How Net Metering Works In Solar Energy

• Net metering gives you credits for extra solar energy sent to the grid.

• You need solar panels and a bidirectional meter to use net metering in a state that allows it.

• Some states are replacing traditional net metering with lower-paying alternatives such as net billing.

You probably know that a solar energy system can save you money on your power bill, but did you know it can potentially get you money back from your energy provider, too? Net metering allows homeowners to return excess energy to the grid for credits.

In this article, we go over what net metering is and how it affects overall solar panel costs. We also cover the potential future of net metering policies and how that could impact you and your finances.

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What is net metering in solar energy?

Net metering is a billing system that allows homeowners with solar energy systems to receive credit for excess electricity they send to the utility grid. When your solar panels produce more electricity than your home uses, the surplus energy flows to the grid and is recorded by a bidirectional meter.

In traditional net metering programs, exported electricity is credited at the same retail rate that customers pay for electricity. In many states today, however, compensation has shifted toward net billing or avoided-cost rates, where exported energy is credited at a lower value that reflects the electricity’s market value to the grid.

Because policies vary widely across states and utilities, the exact value of exported solar energy depends on local regulations and the specific utility tariff.

How does net metering for solar energy work?

To give an example, let’s say you use 900 kWh in your home in a given month at 14 cents per kWh. If you get all of your power from the grid, this would result in a bill of around $119.

Under a net metering system, if your home solar panels generate 950 kWh one month, the additional 50 kWh will be credited to your account.

If you only generated 850 kWh the next month but still used 900 kWh, the credit for the 50 kWh you returned to the grid in the previous month would apply to your account and bring your balance down to zero.

Keep in mind that utilities often charge minimum service or grid-connection fees, so a bill of exactly $0 might not always be possible.

Net metering system components

In effect, net metering is a working agreement between the homeowner and the traditional energy provider. Under these programs, both parties interact through the grid: the homeowner generates electricity while the utility supplies additional power when needed.

To make this system work, there are three main components involved.

Solar PV system

The first component in a net metering setup is the solar photovoltaic (PV) system installed at your home.

You do not need specialized solar panels to take part in net metering. Your system only needs to do the regular job of solar panels: converting sunlight into DC energy and transforming that DC energy into AC energy via an inverter.

Bidirectional meter

Where you do need specialized equipment is in the energy meter you use.

Homes using energy from the grid typically use a one-way meter to track electricity flowing into the home. To participate in net metering, you need a bidirectional meter, which tracks both:

• Electricity delivered from the grid to your home

• Electricity exported from your home to the grid

This measurement allows the utility to calculate your net electricity consumption.

Utility grid

The final component in a net metering system is the utility grid itself.

You can think of the grid as both:

• A backup source of electricity when your solar system isn’t producing enough energy

• A distribution system that accepts excess solar generation

When your system produces more electricity than your home needs, that surplus electricity flows into the grid. When your home needs more electricity than your panels produce—such as at night or during cloudy periods—you draw power from the grid.

Net metering vs net billing policy structures

Net billing is an alternative policy structure that many states are adopting.

While these two systems work in similar ways, they differ in how exported electricity is valued.

Net metering

• Exported electricity is credited at the retail electricity rate

• One kWh exported typically offsets one kWh purchased

Net billing

• Exported electricity is credited at a lower avoided-cost or wholesale rate

• Electricity consumed from the grid is still charged at the full retail rate

For example, if the residential electricity rate is 14 cents per kWh, net metering might credit exports at the full 14 cents. Under net billing, exported electricity might be credited closer to wholesale prices—sometimes 5 to 10 cents per kWh depending on the utility and time of day.

Several states—including California under its Net Billing Tariff (often called NEM 3.0)—have moved toward these structures to better reflect grid costs and encourage solar customers to store or use energy on site.

Benefits of net metering for users and utilities

Net metering policies can create advantages for both electricity customers and the broader power system.

Net metering benefits for energy customers

As an energy customer, net metering helps you by:

• Providing credits for excess solar electricity

• Maintaining grid access as a reliable backup power source

• Helping offset the cost of solar panels through energy savings

• Shortening the payback period for solar equipment

Net metering benefits for energy providers

While utilities often debate the structure of net metering programs, distributed solar generation can provide some operational benefits to the grid, including:

• Supplying electricity close to where it is consumed

• Reducing peak demand during sunny daytime periods in some regions

• Supporting broader renewable energy adoption goals

However, utilities and regulators continue to evaluate how compensation structures affect grid maintenance costs and long-term rate design.

Is net metering going away?

Net metering is not disappearing entirely, but the structure of these programs is evolving.

Many states are transitioning from traditional retail-rate net metering to modified systems such as:

• Net billing

• Time-of-use export rates

• Value-of-solar tariffs

For example, California introduced a Net Billing Tariff (NEM 3.0) that significantly reduced export compensation rates and ties them more closely to grid value at specific times of day.

As of recent policy reviews, roughly 34 states plus Washington, D.C. maintain mandatory net metering programs, while others use alternative compensation structures or utility-specific programs.

Because policies change frequently, homeowners should always confirm the latest rules with their state public utility commission or local utility provider.

Net metering policies by state

In the table below, we’ve provided a simplified overview of common solar compensation structures in each state. Policies can vary by utility and may change over time, so check with local regulators or utilities for the most current information.

Other financial considerations of solar power

Net metering is great to have, but there are other financial considerations for solar. When evaluating the cost of going solar, it's important to factor in additional incentives and payment options that can impact your total investment:

• Solar energy rebates: Offered by states, municipalities, or utilities, these rebates provide cash incentives for installing qualifying solar equipment. They can reduce your upfront installation costs by hundreds or even thousands of dollars.

• Solar panel financing: Solar loans help homeowners spread out the cost of their system over time. Many loans offer low or zero down payments, with fixed monthly installments that may be offset by energy savings.

• Solar panel leasing: With a lease or power purchase agreement (PPA), you don’t own the system—your solar provider does. You pay a monthly fee or per-kWh rate, often lower than your current utility rate, with little or no upfront cost. However, we typically recommend avoiding this type of option since you don’t benefit directly from state or utility incentives.

Bottom line on net metering

Net metering enables homeowners with solar energy equipment to receive credit for electricity they generate but don’t use.

Policies vary by state, and many programs are evolving toward net billing or other compensation structures. Even so, where available, net metering can significantly lower electricity costs and shorten the payback period for solar installations.

However, net metering is only one factor when evaluating solar energy. Take a detailed look at your expected savings and solar panel cost, since solar panels aren't best for everyone.