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How Solar Works: Net Metering

Updated: Mar 3, 2023





Your electricity bill, explained

Traditionally, your local power plant produced electricity and exported it through the grid to the homes and businesses in your community. This is "centralized" energy production, by which electricity all flows in one direction, from centralized production to all recipients. Utility companies are regulated by state utility commissions in order to manage the energy infrastructure and protect consumer interests, and energy cooperatives (co-ops) purchase electricity from the large for-profit utility companies that own or manage the local power grid. Meters at homes and businesses track how much electricity is received from the grid each month, measured in kilowatt hours (kWh). The price per kWh and additional taxes and fees make up your monthly electricity bill.


Decentralized Energy Production

With the increased proliferation of solar farms, rooftop solar arrays, wind farms, and other sources of power production, energy production has become decentralized, meaning energy production can happen virtually anywhere, and not simply provided by a single power plant.


Below, the US Energy Information Administration (EIA) graph demonstrates how clean energy production has grown dramatically over the last 10 years, particularly for wind and solar energy, which has increased the number of homes and businesses that produce their own energy:



Utility companies have adapted to this decentralization of energy production by replacing old meters with digital "bi-directional" meters that track electricity flowing to homes and businesses (import) and from their production (export) back to the grid for resale. This requires a contract called an Interconnection Agreement to govern the relationship between the utility company and the owner of power production (see below for more information).


What is net metering? As an example, solar panels only produce energy when the sun is out (see the EnergySage gif below), and at least some of the energy produced is exported to the grid; at night when the panels cannot operate, energy is imported from the grid. The bi-directional meter tracks both exports and imports, and reports both on your monthly bill. You will be charged for imports and credited for exports, and the remainder is the "net" result of charges minus credits.



There are several types of net metering. Here are the basics:



1:1 Net Metering

This is the simplest net metering, and most popular among homeowners. Solar designs for 1:1 net metering use your historical usage data to determine annual production, which should match or slightly exceed the previous year's annual usage. The panels produce only while the sun is out, but produce much more energy than you will use. For example, if your usage last year was 9,607 kWh and the annual production guarantee for your solar system is 9,996, the offset is 104%. Energy is produced during the day while the sun is out, and the excess power goes to the grid, tracked by the bidirectional meter, and shows as a credit on your bill. You receive 1 kWh credit for each kWh of energy you send to the grid; in this way, you use 1 kWh credit for every kWh of energy you use. This keeps billing simple, and a solar design is straightforward, as it simply needs to produce what you use.


When considering solar for a 1:1 net metering program, it is important to determine any changes to your usage that may cause your energy needs to go up or down dramatically for the coming years. For instance, if a member of the household started to work from home, usage will go up drastically, and the panels will not produce enough energy to cover the increased usage. On the other hand, it is not wise to produce a significant amount of energy over expected usage, because you will simply build up credits you can never use. In that scenario, you are paying too much for your solar, and giving free energy to the utility company.


It is important to ask questions about your utility's net metering program so you know exactly what to expect. Some utilities "true up" credits annually, reseting them to zero (Duke Energy in North Carolina does this at the end of every April). Some utilities will cash out the remaining credits or carry them forward to the following year. Even if the utility cashes out the credits, the credit rate is set by the utility, and will be below the "retail" rate, or the amount you pay for power from the utility.



Net Billing (Export Credit)

Net Billing operates the same as 1:1 Net Metering, except you are paid a credit rate set by the utility instead of receiving a unit credit. Every kWh you export to the grid is credited on your bill at a rate set by the utility company (and subject to change). This rate will be less than the "retail" rate (the rate you pay for each kWh), and each kWh you import from the grid will be billed at that retail rate. For instance, if the residential retail rate is $0.11/kWh, you will be charged $0.11/kWh for energy you import, but the credit you receive for the energy you export may only be $0.06/kWh, meaning a $0.05 deficit per credit.


In this scenario, the best design may be a higher production (say, 120% offset) to sell more to the utility; or a battery to store excess energy during the day to use at night, to avoid the import charges; or a smaller system that covers daytime usage and exports nothing. The specific design is determined by the particulars of the net metering program, so, again, ask questions to ensure you know what to expect. For instance, some co-ops will charge high monthly fees for solar, and do not allow credits to cover the fees; in this scenario, oversizing a system would simply add to your monthly cost. However, some utility companies allow credits to cover fees, so oversizing a system may make sense. Also, the cost of a battery may undermine efforts to save money in an export credit system; for Time of Use (TOU) billing, for instance, the highest utility rate is in the afternoon, when the panels produce the most energy. Utility companies with TOU billing typically pay a higher credit for these periods of the day as well, so it may make more sense financially to earn credits during the highest rate/highest production time of day.



Monthly Net Metering

This net metering program works like 1:1 net metering, except the "true up" occurs monthly rather than annually. For a typical monthly net metering program, the import/export units are netted on a 1:1 basis, but any excess production credit rolls over to the following month at an avoided cost rate credit (a credit less than the retail rate).


As a homeowner, you should look at your usage throughout the year, and understand that you will probably create excess credits during the spring and fall (and possibly winter, depending on whether you use electricity for heat), but you will continue to have a utility bill for summer months, minus the system production and amount of credit carried over on your bill. It is possible to oversize the array to more closely match production to highest level of usage and build up credits for those months, but pay attention to the credit rate. If the export credit is a small fraction of the retail rate, it simply does not make sense to spend so much money on production if the utility company gives you nothing in return. For example, El Paso Electric pays $0.01/kWh for export credits and bills an import rate of $0.112/kWh (as of 2022 rate schedule). The deficit of more than $0.10/kWh does not make sense for investing in overproduction. In this case, it is likely more economically viable to add a battery so you can store and use the energy you produce, rather than drawing from the grid.



Buy All, Sell All

This model is rare, but works like this: all production from an array is credited at a specific rate; all consumption is charged the retail rate. Homeowners with solar must pay for all the energy they use, regardless of the source of production, and the offset credit offered by the utility is a lower rate. This requires a special meter to measure all production and usage. Often, solar is not financially viable for a buy all, sell all system, but it depends on the details of the program.



Interconnection Agreement

Net metering programs are facilitated through a contract called an Interconnection Agreement. In order for net metering to work, your solar system must be connected to the grid. A power production system connected to the grid must meet certain installation and safety standards, and so must be permitted by your city or county, and inspected before operation. Because your system sends energy to the grid, a safety shutdown mechanism is required; if the grid goes down, your system must automatically shut down as well. This prevents your system from endangering utility workers while they are working on a downed grid. The Interconnection Agreement often locks in terms and rates for net metering, so you can establish a predictable billing service with the utility company for the duration of the contract.


You should only purchase solar from an installation company properly bonded and licensed, as well as approved by the panel and inverter manufacturers for warranty requirements. This ensures proper installation, inspection approval, on-going service and support, and valid manufacturer warranties to protect your investment. Small installation companies often do not have proper certification or manufacturer agreements, and this can cause liability issues and voided warranties, as well as an absence of longterm support for your sytem.



FAQ

  • What happens if the power goes out? Utility companies shut down the grid for areas in need of repair, so your solar system will also be shut down in order to prevent a back flow of energy into the grid, which would endanger utility workers. If the grid goes down, your solar system also goes down. If you install a battery for back up, make sure your installation company provides a transfer switch or other mechanism to allow the panels to charge the battery system while the grid is down. Without a transfer, the solar panels cannot distribute the energy being created until the grid comes back up.

  • What about house batteries? Generally speaking, batteries are not necessary under a net metering system, because credits act as your battery. In other words, you do not need to store excess energy for later use, because the grid does it for you. Batteries can be useful as a backup when the power goes out, but batteries tend to offer either limited storage at a modest cost (meaning they would only operate for a few hours and for a limited number of your circuits in an outage) or relevant storage for a high cost (meaning you would pay tens of thousands of dollars for something you may never need). There are a number of batteries on the market, and improvements and options are quickly becoming available, so the answer to this question changes constantly. Please see references to batteries in each net metering type above for more specific information.

  • What about a generator? As a back up for power outages, this is the most reliable and economically viable solution for most homeowners. Solar arrays offer connection to the system, so a homeowner can hire an electrician to connect a generator to the main service panel to offer power when the grid goes down. Generators are more affordable than batteries, and can potentially power your entire home if set up properly.

  • Will I pay a power bill after I purchase solar? Yes, but results vary. Even with 1:1 net metering, if your export credits zero out import charges, you will typically have one or more fees from the utility company. Sometimes, as with Duke Energy in North Carolina, the fee may only be the monthly facilities fee every homeowner pays; others, as with El Paso Electric, use fees to offset the admin costs of managing net metering, so a minimum monthly fee is set ($30.25 for El Paso in 2022). Most utility fees and taxes are applied to energy sold to consumers, so solar eliminates most fees in most cases, but it is important to ask questions about your specific utility company, for full disclosure of your estimated monthly utility costs. Additionally, a solar offset is based on historical data, so a design has a production guarantee, but not an offset guarantee; if your usage goes up, the system cannot produce more to keep up, so the production offset of your usage will go down, and you will pay more on your monthly utility bill.

I hope this is informative and helpful for homeowners thinking about solar. If you have any questions about net metering or solar panels for your home, feel free to contact me, I'm here to help!





Jamie Duncan is an energy consultant operating virtually nationwide. Please click the button to learn more or set up a virtual appointment to discuss solar for your home.






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