More and more homeowners are getting the positive benefits of the 30% tax credit for rooftop solar and battery storage purchases made available under the Inflation Reduction Act. But on the other side, there are changes to state policies that might be hurting their ability to save with solar.

Net Metering Overview

Net metering is a policy that helps homeowners with residential solar panels save money and promote clean energy. Here's how it works: Solar panels often generate more electricity than your home needs. Net metering sends that extra electricity back to the power grid. When your home uses electricity from the grid, your meter goes forward. But when your solar panels produce more electricity than you use, the meter goes backward, and you earn credits for that extra energy. These credits can lower your future electricity bills.

Net metering policies ensure solar owners are compensated for the clean electricity they produce and give back to the grid, which is important since a utility can sell that electricity to someone else in the community. Net metering can also speed up a solar customer’s payback period of their initial investment. 

While net metering policies help with a homeowner’s potential savings, it’s important to keep in mind that there isn’t a federal standard. This policy is left to the discretion of the states and utilities, many of which are starting to reevaluate their net metering policies as solar adoption increases. This patchwork of net metering laws has created immense variation in how solar customers are billed and compensated. 

 Let’s break down what these various net metering policies look like.

Rate Retail Net Metering 

Retail net metering is the simplest version of this practice. It means that when solar energy is sent back to the grid – like during the middle of the day when the sun is shining, and no one is home – solar owners get paid the same amount they would pay for electricity they use from the grid. This is called 1:1 retail net metering because the price of electricity doesn't change whether you buy it or sell it back. In many states, this is considered a fair way to compensate solar owners for the power their system is producing.  

Net metering offsets how much a customer pays for the utility for power, reducing their overall electricity bill. At the end of each billing period, their imports and exports will be tallied up. If it turns out the homeowner used more electricity than they sent back to the grid, they will be billed for the difference. On the other hand, if more power was sent to the grid than was used within the home, the customer will receive a credit that can be rolled over to their next monthly electricity bill. 

Credit rollovers are helpful in paying down future electricity bills. Depending on the net metering program, solar customers can accumulate excess credits indefinitely, using the credits from previous months to pay down charges during less sunny months or for future years. More commonly, utilities confine credit rollovers to a 12-month period. And at the end of the 12th month, customers are compensated by the utility for unused credits at a reduced cost. 

Conversely, but less commonly, there are also programs that snap up excess credits every month, preventing customers from accumulating credits and maximizing the financial benefit of their solar system.   

Time-of-Use Retail Rate Net Metering 

In several states, customers pay a flat rate for electricity, meaning they pay the same amount per kilowatt-hour no matter the time of day. In some states, however, utilities have adopted time-of-use (TOU) rates, where the cost of electricity changes throughout the day depending on energy demand. Typically, TOU rates are lower during the day (off peak) and higher in the evening (on peak) when customers come home from work and turn on their appliances. 

In a retail rate net metering scenario, a customer’s compensation for exported solar power will align with the cost of electricity purchased – regardless of whether they’re on a flat or variable rate. It’s still 1:1. But unlike a flat rate, a TOU solar customer’s compensation will change during on peak and off peak hours. When stress on the grid is low, the cost and compensation of electricity is low. But when supply is struggling to meet demand, solar customers are compensated at a much higher rate as they are supplying the grid with needed electricity.  

A TOU or variable rate incentivizes solar customers to pair solar systems with battery storage. That way, rooftop solar customers can store up the excess solar power their system generates in the middle of the day, when power prices and thus their net metering rate is low, for use during the evening when power prices spike. That stored solar power will reduce the amount of electricity a homeowner needs to buy during expensive peak times, and any excess stored power sent back to the grid will be compensated at a higher rate.  

Some utilities argue that TOU or variable rates more accurately reflect the cost of a given electron based on the balance of supply and demand on the grid. In North Carolina, for instance, utilities are transitioning from flat rate 1:1 net metering to TOU net metering. In California, customers who install solar have been required to go on TOU rates since 2017 as part of the state’s NEM 2.0 policy. Learn more about California’s recent net metering policy changes here. 

Net Billing

Under net billing, the excess power from a customer’s solar system is sold to their utility for less than they pay for electricity. So instead of compensation matching the cost of a kilowatt-hour on a utility bill, there is a misalignment between the cost of electricity to the homeowner and the homeowner's solar credit. For example, a customer might pay 15 cents per kilowatt-hour, while their solar compensation could be closer to 7 cents.  

Avoided Cost Net Metering 

In an avoided cost net metering model, utility companies compensate customers based on the costs the utility avoids from not having to serve those households. In some cases, the wholesale price of electricity is used to compensate solar customers while still charging customers retail prices for electricity consumed from the grid.   

Other utilities have adopted a “value of solar” model that incorporates other factors into the compensation calculation, such as the benefits that residential solar provides to the grid. 

Depending on how the avoided cost model is structured, the price of solar sold back to the grid can fall below the retail rate. In states where the utilities avoided cost for not serving solar households is below the retail rate, homeowners will not maximize their potential savings and see longer payback periods. 

If you're thinking about getting rooftop solar panels, adding a battery to your existing solar system, or combining solar with storage, it's important to know the net metering policy in your state or region. This will help you weigh the value of your investment and how long it will take for the system to pay for itself in energy bill savings. To find out about net metering laws and other solar incentives in your state, you can visit the Database of State Incentives for Renewables & Efficiency.