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What is Net Metering?

#3 in our “Key Solar Concepts” series.

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Net Metering is one of the most important solar policies. In fact, it’s so important that we made this sweet infographic about it (read below if you prefer text to images):

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What net metering is and why it’s so important

Net Metering is an electricity billing arrangement under which solar panel owners are credited on a 1-to-1 basis for the energy their panels produce and send to the grid. For example, if your solar panels generate 10 kilowatt-hours (kWh) and send them to the grid while you’re at work during the day, then you come home and use 10 kWh of electricity at night, your bill for that day would be $0.

Essentially, net metering is what people are talking about when they say solar “makes your electric meter run backwards.” It’s a deceptively simple concept, but there are lots of rules and regulations that have an affect on how it works. And it’s the single most important policy that makes solar financially viable over the long term.

Why is net metering important?

Net metering has long been adopted by most of the country as the default billing arrangement for solar owners. Because people are usually away from home during the day when solar panels are producing electricity, most of the power is used by someone other than the owner. Without net metering, that electricity could be credited at wholesale rates, often about 25% of retail.

So net metering makes solar economical, and allows solar owners to benefit from both sunny days and summer months, when their solar panels produce more energy than they can use, which builds up credit with the utility company that can be applied when the sun isn’t shining.

Which states have net metering?

Currently, 38 states have decent-to-good net metering policy, and 3 states are on the cusp of making that list. The website http://freeingthegrid.org/ is a great resource for learning more about the issue. They award letter grades to states based on their net metering and interconnection policies, based on how well the states meet certain criteria that enable solar growth.

Here’s what net metering in the U.S. looks like in 2016:

What are the benefits of net metering?

The benefits of net metering might seem like they only affect solar panel owners, but that’s not true at all. Sure, solar owners get paid retail prices for the electricity their panels produce, unlike traditional power plants that sell their generated electricity for wholesale rates. But rooftop (aka “distributed”) solar power tends to be consumed locally, reducing strain on generation and transmission infrastructure that would otherwise be carrying fossil-fuel-based electricity from a faraway power plant.

See, solar panels aren’t the same as other forms of electric generation—they replace an expensive, inefficient system with a localized, modern one. To build a power plant or industrial-scale solar farm, the utility companies need to buy, rent, or take (via eminent domain) land; get public approval for huge construction projects and power line rights-of-way; and build and maintain expensive infrastructure. Sending power from far away to the point of use means losing some of that electricity due to the nature of the power transmission system.

Small solar is better. The panels are located on top of existing structures, where power consumption is happening, reducing demand at peak times and preventing costly infrastructure investment and power losses in distribution. Those are huge advantages.

What is the controversy over net metering?

Utility companies all across the nation were totally cool with solar net metering… right up until solar started really taking off and becoming financially viable. Over the past several years, industry groups have been working with pro-business groups like ALEC to write legislation that rolls back protections for solar net metering.

These groups have had limited success in getting rid of popular Renewable Portfolio Standards through state legislatures, but they’re beginning to find footholds among lesser-scrutinized state public utilities commissions (PUCs). PUCs are usually appointed by the governor, and not subject to the kinds of scrutiny elected officials have to deal with. They make the rules that govern how the electric utilities can operate in the state, and they have the power to change net metering rules without oversight.

For example, Nevada’s PUC changed net metering rules in December, 2015, completely eliminating net metering in the state, and phasing in new rates over the next several years under which solar owners will be paid less for each kWh of energy produced by their panels and see fixed monthly utility fees increase.

The Nevada PUC argues that because they are paid retail rates for the electricity their panels produce, solar owners are not paying their fair share of grid maintenance costs. They claim its a subsidy for people rich enough to be solar owners (even though it’s not). They claim those costs have been shifted onto non-solar customers, who shouldn’t be forced to bear the burden.

But as we mentioned above, distributed (rooftop) solar has many benefits to the grid, including reducing the need for expensive energy generation and transmission infrastructure that the per-kWh fees are designed to collect money for. In fact, in 2014, Nevada’s PUC commissioned a study of the value of solar, precisely to see whether costs were being shifted to non-solar customers, or whether solar had greater-than wholesale value to the grid and the larger community.

The study found that net metering for solar is actually responsible for financial benefits greater than its costs. That’s why it’s so crazy (and pretty fishy) that the PUC then voted to end net metering in the state.

The changes have caused solar companies in the state to shut down operations, leading to the loss of an estimated 5,000 jobs for Nevadans. On top of that, people who just recently installed solar panels saw their financial future change with the stroke of a pen, and now face the prospect of losing money on the deal, because the new rules affect all solar owners, even those who installed panels when net metering was the law of the land.

Nevadans protesting the changes

The Nevada changes led to widespread protests in the state, with many people calling for the end of Governor Brian Sandoval’s administration, and asking the PUC to reconsider rule changes for existing solar owners.

As of February 26, 2016, the outcry has caused the PUC to change the phase-in period for the new rate schedules from 4 years to 12 years, which will allow existing solar owners to reclaim some of the value of panels they’ve already paid for, but will not help to rebuild the state’s scuttled solar industry. A ballot initiative to reinstate net metering is likely to put the issue in front of voters in November.

This is what net metering advocates are up against: a concerted push to end fair compensation for solar, even as states continue to push for higher renewable energy use. Monopoly utility companies don’t like competition because they can’t continually raise rates on energy people generate themselves. Now that we’re seeing an explosion in home solar and falling prices for solar panels, the utilities are ready to put a stop to it, while building up thier own industrial-scale renewable generation facilities.

As of early 2016, nearly half of all states are studying changes to net metering rules. Nevada and Hawaii have already made huge changes to net metering. Maine is next. Expect to see more changes around the country in the coming months.

What happens if net metering goes away?

If net metering is replaced by wholesale power purchasing, solar is likely to struggle to keep up with grid prices, at least until prices fall below a certain threshold, which they’ve been rocketing toward ever since the 2008 extension of popular solar tax credits. Check out what falling prices does for solar installations:

Prices for solar are so cheap that, after tax credits and rebates, buying solar is far better than paying the utility for electricity. Solar saves its owners thousands of dollars over its 25-30 year lifespan in every state in the union.

But that’s with net metering in place. If net metering goes away, solar will still offer a narrow financial benefit in sunny states, but solar owners will get paid pennies on the dollar for the electricity they send onto the grid. And if Nevada is any indication, net metering going away will kill much of the solar industry in the country. Unless some alternative to net metering can be found.

What are the alternatives to net metering?

Glad you asked! The first, and most damaging to Americans’ pocketbooks, would be increased fees and wholesale prices for excess energy. This would likely put solar leasing companies out of business, but as prices for solar panels keep falling, it’s likely that paying up front for a solar purchase would still return a tiny profit over the long term. If the switch to higher fees and lower payments happens across the country like it did in Nevada, the utility companies will retain control of the generation and transmission infrastructure, and keep making money hand over fist, much like they have for the last 75 years or so.

Federal regulation

The most beneficial alternative would be a nationwide net metering standard. This could be brought about through legislation to pass a comprehensive renewable portfolio standard and net metering bill for the whole country, or it could come through similar, non-legislative regulation like what’s happened under some state PUCs.

The Federal Energy Regulatory Commission (FERC) is the federal governmental entitle that has jurisdiction over the rates, terms & conditions of wholesale electric sales by public utilities. FERC has purposefully stayed out of the fight over net metering nationwide, though some people argue that FERC should step in and provide clear guidance.

A nationwide standard for net metering would end complex state rules and effectively make the whole country good for solar, from a financial perspective at least. It would decrease the chances that changes in law could result in the kind of chaos we’ve seen in Nevada, and would set the country on a solid path to solar growth.

The value of solar

Like we mentioned above, Nevada, among other states, have spent a great deal of time and effort studying the value of solar. The findings of those studies have been proposed as a way to guide the establishment of fair alternatives to net metering, which recognize the collateral benefits of distributed solar power for utility companies and the customers they serve.

Generally, the proposals to switch from net metering to a solar compensation mechanism called a “levelized Value of Solar (VoS) tariff, which would be a fixed per-kWh payment to solar owners over a long-term contract, usually of 20 years. A study in Minnesota concluded that a levelized VoS would be about 30% higher than current retail prices for electricity, but would be paid over a 25-year contract.

The advantage of a fixed price over a long term contract is it makes solar pay itself back now, and have a relatively smaller impact on the utility company into the future—as retail rates increase over time, either keeping pace with inflation or adjusting for other reasons, the VoS tariff stays the same. The benefits of decreased electric supply volatility, reduced need for infrastructure investment, and carbon mitigation accrue to the utility over the life of the contract.

With a smart implementation of a levelized VoS tariff, solar can grow and be a key part of our future energy mix. It is the best alternative to net metering, from a financial sustainability perspective.

That’s all, folks

We hope you’ve learned a little something about net metering, and understand why it’s such an important issue for solar owners. Now get out there and advocate for sensible solar policy where you live.

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4 thoughts on “What is Net Metering?

  1. oscar says:

    i live in alabama i do have a solar array putting 8 kw of power a day in this state the rules are so hard for net metering because of ignorance and corruption this great nationis going to down hill the state and the utilities company can loose more money thats why they do it the more people with solar the less money they make they dont care about envyrontment they only care about the mighty dolar

  2. Gregory Smith says:

    I am a copywriter for solar energy and I can see you need to update some of your articles on Nevada and their issues with net metering. The PUC in Nevada has changed its mind and has all 32,000 solar owners back into netmetering as a grandfather’ed measure.

    1. Ben Zientara says:

      Thanks, Gregory, and you’re right. PUCN just finished the process of grandfathering in all former solar owners, and we couldn’t be more thrilled. We’re working on the 2017 edition of our State Solar Power Rankings report, and we’ll be sure to give Nevada a retroactive gold star (and several angry words) about its current and future feed-in tariff woes.

  3. Gregory Smith says:

    I am a solar trained installer and technical sales certified graduate from SEI. I live in Oklahoma and I have big problems with your graphic saying Oklahoma is renewable energy friendly. IT ISN’T! Oklahoma consistently scores an F on every scale dealing with everything but wind energy production. Solar has been demonized by Republicans in the state and the state legislature has failed to comply with PURPA laws. They should be fined for their deliberate lack of respect for everything legal dealing with electricityband NEC Code enforcement. I Can tell you the many benefits from solar as a distributed energy source and yet thevlegislature still refuses to repeal SB 1456. Until Solar is treated right I am declaring war on my political party. They all need an education on solar.

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