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Take my energy: What is net metering and how it works

How can you make use of all the energy that a solar system produces? There are two options: add batteries or sell the excess to your utility. The power company will lower your bill in exchange. It’s called solar net metering, a crucial mechanic for solar owners. In this article, we’ll take a close look at how it works.

Imagine grid as a large battery

Advantages of Grid-Tied Solar Systems

Standard batteries are expensive to get for most homeowners. Luckily, net metering is another way to catch sunlight in a jar: an electric grid can be used as a large, large energy storage. When you export excess solar energy into the grid, it can be used for someone else.

Net metering originated in Massachusetts in 1979. The first two projects to use net metering were an apartment complex and a solar test house. Minnesota is commonly cited as passing the first net metering law, in 1983. 

Here is how net metering works: when your solar system is complete and the utility connects it to the grid, electricians install a bi-directional meter. When you pull the energy from the grid, the meter runs forward. When you export excess energy from your PV system, the meter goes backward. At the end of the month, you pay the difference.

Net monthly consumption = (total electricity consumed) - (total electricity generated)

Credits may expire

20-40%

of a home solar system’s production goes into the grid on average

What if you export more energy to the grid than you pulled throughout the month? There are three types of classic net metering:
• Perpetual net metering: Credits that you earned carry over to the next month or year indefinitely.
• Annual net metering: Credits are stored for 12 months. They expire either by the end of a year or on a month set by the utility or customer in rare cases.
• Monthly net metering: Credits reset monthly.

Vasilii Smirnov
Solar Installation Expert

There is a rumor that on occasion net metering can end up as a paycheck from utility to a homeowner if excess generation exceeds consumption. This rarely happens. A utility either lets you carry credits over into future years or reset your credits. We recommend sizing your system correctly from the start so it doesn’t produce much more than you need.

Net metering terms vary

The conditions for net metering vary across the states and utilities. The policies differ for residential, commercial and industrial solar projects.

The restrictions often include system size caps. There can be a concrete limit: for example, up to 25 kW for a home system. Sometimes it is defined as a percentage of your consumption: for example, the system may not generate more than 125% of average monthly consumption to be eligible for net metering.

The big question is how exactly your utility is going to buy energy from you and what are they willing to pay for it. There are lots of variations but you can distinguish several most common types.

Retail net metering

Ideally, you want to receive full retail credit or 1-for-1 compensation for your excess energy. In this case, you get paid for your kWhs just as much as you pay for electricity from the grid. If you are on a Time-of-use (TOU) rate, you will generate net metering credits based on the TOU rate.

However, utilities fight the classic type of net metering hard. They claim solar system owners can nullify their electric bills and avoid charges for the electric infrastructure that they use that way. That’s why some states adopt net billing as a primary policy.

Net billing

This used to be a model for commercial and industrial projects but has become more widespread among residential customers as well. The energy that a customer sends into the grid is credited at an avoided cost rate. This stands for money that the utility saves by not providing your house with energy. The credit rate is set by the utility or state, and it is much lower than the retail rate for electricity.

Virtual net metering

Community solar projects, such as a solar farm or a shared solar system on top of an apartment building, go together with virtual net metering. Those who allotted a portion of a solar project, subscribe to it later and receive credits as if it was their own home solar system.

Buy-all, sell-all

This model is also known as gross metering. Under this program, you sell all the electricity that you generate with solar panels at a fixed rate. You also purchase all the electricity for your home just like any other customer. This arrangement requires two separate meters: one for import and one for electricity export.

Feed-In Tariffs (FIT)

The FIT policy was designed to encourage people to switch to renewable energy. Customers under this policy receive credits at a higher than the retail rate for solar energy that they export to the grid. After a few years, the rate can decrease to a retail level. FITs are a rare case: for example, Vermont used to offer the FIT program but 2022 was the final solicitation year for it.

In most cases, you don’t choose a utility or net metering program. However, there are places with a deregulated electric market, such as Texas, where you can pick an electric company with the best terms for you.

Net metering across the United States

Most states have mandated net metering for certain utilities. Some established a form of mandatory compensation for solar energy other than net metering — like net billing in Arizona. A few states are transitioning from net metering to an alternative type of compensation — like California. And then there are Texas and Idaho which don’t have a statewide policy on net metering but some of their utilities still offer it. Let’s look at a few examples.

Florida net metering: A close call

Customers are usually compensated at a full retail rate. Net excess generation (NEG) is carried forward at a retail rate to the next bill for up to 12 months. At the end of this period, the utility pays the customer for any remaining NEG at the utility's avoided cost rate.

Recently, the net metering policy in Florida found itself under threat. In spring 2022, a bill passed through both houses of the Florida legislature that would deny net metering credits for homeowners with solar systems launched after December 31, 2023. Luckily, Governor DeSantis vetoed it on April 27th, 2022. A close call and it can happen again. If you are undecided about going solar, it might be better to act fast and secure a good deal.

Arizona net metering: Replaced with net billing

Arizona Corporation Commission (ACC) replaced net metering with net billing in 2016. New customers are credited at an avoided cost rate for energy exported to the grid. Systems must be sized not to exceed 125% of the customer’s total connected load. For net billing customers, monthly NEG is carried forward indefinitely.

California net metering: NEM 3.0 ends solar dream

California was one of the best states for going solar for many years because of net metering at full retail rate. However, the California Public Utilities Commission (CPUC) approved Net Energy Metering (NEM) 3.0 on December 15, 2022. It reduced net metering compensation rates by around 75% for all the customers that completed interconnection after April 14, 2023.

New customers will now be compensated at avoided cost rate instead of a full retail rate. Basically, it’s a transition from net metering to net billing. NEM 3.0 is going to increase the payback time of a solar system in California from 4-5 years to 8-10 years, making California from one of the best places to go solar to a pretty generic one.

Those who connected a PV system to the grid before April 14th have locked in the old NEM 2.0 policy for 20 more years. To those who couldn’t make it in time, we recommend adding batteries to a PV system. The compensation for sending solar energy into the grid is going to be so low that it’s better to save it for yourself.

Virginia net metering: Going strong

Virginia's net-metering law applies to customers with solar systems up to 25 kW capacity. The production of a system shall not exceed the expected annual consumption, based on 12 months of billing history. NEG is credited to the customer's next bill at a retail rate. After a 12-month cycle, customers may opt to roll over credit indefinitely or to receive payment at an avoided cost rate.

Texas net metering: Deregulated market

Texas doesn’t have a statewide net metering policy. It’s up to utilities whether they want to buy solar energy from customers or not. There are only a few utilities that offer solar buyback plans that are almost the same thing as net metering. Most of the Texas electricity market is deregulated though. It means that you choose an electric provider whose program fits you the best. 

In Austin, Texas you can find an unusual Value-of-Solar (VOS) policy. It takes into account the benefits of solar energy to the grid and the environment. Austin Energy meters your solar production and credits 100% of it at the VOS rate. At the same time, it charges solar customers for all their energy consumption, whether energy comes from PV systems or the grid. At the end of the month, the utility applies Solar Bill Credit to electric bill charges and the customer pays the difference.

What solar incentives your state has to offer?

Check out the programs in your area that will lower your upfront costs of going solar and increase savings!

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Andrey Gorichenski
Senior Editor

Andrey had been a news editor and freelance writer for a number of medias before joining A1SolarStore team. Climate change and its impact on people's lives has always been among his interests and it partially explains his degree in Philosophy and Ethics.

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