What is net metering and how does it work?

Process diagram of how net metering works

Net metering is an electric billing tool that uses the electric grid to "store" excess energy produced by your solar panel system. Under net metering, the energy produced by your solar panels that you don’t use is credited back to you. On a cloudy or rainy day when your panels aren't producing enough energy, the utility grid will feed your home energy and count that energy against the credits you've banked over time. As a solar customer, you will only be billed for your "net" energy usage. Also known as net energy metering or NEM, net metering is the solar industry's foundational policy.

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Say you've installed a solar panel system and you live in an area with a net metering program. When your photovoltaic system produces more electricity than you're using at any point during the day, the electricity is sent back to the grid, running your electric meter in reverse. When your energy use is higher than your solar panel production, either at night or on cloudy days, you'll pull electricity back from the grid, running your meter forward. At the end of the month or year, you'll be billed the net amount of what you send to the grid and what you pull from the grid: hence "net metering".

With a correctly sized solar energy system, you can produce enough electricity to match your home's electricity use for the entire year. However, the amount of electricity your solar panels produce will vary throughout the year: more in sunnier summer months and less when the sun is lower in the sky and sets earlier in the winter. Net metering helps you to account for these seasonal differences in solar production by crediting you for the excess electricity your panels produce so that you can use it at a later date.

Net metering policies were designed for two primary purposes: first, to encourage the greater adoption of renewable energy throughout the country, and second, because utilities–and the electricity grid as a whole–can benefit from the influx of low- to no-cost solar energy onto the grid. Solar energy can help balance the cost of purchasing electricity from other resources, especially during summer months when electricity is often the most expensive on the hottest–and sunniest!–days of the year.

In general, most homes will produce excess electricity in the summer months and will use more electricity from the grid in the winter. Because these variations in production are fairly predictable, your utility won't send you a monthly check when you produce more than you need. Instead, you will build up extra credits during the summer months so that you can draw from them at night and during the winter months when you need them. With the right design, your system can generate enough power to match your total electricity use for a year, even if you produce much more than you need in some months and much less in others.

When your solar power system generates more electricity than you use over the course of a month, you will receive a credit based on the net number of kilowatt-hours you gave back to the grid. If you produce less electricity than you use in a given month, you must buy electricity from your utility to make up the difference. In these instances, you would pay for the electricity you use, minus any excess electricity your solar panels generated.

While traditional net metering is the most popular way to receive credits back from solar energy generated, there are other ways depending on where you live and what your state and utility provider have available.

Buy all/sell all

As opposed to other models of metering, the buy all/sell all model works by allowing users to sell 100% of the energy generated by their panels to the utility company. In return, they get 100% of their home's energy from their utility at the retail rate. Two separate meters are required for this type of net metering and the user will pay the difference between the amount generated and the amount consumed. With buy all/sell all net metering, you don't directly consume any of the energy generated by your solar panels.

Net billing

In the past, net billing has been most common in large commercial solar installations, but it's becoming increasingly popular for home installations as the total number of distributed solar energy systems increases. Net billing is similar to net metering in that it allows you to essentially use the grid as storage for the excess electricity generated by your solar system. 

Under net metering, your credits are typically a one-to-one exchange: a kilowatt-hour produced by your solar panels is worth the same amount as a kilowatt-hour produced by the grid. However, with net billing, your compensation rate is typically lower than what you pay for electricity. Instead of "banking" the credits earned from the excess energy generated by your solar panels, you'll "sell" that energy back to your utility, typically at the wholesale rate instead of the retail rate.

Net metering is the best solar policy because it allows you to store every unit of energy you produce with solar to be used at a later date from the grid. In fact, thanks to net metering, you can save tens of thousands of dollars over the lifetime of their solar panel system by offsetting your need for electricity from the grid.

While net metering is not the only way that utilities compensate homeowners for going solar, it's by far the most common and effective solar policy at the moment. Check out this article to learn if your state offers net metering or another type of solar compensation program, and be sure to visit the Database of State Incentives for Renewables and Efficiency (DSIRE®), which tracks net metering and other solar incentives and rebates. 

To see how much you can save with solar, check out the EnergySage Solar Calculator, or register for a free account on EnergySage to see custom solar quotes from local installers today.

Here are some key questions residential customers often have about net metering:

Do net metering credits expire?

While it can depend on where you live, in most states, your net metering credits will roll over from month to month and sometimes year to year, meaning you won't have to use all of your credits in one billing period. So, since your solar energy system produces high amounts of energy in the summer, you can build up credits to use in winter billing cycles when your generation is lower. 

What is virtual net metering?

Many states have virtual net metering, or VNEM, policies, which allow you to benefit from net metering even if you don't have solar installed onsite at your home. In most cases, you participate in virtual net metering by subscribing to a local community solar farm. Under virtual net metering, the electricity generated by the solar farm will be fed into the grid and the net metering credits will be shared among all subscribers. The energy produced by your share of the farm is sold to you at a discount, reducing your annual electricity costs by 5-15%. Community solar is a great option if you're unable to install a rooftop solar system – check out the EnergySage Community Solar Marketplace to explore projects near you. 

What is NEM 3.0?

In December 2022, the California Public Utilities Commission (CPUC), the regulatory agency in charge of private utility companies in California, approved California's new net metering policy, NEM 3.0. NEM 3.0 went effect on April 14, 2023 and significantly reduces the rate at which utility customers with solar energy systems are compensated for the excess electricity they send to the grid.

Does net metering only apply to solar?

Not necessarily – while solar is by far the most common, depending on the net metering rules in your state, you may be able to net meter with other types of distributed generation systems like wind turbines.

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