How Does Net Metering Work with Solar Panels?

Net metering is one of the best solar incentives widely available in many countries. Some states have even passed net metering laws, in others the participation in the program is voluntary and you need to check the criteria of your utility company if interested. Either way, this program has been a key player in the financial attractiveness of solar power for homeowners over the years. 

For instance, in California, net metering has enabled homeowners to save an estimated $2,000 to $3,000 per year on electricity costs. The final saving depends in all cases on the size of the solar system, individual energy consumption and price of electricity from the grid. 

However, in California, favorable net metering programs have boosted the State to be one of the leading states for solar adoption, with over 1.3 million residential solar installations as of 2023​ [1].

In New York, which is another strong net metering state, homeowners can save around $1,500 annually. Some homeowners even report savings of up to 90% on their utility bills. Such high savings are driven by the state’s robust net metering policies, which credit excess solar energy at the full retail rate​.

On the other hand, in states like Idaho, recent changes from net metering to net billing have reduced compensation rates by about 32%. This shift could mean that Idaho homeowners now save hundreds of dollars less per year compared to what they would have under the previous net metering policies [2]​. It is not such a favorable development for new solar energy customers.

When talking in the general terms and not locally focused, net metering has been offered since the beginning of solar energy advancements as a powerful incentive to encourage more people to adopt solar power. This system benefits not just the individual homeowner but also the wider community. By supporting distributed energy generation, net metering reduces the strain on the electrical grid, especially during peak demand times. This, in turn, can help lower energy costs for everyone and reduce the need for expensive new infrastructure for renewable energy. 

Additionally, as more people switch to solar power, reliance on fossil fuels decreases, leading to a cleaner, more sustainable environment for future generations. Net metering is a win-win solution, providing both financial savings and environmental benefits to whole communities.

What is net metering in a solar system?

In general, net metering is a system designed to make solar energy more efficient and accessible. Here is briefly explained how it works: when your solar panels generate more electricity than your home needs during the day, the excess power goes back to the grid. Yes, this means that your solar system is connected to the grid – ran usually by your utility company. 

In return, your utility company gives you credits on your electricity bill. Later, when your solar panels aren’t producing to their full potential, like on cloudy days or at night, you can use those credits to offset your annual energy use.

This setup is practical for many homeowners because it helps balance out the ups and downs of solar energy production – do not forget that solar panels on their own without a costly battery backup, do not store generated energy. Net metering in this case sort of performs this function of supplying your house with energy evenly. 

The outcome is that net metering not only reduces your monthly electricity bills, but it also shortens the time it takes to pay off your solar installation. By allowing you to earn credits for the excess electricity from your solar system and send it back to the grid, net metering helps reduce or even eliminate monthly electricity bills – at least during the sunniest months of the year. 

Here is also a small tip from Greentumble. Installing a smaller solar system and participating in the net metering program is still a great way to reduce your electricity bill up to 50 percent or more. Why? 

Let us assume that you are gone on a vacation with your family. The solar system still generates energy when you are gone but since you are not using it, it is being automatically sent back to the grid.

When sending energy to the grid, the electricity meter runs backwards, giving you credits for extra unused power your panels produce. As a result, your annual electricity bill will decrease according to how many credits you have.

The solar energy your system has supplied to the grid is typically distributed to nearby customers. There is no denying that this way of energy generation is beneficial for your household but also climate-friendly.

However, you should be aware that the utility company will not pay you for the energy produced by your solar system. You only receive a “credit to spend” on using electricity from the grid in times your system doesn’t produce enough. Keep that in mind when deciding on getting solar panels and determining how much of your energy consumption they should offset.

How does net metering work with solar panels?

After installing solar panels, you will still receive a monthly bill, but the charges will be different. The bill will now include a “net metering” charge. It is the difference between the electricity generated by your solar panels and the electricity consumed. If the solar panels generate more power than your house consumes, the net metering charge will be zero or even negative. You will be given credits to use later when there is not enough solar energy coming in.

The bill also includes a separate charge for any electricity that is consumed from the grid in addition to the electricity generated by the solar panels. This system is common and is known as “grid-tied.” It is valued for being less risky than stand alone systems. Your home stays connected to the grid. Your house still uses the grid power during the night or in case of low sun conditions. When the sun is abundant, the excess solar power goes to the grid in exchange for credits, and thus reducing the bill.

In many cases, the net metering charge and the separate charge for grid electricity are lower than the charges for electricity before installing solar panels, resulting in a significant reduction in your electric bill.

The net metering system is designed for homeowners with solar panels, but the specifics of net metering can vary depending on where you live. Some places offer better rates or different terms, so it’s always good to check with your local utility or a solar expert to understand how net metering works in your area.

Recent changes to net metering, especially in places like California, have shifted towards a new model called “Net Billing.” This model differs from traditional net metering by crediting excess solar energy at a lower rate, often based on time-of-use or wholesale market rates, rather than the full retail rate. 

How does it work? Unlike the old monthly net metering, the new system calculates your solar production and consumption instantaneously. This means the energy you export to the grid is credited at varying rates depending on the time of day and the utility’s avoided costs. Unfortunately, the switch to real-time netting may reduce overall savings compared to the old net metering system, particularly if most of your solar production happens during low-credit hours.

Additionally, there may be new fees or reduced incentives for solar customers. These changes are intended to address grid costs and equity concerns but could reduce the financial benefits for new solar power adopters.

Why net metering still matters for homeowners? 

Net metering lets you offset your electricity costs by crediting you for the excess energy your solar panels produce during peak sunlight hours. This energy is credited to your account, allowing you to draw from these credits when your panels aren’t producing energy. It is still advantageous. 

Some homeowners report cutting their electricity bills somewhere between 50% to 100%. For example, if a typical household bill is around $150 per month, net metering can reduce it to nearly $0, depending on the solar system’s size and energy usage.

The payback period for solar panel installation can be reduced to as little as 6 to 8 years when signed up for the net metering at your utility. This means, for example, if you have a solar system costing around $20,000, you could reach breakeven couple years sooner and then still use the solar energy for the next 15 years without having to pay extra.

Another great advantage is that net metering allows you to effectively use the grid as a battery. If for example, during the day, your solar panels produce 10 kWh and your home uses 5 kWh, the excess 5 kWh is sent to the grid and credited to your account. You can then use these credits at night or during cloudy days when your solar panels aren’t producing as much energy.

What are the disadvantages of net metering?

You may have expected this chapter based on the previous mentions of some newest updates to the net metering policies in certain states. Despite its many benefits, net metering comes also with some disadvantages that may specifically affect you – depending on your location. These drawbacks can impact the financial returns of your solar investment and how energy savings are realized.

Here are some of the most common disadvantages of net metering:

Policy variability: Some solar owners experienced reductions in the value of net metering credits over time due to changes in local policies. For instance, credits that were initially valued at the retail rate of $0.15/kWh might drop to $0.03/kWh as policies evolve. As you can imagine, such a drop is quite disappointing and dramatically reduces expected savings.

In many cases, the rate you receive for excess energy sent back to the grid might be locked in when you sign the contract or when your solar system is interconnected to the grid. However, this isn’t always the case. In some regions, net metering rates are subject to change based on state regulatory decisions, and future changes could potentially affect both new and existing customers. 

You need to carefully review your contract and consult with your solar provider and utility company to understand the specific terms and conditions that apply to your net metering agreement. 

Low export rates: In areas where utilities only pay a fraction of the retail rate for excess energy, homeowners might only receive $0.02 to $0.05 per kWh for the energy they send to the grid, compared to the $0.10 to $0.20 per kWh they pay for grid electricity. 

Regional differences: Net metering policies and rates can differ dramatically by location. In places like Alabama, the rates paid for excess energy can be very low. Other states with low rates are South Dakota, Tennessee and Idaho. These states do not have a mandatory statewide net metering program. Net metering programs are offered by the individual utility companies and they often offer poor compensation rates.

On the other hand, California has a robust system in place that has allowed many homeowners to significantly reduce their electricity bills through solar energy. California’s policies include generous compensation for excess solar energy sent back to the grid, often at the retail rate.

Other states with strong net metering policies include New York and New Jersey, both of which offer favorable terms.

Connection fees: Even with net metering, some users note that they still have to pay a monthly connection fee to remain connected to the grid. This fee can range from $10 to $30 per month, depending on the utility company. For a smaller household, such a fee could actually increase the electricity bill as opposed to what it was without solar energy.

Net metering or no net metering?

If you are considering going solar right now, you should be aware of how net metering works in your area and how changes to the net metering policies could impact your return on investment in the upcoming years. Solar companies may not always provide the full picture, so doing your own research is recommended in any case. 

It is recommended to be strategic in sizing your system and be realistic about the potential financial returns, especially in areas with weaker net metering policies. Many professionals suggest sizing your solar system to offset only 60 to 80% of your energy usage to avoid giving away too much excess energy at lower rates. 

Additionally, if your local net metering policies are not favorable, you should weigh the decision carefully, as relying solely on financial savings could lead to disappointment or even a financial loss. Without robust net metering, the financial benefits diminish significantly because you will be selling excess energy back to the grid at a much lower rate than what you pay to buy it back, resulting in continued high energy bills despite your investment in solar energy.

You can find great information on the Database of State Incentives for Renewables & Efficiency website. It is up to date and local.