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Net Metering

Net energy metering (NEM), commonly referred to as net metering, is a metering and billing arrangement designed to compensate distributed energy generation (DG) system owners for any generation that is exported to the utility grid.

NEM allows utility customers with on-site DG to offset the electricity they draw from the grid throughout the billing cycle (e.g., one month). The utility customer pays for the net energy consumed from the utility grid.

NEM customers directly use the electricity generated on-site by their DG systems. If the amount of electricity the NEM customer’s DG system produces exceeds the amount of electricity that customer can use, the excess amount is exported to the utility’s electric grid. If the NEM customer uses more electricity than his or her DG system produces, the customer imports electricity from the grid, and pays the full retail rate for that electricity, just like a traditional utility customer.

The NEM customer is typically compensated for excess electricity that is exported to the grid by the utility on a per kilowatt-hour (kWh) basis. The level of compensation varies by location depending on the state and local policies in place. In some locations, utilities may compensate NEM customers for excess generation at the full retail rate, or some amount less than retail. In certain cases, compensation levels may be zero. At the end of the billing cycle (e.g., monthly), the NEM customer’s charges for energy imported and credits for energy exported are netted against one another. If the amount of electricity a customer imports exceeds the amount exported from the DG system, the difference is billed to the customer. If exports exceed imports during a billing cycle, typically the NEM customer can carry the balance forward into future billing cycles (i.e., a rollover credit). Again, depending on the policies in place, this balance can either be carried forward indefinitely, or it might expire at some fixed point in time (e.g., at the end of the calendar year).

Virtual Net Metering

Virtual net metering utilizes the same compensation mechanism and billing schemes as net metering, without requiring that a customer’s DG system (or share of a DG system) be located directly on site. Virtual net metering has been implemented as a mechanism to facilitate participation in shared renewable energy projects, in which multiple customers can receive net metering credits tied to their portion of a single DG system. Net metering credits appear on a customer’s bill as if the distributed generation were actually located on his or her property. Like on-site NEM, the value of these virtual NEM credits varies depending on the applicable policies in place.

Background

NEM has been widely implemented as a customer-sited DG compensation mechanism at the state level in the United States since 1983. Currently, 41 states, in addition to Washington, D.C., American Samoa, U.S. Virgin Islands, and Puerto Rico, have mandatory net metering policies in place. Some utilities have voluntarily offered NEM arrangements to customers, as well. For example, Idaho and Texas do not have mandatory NEM policies, but some utilities in those states do offer NEM (DSIRE, 2016). Net metering has been consistently recognized as a foundational policy to support the growth of a distributed solar marketplace (Krasko and Doris, 2012).

Benefits

The benefits of NEM include:

  • NEM is a relatively straightforward billing concept, from a customer and utility perspective.
  • NEM does not require changes to existing retail rates.
  • NEM often uses existing metering infrastructure.
  • Through NEM, customers receive compensation for excess electricity that improves the financial return on investment of their on-site DG systems.

Implementation Issues and Challenges

Despite the many benefits, NEM policies also pose challenges, which include:

  • Some consider NEM an imprecise instrument for compensating DG because it does not finely calculate the costs and benefits of DG to the electricity grid.
  • Under most existing utility business models, NEM leads to forgone utility sales when customers generate their own electricity.
  • There has been recent interest in whether NEM encourages cost shifting (i.e., a “cross subsidy”) where non-DG system owners subsidize those utility customers that have invested in DG. Since 2010, many states and research organizations have explored this question by conducting solar cost-benefit studies.

Program Design

NEM policies commonly vary with regard to the following:

  • Eligible Technologies: NEM policies specify eligible renewable energy technologies including, but not limited to, photovoltaics, wind, geothermal electric, biomass, and fuel cells.
  • System Size Caps: NEM policies have system size caps that set the maximum individual system size that can net meter. Caps can be capacity- (e.g., kW) or percentage-based (e.g., 120% of maximum daily load).
  • Program Size Caps: NEM program caps set a limit on the total amount of NEM systems installed in a region or utility service territory. NEM program caps can be calculated in many ways, including percent of peak demand or load and capacity. Some states have no program caps, and some states have trigger mechanisms that require net metering policies to be reevaluated when certain thresholds are met.
  • Customer Type: NEM policies specify eligible customer classes (e.g., residential, commercial).
  • Net Excess Generation: NEM policies vary in terms of how customers are credited for net excess generation. The rate (e.g., full retail, less than retail, no compensation) can differ by policy as well as how credits expire.
  • Ownership of Renewable Energy Credits (RECs): Most NEM policies allow customers to own the RECs associated with their DG output.

Next Steps

As the amount of installed DG (particularly distributed PV) capacity continues to increase in the United States, there are multiple active debates at the local level related to net metering. States are increasingly addressing net metering in legislative or regulatory proceedings. The issues being debated include whether or not net metering encourages cost shifting (i.e., a cross subsidy among utility customers), and whether it adequately balances the fixed costs associated with maintaining the utility grid infrastructure (e.g., transmission and distribution systems) with the benefits associated with the production of on-site renewable energy.

As distributed PV markets evolve in the United States, certain states have been experimenting with alternatives to net metering that seek to more finely calculate the costs and benefits of distributed generation and compensate stakeholders accordingly. Advancements in communications and smart grid technologies also enable more refined calculations of distributed generation value.

For example, Minnesota adopted a value of solar (VOS) tariff methodology in 2014 in which the amount of energy sold between the utility and the customer and the rate at which that energy is valued takes into account utilities’ variable and fixed costs, distribution and transmission line losses, ancillary services, and environmental benefits. Other alternatives to NEM include feed-in-tariffs and net billing.

Sources

Database of State Incentives for Renewable and Efficiency (DSIRE). 2016. A comprehensive source of information on incentives and policies that support renewables and energy efficiency in the United States.

Solar Energy Industries Association. “Solar Cost-Benefit Studies.”

Krasko, V., Doris, E. 2012. Strategic Sequencing for State Distributed PV Policies: A Quantitative Analysis of Policy Impacts and Interactions. Golden, CO: National Renewable Energy Laboratory. NREL/TP-7A30-56428.