How Net Metering Works (and Why Your Electric Company Hates It)

Net metering is the single policy that makes rooftop solar financially viable for most homeowners. It is also the policy that electric utilities have spent millions of dollars lobbying to eliminate. Understanding how it works, why it matters, and what is happening to it across the country will directly affect whether solar makes sense for your home — and how much money it saves you.

Here is the plain-English explanation.

What Net Metering Is

Net metering is a billing arrangement where your utility gives you credit for excess solar electricity you send back to the grid. Your electric meter literally runs in both directions — forward when you pull electricity from the grid, and backward when your solar panels produce more than you are using and push the surplus out.

At the end of each billing period, you pay only for the net difference between what you consumed from the grid and what you exported to it. If you exported more than you consumed, you carry the credit forward to the next month.

Simple example:

• Your home uses 1,000 kWh in a month
• Your solar panels generate 1,200 kWh
• You used 600 kWh directly from your panels during the day
• You exported 600 kWh of surplus to the grid during the day
• You pulled 400 kWh from the grid at night

With 1:1 net metering, your 600 kWh of exports fully offset your 400 kWh of imports. Your net usage is -200 kWh. You owe nothing, and you carry a 200 kWh credit into next month. That credit typically covers the shorter, less sunny months in winter.

Why Net Metering Matters So Much

Without net metering, your solar panels only save you money on the electricity you use in real time — while the sun is shining and your panels are producing. Any surplus you generate during the day is either wasted or sold to the utility at a wholesale rate far below what you pay to buy it back at night.

The math changes dramatically:

With 1:1 net metering, a typical solar system offsets 90-100% of your electric bill. Your electricity cost drops to nearly zero plus a small monthly grid connection fee ($10-20).

Without net metering (or with reduced credits), that same system might only offset 50-60% of your bill, because the energy you export during the day is worth a fraction of what you pay during peak evening hours.

This is why net metering is the first thing to check when evaluating solar. The panels and installation costs are similar everywhere. What varies dramatically is how your utility values the electricity you produce.

How Net Metering Credits Actually Work

Monthly vs. Annual True-Up

Most net metering programs operate on a monthly billing cycle with an annual true-up. Here is what that means:

• Each month, if you export more than you import, the surplus rolls over as a credit.
• Each year (on your anniversary date), any remaining unused credits are typically paid out at a lower "avoided cost" rate — often $0.02-$0.05/kWh, far below the retail rate.

This means the smartest solar system design produces roughly what you use over a full year, not significantly more. Oversizing your system to generate credits you cannot use is wasting money — those annual surplus credits are worth very little.

Retail Rate vs. Wholesale Rate

The core debate around net metering is whether solar homeowners should be credited at the full retail rate (what you pay for electricity) or at the wholesale/avoided cost rate (what it costs the utility to generate that electricity).

• Retail rate (1:1 net metering): You get the same value for exported kWh as you pay for imported kWh. This is the traditional net metering arrangement and the most favorable for homeowners.
• Wholesale/avoided cost rate: You get $0.02-$0.05/kWh for exports but pay $0.15-$0.45/kWh for imports. This dramatically reduces the value of solar.
• Time-of-use export rates: You get different credit rates depending on when you export. Exports during peak hours are worth more. This is the model California adopted with NEM 3.0.

The NEM 3.0 Controversy

In December 2022, the California Public Utilities Commission approved Net Billing Tariff (commonly called NEM 3.0), which took effect in April 2023. It reduced export compensation for new solar customers by approximately 75%.

What changed:

Under NEM 2.0, California solar customers received roughly $0.25-$0.35/kWh for exported electricity. Under NEM 3.0, export credits vary by time of day and month but average $0.05-$0.08/kWh — a massive reduction.

The practical impact:

A solar-only system under NEM 2.0 had a payback period of 5-7 years in California. Under NEM 3.0, the payback stretched to 9-12 years for solar alone. However — and this is the critical point — adding a battery under NEM 3.0 brings the payback back down to 5-8 years, because you store your surplus instead of exporting it at rock-bottom rates and then buying it back at peak prices.

The deeper controversy:

Solar advocates argue that NEM 3.0 was the result of aggressive utility lobbying (PG&E, SCE, and SDG&E spent over $100 million on the campaign) and that it was designed to protect utility profits by making rooftop solar less attractive.

Utilities argue that net metering creates a "cost shift" — that solar homeowners avoid paying for grid maintenance, and non-solar ratepayers (disproportionately lower-income) subsidize the grid costs that solar homeowners still rely on but do not pay for.

Both sides have valid points. But the result is clear: if you are a California homeowner considering solar in 2026, a battery is now essentially a requirement for the economics to work.

State-by-State Net Metering Status (2026)

Net metering policy varies dramatically by state. Here is a simplified overview:

States with Strong Net Metering (1:1 or near 1:1)

• New Jersey, New York, Massachusetts, Connecticut, Maryland, Oregon, Colorado, Illinois, Minnesota, New Mexico, and several others
• These states offer the best economics for solar-only systems (no battery required for savings)

States with Reduced or Modified Net Metering

• California — NEM 3.0, significantly reduced export credits
• Nevada — restored net metering after a controversial 2015 rollback, but rates have been modified
• Arizona — reduced export credits, varies by utility
• Indiana — transitioning away from retail-rate net metering
• Hawaii — ended traditional net metering, moved to self-supply and grid-supply programs

States with No Mandatory Net Metering

• Texas — no statewide net metering requirement (some utilities offer it voluntarily)
• Alabama, Tennessee, Mississippi — limited or no net metering
• Idaho, South Dakota — no mandatory net metering

The Trend

The trend nationally is away from 1:1 net metering. Utilities in nearly every state have filed or are planning to file proposals to reduce export compensation. If you are considering solar, current net metering rates are likely the best they will ever be in your state.

This creates urgency: Homeowners who go solar now typically get "grandfathered" into the current net metering rate for 15-25 years. Waiting means you may end up on a less favorable rate structure. In California, homeowners who installed under NEM 2.0 are grandfathered for 20 years, while new installations get NEM 3.0 rates.

What Happens Without Net Metering

Without any net metering or export compensation, solar still works — but differently:

1. You benefit from direct consumption only. Every kWh you use while the sun is shining saves you the retail rate. But surplus generation is worth nothing.
2. System sizing changes. Without net metering, you size your system to match your daytime usage, not your total usage. This means a smaller system.
3. Batteries become essential. To use solar electricity at night, you need to store it. A battery captures surplus daytime generation for evening use.
4. Payback periods lengthen for solar-only systems but remain reasonable for solar-plus-battery systems in states with high electricity rates.

How to Find Your State's Net Metering Policy

1. Check your utility's website. Search for "net metering" or "solar billing" on your electric utility's site. The tariff details will be there, though they may be buried in regulatory language.
2. Use EnergySage. Their state-by-state solar guides include current net metering policies, incentives, and typical savings for your area.
3. Ask potential installers. Any reputable solar installer should explain exactly how net metering works with your specific utility and rate plan. If they cannot, find a different installer.
4. Check DSIRE (dsireusa.org). The Database of State Incentives for Renewables and Efficiency maintains the most comprehensive database of solar policies by state.

Key Takeaways

• Net metering credits you for surplus solar electricity you send to the grid — it is the key policy that makes solar financially viable
• 1:1 net metering (full retail credit) offers the best solar economics; reduced net metering makes batteries important
• California's NEM 3.0 cut export credits by ~75%, making batteries essential for new solar installations there
• The national trend is toward reduced net metering — current rates are likely the best they will be
• Homeowners who install solar now are typically grandfathered into current rates for 15-25 years
• Without net metering, solar still works but requires batteries and smaller system sizing
• Check your specific utility's net metering policy before getting quotes — it is the single biggest variable in your solar savings

The net metering landscape is changing fast. If you have been considering solar, the best time to lock in favorable rates is before your state's policy changes. Every year you wait is a year of savings you miss and a year closer to potentially less favorable export rates.

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