit. However, most net metering programs pay a lower rate for excess production. Power companies tend to oppose net metering, under the argument that their prices include business expenses that small-scale solar generators don’t have.

  • Using the same example, assume the price of 20 cents/kWh is broken down into an energy cost of 12 cents/kWh and a power grid cost of 8 cents/kWh.
  • In this case, the electric company may offer compensation at the energy price of 12 cents/kWh. You would get $36 instead of $60 for 300 kWh.
  • This has been a controversial topic in several states. Many utility companies have lobbied to reduce net billing tariffs, or even to remove the benefit completely.

Generally, the term “net metering” is used when you get full credit for each kilowatt-hour, and “net billing” is used when you are compensated at a lower tariff.

What Happens if Net Metering Credits Are Higher Than My Monthly Bill?

There may be times when the output of your solar panels is higher than your home consumption in an entire billing cycle. For instance, this can happen if you go on vacation in a summer month, and your solar panels were sending power to the grid all those days.

Contrary to popular belief, you cannot use net metering to flip around your power bill. Installing a large solar array and billing your power company every month may seem like a great idea, but net metering programs have rules to prevent this.

If there is a month where your net metering credit is higher than your bill, you can generally carry the unused balance to the next bill. This means you can accumulate credits during the summer months, when solar panels are more productive, and use them up during winter. However, if you accumulate unused credits over a 12-month period, most programs have one of the following policies:

  1. Unused solar energy credits expire once per year, and your balance reverts to $0.
  2. You are paid for your annual surplus production, but at a very low tariff.

Many net metering programs also have a size limit for solar panel systems. For example, a power company may establish a maximum PV system capacity of 10 kW for homes.

Oversizing a solar array is rarely a good investment. You end up with large amounts of surplus production, and you accumulate plenty of unused credits. In a best-case scenario, you may be paid for this energy at a very low price, which will not cover the additional cost of oversizing. In a worst-case scenario, you will give away all this energy to the local power company for free.

How Does Net Metering Improve the ROI of Solar Panels?

Net metering makes home solar systems more affordable by making batteries optional. As of 2023, the average cost of solar panel systems in the US is $2.95 per watt (or $2,950 per kW). This means you can expect to pay around $19,470 for a 6.6-kW solar system. 

The US has abundant solar resources, and you can see this for yourself in the World Bank Global Solar Atlas. With favorable site conditions, a 6.6-kW solar system can generate around 10,000 kWh per year. At an electric tariff of 16 cents/kWh, you can save around $1,600 per year.

  • Thanks to the 30% solar federal tax credit, the net cost of the 6.6-kW system in this example is reduced to $13,629.
  • If you save $1,600 per year, the simple payback period is 8.5 years. For comparison, the best solar panels have a 25-year warranty, and their total lifespan can exceed 40 years.

Without net metering, the financial scenario changes completely. According to the Solar Energy Industries Association (SEIA), homeowners generally use 60-80% of the electricity produced by solar panels, and the remaining 20-40% goes to the grid. In this case, you need a battery to store the energy that would otherwise go to the grid without compensation.

Home batteries typically cost $10,000 or more, and they qualify for the solar tax credit just like solar panels.

  • In this example, the cost of your solar project increases by $7,000, reaching a total budget of $20,629.
  • Since a battery does not generate additional electricity, annual savings remain at $1,600 and the payback period is extended to 13 years.

IMPORTANT NOTE: This is just a simplified example, and the actual calculations involved in a solar PV system design are much more complex. However, these ballpark figures show how the payback period of solar panels is shortened by net metering.

Which US States Have Net Metering Programs?

Providing a general guide on how to participate in net metering is not feasible in a single article. Each state has its own net metering policy, and individual power companies have their own rules and interconnection requirements. Depending on your location, there may also be an initial application fee to participate in solar buyback programs.

You can visit the Database of State Incentives for Renewables and Efficiency (DSIRE) to read about net metering in your respective state. EnergySage also has an updated list showing the availability of net metering and net billing programs by state. As of 2023, most states offer some have an official net metering or net billing policy, with a few exceptions:

  • Texas and Idaho don’t have a state net metering policy. However, local electricity providers offer solar buyback in some of their energy plans.
  • There are only three states with zero compensation for solar owners: Alabama, South Dakota and Tennessee. These states don’t have a net metering policy, and local power companies don’t offer the benefit voluntarily.

There are numerous net metering programs with different terms and conditions throughout the US. The best recommendation is hiring a professional solar installation company who is familiarized with their requirements.

Net metering is often associated with solar power, but most programs are also available for other renewable technologies. For example, you can also participate if you own a small wind turbine or hydroelectric generator.

Additional Facts You Should Know About Net Metering

Depending on state regulations, you may have access to community solar projects. If you cannot install solar panels on your property for any reason, you can join a shared PV array near you and get part of the savings.

  • Solar generation is measured at the project site, but credits are applied to your monthly power bills.
  • This concept is called virtual net metering or off-site net metering.

Some states have Renewable Portfolio Standards (RPS), which establish clean energy targets for local utilities and other large energy companies. Many of these states also have Solar Renewable Energy Certificates (SREC):

  • You get one SREC for every 1,000 kWh generated.
  • SRECs can be sold to the companies who have clean energy mandates under the local Renewable Portfolio Standard, and these credits count towards their target.

Net metering and net billing programs have different rules for SRECs. Some power companies only pay you for surplus solar energy, and you keep the corresponding SRECs. Other companies also purchase your SRECs along with your excess production.

What is the NEM 3.0 Program in California?

NEM stands for Net Energy Metering, and NEM 3.0 is the new policy introduced by California on April 14, 2023.

  • NEM 1.0 gave solar owners full credit for excess generation sent to the grid.
  • NEM 2.0 reduced the net metering tariff slightly, but it was still very close to retail prices.
  • NEM 3.0 applied a drastic cut. According to estimates by Energy Sage, Californians now get around 75% less credit for excess solar energy sent to the grid.

Note that NEM 3.0 only applies for home solar systems that were not submitted for interconnection by April 13. Homeowners who qualified for NEM 1.0 and NEM 2.0 have not been moved to the new rates.

EnergySage has also estimated that the payback period of home solar systems in California will increase from 5-6 years to 9-10 years as a consequence of NEM 3.0. However, this also represents an opportunity for battery systems: California homeowners can still save the full value of each kWh stored for later use.