The Basics of Net Metering
Net metering (sometimes called net energy metering or NEM) is a billing arrangement between solar panel owners and their utility company. When your solar panels produce more electricity than your home needs at any given moment, the surplus flows back into the grid — and your utility credits your account for that energy. When your panels aren't producing enough (at night or on cloudy days), you draw from the grid as usual.
At the end of each billing period, you're billed only for the net amount of electricity you used — your consumption minus your solar exports. This is what makes net metering such a powerful financial mechanism for solar homeowners.
How the Credit System Works
The value of net metering credits depends on your utility's policy, but there are two main models:
- Retail-rate net metering: You receive a credit equal to the full retail electricity rate for each kWh you export. This is the most favorable arrangement for homeowners — you're effectively "banking" electricity at its full value.
- Avoided-cost or wholesale-rate compensation: You receive a lower credit, often based on the utility's avoided cost of generating electricity. This is less favorable and becoming more common as utilities revise their NEM policies.
Annual True-Up vs. Monthly Netting
Utilities handle net metering credits in different ways:
- Monthly netting: Credits are applied each month. Any leftover credits may or may not roll forward to the next month.
- Annual true-up: Credits accumulate throughout the year and are settled once annually. This approach benefits solar owners in climates with strong seasonal variation, allowing summer surplus to offset winter grid usage.
Bidirectional Metering
To participate in net metering, your utility will typically install a bidirectional (net) meter that can measure both the electricity you consume from the grid and the electricity you export to it. In some cases, this involves replacing your existing meter. Your installer and utility will coordinate this process as part of your solar interconnection agreement.
How Net Metering Affects System Sizing
Because net metering allows you to bank excess production, many solar installers size systems to offset 100% of annual consumption — even if production and consumption don't align perfectly month to month. A homeowner might produce excess energy in summer and draw from the grid in winter, with net metering balancing those seasonal differences.
However, this strategy only works well under full retail-rate net metering. If your utility compensates exports at below-retail rates, it may make more financial sense to size your system to avoid large monthly surpluses and instead pair it with battery storage.
Changes to Net Metering Policies
Net metering policies vary significantly by state and utility, and they are evolving. Some states have moved to NEM 3.0 or successor tariff models that offer lower export rates. Others maintain strong retail-rate policies. Key things to check in your area:
- Does your state mandate net metering by law?
- What is the current export compensation rate?
- Are there caps on system size for net metering eligibility?
- Are there monthly or annual limits on how many credits you can accumulate?
Your solar installer and your state's public utilities commission (PUC) website are good starting points for current policy information.
Net Metering vs. Feed-In Tariffs
A feed-in tariff (FiT) is an alternative policy where the utility pays you a set rate for all solar electricity you generate, separate from what you consume. Feed-in tariffs are common in Europe and Australia. In the U.S., net metering is far more prevalent, though some states offer feed-in tariff programs for specific customer segments.
Why It Matters for Your ROI
Net metering policy is one of the most important variables in calculating solar payback period. In states with strong retail-rate net metering, solar systems can pay back their cost in as little as 6–9 years and deliver decades of savings afterward. In states with reduced export rates, payback periods lengthen — making battery storage a more critical part of the equation.
Always research your local net metering policy before finalizing your solar investment decision.