How Net Metering Works

Net metering is a billing arrangement that allows owners of solar panels and other small-scale generators to receive credit on their electricity bills for excess power they send to the grid. During the middle of a sunny day, a rooftop solar system may generate more electricity than the home consumes. That excess flows out through the meter and into the distribution grid. The meter effectively runs backward during these periods, and the customer receives a credit.

In the evening, when the solar system stops producing, the home draws electricity from the grid as usual. At the end of the billing period, the customer pays only for their net consumption: the total electricity drawn from the grid minus the total sent back to it.

State Policies and Rate Structures

Net metering is governed at the state level, and policies vary significantly. As of 2025, most states offer some form of net metering, but the details differ in important ways. The key variable is the compensation rate. Under traditional full-retail net metering, each kilowatt-hour of excess solar sent to the grid earns a credit at the full retail electricity rate.

Many utilities argue that full-retail net metering over-compensates solar customers because the credit covers costs that the solar customer’s excess generation does not actually avoid. The distribution grid still needs to be maintained whether or not a home has solar panels. This argument has led to a wave of net metering reform across the country.

California’s NEM 3.0: A Case Study in Reform

California was a pioneer of generous net metering, which helped make it the nation’s largest rooftop solar market. In 2023, the California Public Utilities Commission implemented NEM 3.0, which dramatically reduced the compensation rate for new solar customers from the full retail rate to a time-of-use rate that more closely reflects the wholesale value of electricity.

Under NEM 3.0, the value of solar exports varies by time of day and season. Electricity sent to the grid during midday receives minimal credit. Electricity exported during the evening peak receives higher compensation. The policy encourages solar customers to install batteries and shift excess generation to the hours when it is most valuable to the grid.

The immediate impact was significant. Rooftop solar installations in California dropped sharply. However, battery attachment rates surged, with a majority of new solar installations now including a paired battery system.

The Cost Shift Debate

The most contentious issue in net metering policy is the cost shift argument. Utilities contend that net metering customers reduce their bills while still relying on the grid for backup power and infrastructure. The costs of maintaining that infrastructure are then shifted to non-solar customers.

Solar advocates counter that rooftop solar provides substantial grid benefits: reduced transmission costs, lower wholesale prices during peak periods, local resilience during outages, and reduced environmental costs. The debate comes down to how these benefits and costs are valued.

The Future of Net Metering

The trend in net metering policy is toward more sophisticated rate structures that reflect the time-varying value of distributed solar. Time-of-use rates, demand charges, and value-of-solar tariffs are replacing simple flat-rate net metering in an increasing number of states.

The integration of battery storage is transforming the equation. A solar-plus-storage system can export electricity during the hours when grid value is highest, rather than simply dumping excess power whenever the sun shines. As battery costs continue to decline, the economics of solar-plus-storage will increasingly diverge from solar alone. Net metering is not disappearing, but it is being redesigned to better align individual incentives with grid needs.