Understanding Net Metering

By Amanda Lutz Updated February 12, 2024

As solar panel systems become more and more popular all over the country, so does net metering. This approach to energy billing allows you to receive credit for the excess energy your system generates during sunny days and use it when the weather is cloudy.

While most states have adopted the net metering approach, others either have different forms of compensation or plan to implement solar initiatives in the future. In this guide, we’ll review how net metering works and how it can help reduce your energy bills and carbon footprint.


What Is Net Metering?

Net metering is an energy billing system that allows you to pay for the energy you use on cloudy days with the credit you receive from generating excess energy when the weather is sunny. High-quality solar power systems generate enough energy during the summer to cover the household’s winter energy needs. With net metering, it’s possible to avoid paying for electricity all year round.

Here are a few main purposes of net metering:


How Does Net Metering Work?

Net metering works by connecting a renewable energy system to the electrical grid. When the system generates more electricity than necessary to support a building, the excess energy flows back into the grid. This surplus energy is then credited to your account, spinning your electricity meter backward.

On sunny days, your solar panel system usually generates more energy than you need for your home. Instead of letting this excess power go to waste, you can transfer it to your utility company’s electrical grid and receive credit. For each excess kilowatt-hour (kWh) you produce, you get credited a kWh for future use.

During the night or when the weather is cloudy, you can use the utility’s power against the credit you’ve received in the past. When you don’t have any credit left, you start paying for electricity according to the regular rates.

For example, let’s say your house uses 1,000 kWh per month. If your solar panel system generates 3,000 kWh in August, the excess 2,000 kWh goes into the grid. If your solar panel system generates only 500 kWh in September, you’ll have to get the other 500 kWh from the utility. However, since you have a 2,000 kWh bill credit, you don’t have to pay for energy during this billing cycle and still have 1,500 kWh left for future use.

When implemented correctly, this system provides benefits for all parties while supporting a transition toward a more sustainable future for the planet. People wondering whether solar panels are worth it tend to lose their doubts after receiving a return on investment (ROI) after just a few years of use.


Benefits of Net Metering

Net metering is a major step toward responsible energy production and consumption. Here are a few key benefits of this approach:

Energy Use Awareness

Net metering promotes higher awareness and control over energy consumption. When you generate your own power and receive credits for excess electricity, you become more conscious of monthly energy usage patterns. This awareness can lead to more efficient energy consumption habits and further reduce energy costs.

High ROI

For many consumers, the substantial cost of solar panels prevents them from installing a system. While solar panels can increase home value and reduce monthly energy bills, the ROI takes a long time to surface. With net metering, it’s possible to see the benefits of this investment much faster. Property owners can notice significant energy savings in just a few months in states where net metering is currently in place.

Lower Energy Costs

The most obvious benefit for consumers is decreased energy costs. By generating your own energy, you reduce the reliance on the grid. This lowers your energy bills while your solar panels are working and reduces the expenses when the sun isn’t out. In some states where the sun is highly active, the net metering system could eliminate the need for solar panel owners to pay for energy.

Reduced Infrastructure Costs

The more consumers who take advantage of solar panels to power their homes, the less strain they put on the electrical grid. This reduces the need for power companies to invest in costly infrastructure updates, and the transmission lines don’t have to struggle with growing energy demands.

Safety for the Community

Aging power grids are a serious problem for many states. Net metering alleviates the stress of growing energy demands by reducing the volume of power that needs to be transmitted across long distances. This can help prevent grid failures, blackouts, and other safety issues associated with an overburdened electrical system.

Sustainability

By itself, solar energy is environmentally friendly and reduces the strain on power plants that release harmful pollutants into the environment. According to studies, it takes about four years of solar plant operation to generate the same amount of energy that was used to produce the system, which lasts more than 30 years.

Unlike fossil fuels used by power plants, the sun is a renewable source of clean energy. Meanwhile, solar panel systems require little maintenance for decades. The financial and convenience incentives provided by the net metering system encourage property owners to install solar panels. The more people who take advantage of solar energy, the less negative impact their actions have on the environment.


Limitations of Net Metering

While the concept of net metering is highly effective, the execution isn’t always smooth. Here are a few downsides and limitations of net metering:

Availability

The net metering system isn’t available in all states. Alabama, South Dakota, and Tennessee don’t provide compensation for excess energy production, and a few others have less effective net billing systems than other states.

Changing Policies

While states are constantly working on improving the net metering programs for solar customers, these changes aren’t always favorable. For example, some states that may have allowed the credit to roll over indefinitely could limit this option to just 12 months. Other states may reduce the compensation rates.

Policies can be implemented and changed depending on such factors as the system capacity, emerging technologies, and the number of property owners buying solar panels.

Connection to the Grid

To take advantage of net metering benefits, you must be connected to the grid, which can come with additional expenses. Meanwhile, if your goal is to go completely “off the grid” and provide energy solely for yourself, this option won’t work.

Fair Compensation

Each state that’s adopted a net metering system has its own compensation policy. In some states, you won’t get 100% credit for each excess kWh your system generates. For example, if you pay 20 cents per kWh provided by the electric utility company, you might get credited only 15 cents (75%) for each excess kWh your system produces. In the previous example, instead of getting 2,000 kWh credited to your account in August, you would receive only 1,500 kWh for future use.


Net Metering Availability

Net metering is available in the majority of the United States. The only three states that don’t have any type of net metering are Alabama, South Dakota, and Tennessee. Among the states that approve of net metering, Idaho and Texas don’t have compensation policies. In these states, utility companies may offer net metering options directly. Additionally, Arizona, California, Utah, and the U.S. Virgin Islands will only give you partial credit for each excess kWh of energy.

The availability of net metering in some states may change with time. The key players of the net metering game—the utility companies—argue that consumers take advantage of the grid to save money while leaving the maintenance and other expenses to the utilities that don’t receive any profit. Historically, trade groups like Edison Electric Institute (EEI) initiated campaigns against the growing use of solar panels. With energy companies focusing on profit, they can overlook the multiple benefits net metering has for everyone involved.

These campaigns can lead to changes in net metering policies across the country. For example, California recently changed its Net Energy Metering rules. Instead of giving utility customers net metering credits for kWh at a retail price, they adopted the NEM 3.0 policy, which decreased the value of solar energy credits by 75%.

In addition to the U.S., here are some other countries that have regulatory net metering policies:

  • Barbados
  • Belgium
  • Brazil
  • Canada
  • Chile
  • Denmark
  • Dominican Republic
  • Guatemala
  • Italy
  • Japan
  • Jordan
  • Lebanon
  • Malta
  • Mexico
  • Pakistan
  • Panama
  • Philippines
  • Portugal
  • Singapore
  • South Korea
  • Sri Lanka
  • Tunisia
  • Uruguay

Kenya and Senegal are also considering the implementation of this approach to solar electricity management.


How to Participate in Net Metering

If your state or utility company offers a net metering option, take the following steps to leverage the program:

1. Install a Renewable Energy System

If you haven’t already done so, then learn how to install solar panels on your property and invest in the necessary equipment. While some homeowners have the experience and resources to install solar panels on their own, most turn to solar companies for professional installation services.

2. Connect to the Electrical Grid

Contact your local utility company to initiate the process of connecting your solar panel system to the electrical grid. They will guide you through the necessary paperwork and provide information on technical requirements and safety protocols. Once you’re connected to the grid, the company will schedule an inspection of the system to ensure its compliance with technical standards. After you pass the inspection, you can sign the net metering agreement.

3. Sign the Net Metering Agreement

The net metering agreement should contain all the terms and conditions of the net metering system confirmed by the utility company. Pay special attention to these two types of rates in the contract:

While the majority of companies will buy and sell energy to you at the same rate, others may not compensate you for your excessive energy in full. If you live in Arizona, California, or Utah, these two rates can differ significantly. Additionally, your utility company may adjust rates even if your state has adopted the net metering policy.

Once you sign the agreement, you can take advantage of the solar net metering benefits. Monitor the energy consumption and production monthly to make sure you’re getting the credit according to the contract.


Our Recommendation

Net metering can save consumers money on electricity bills and contribute to a healthier environment. While the majority of states have already adopted net metering, there may be some changes in the future, with some utility companies actively fighting this system.

If your state or utility company offers net metering, consider taking advantage of it. Besides lowering the cost of your utility bills, this system reduces your carbon footprint, decreases the strain on the power grid, and helps the community.


Net Metering FAQ

What is the controversy with net metering?

The controversy with net metering involves utility companies that lose revenue because they have to credit consumers for the excess energy generation from their solar systems. Because of this issue, some states are changing their net metering policies to be in favor of utility companies.

Is net metering a good idea?

Net metering is a good idea if you want to save money on energy bills and reduce your carbon footprint.

How can I benefit from net metering?

To benefit from net metering, you need to first connect your solar panel system to the electrical grid and sign a net metering agreement with your utility company. Once this agreement is signed, you’ll be able to take advantage of solar net metering benefits, such as lower electricity costs.

Is there net metering in North Carolina?

Yes, there’s net metering in North Carolina. However, in May 2023, the North Carolina Public Utilities Commission adopted net metering rules that reduce consumer savings by around 20%.

Is net energy metering worth it?

Yes, net energy metering is worth it because it reduces energy bills and encourages others to install environmentally friendly energy generation systems. It can also increase the ROI of your home solar system if combined with other solar incentives and rebates.