Net Metering: What Is It and Why Is It Becoming Controversial?

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Net Metering
Energy Market

What is Net Metering?

Net metering allows customers who generate some or all of their own power to offset their purchased power regardless of the time of day that they generate or use electricity. Because it doesn’t matter when the power is generated or used, the impact of generated kilowatt hours (kWh) is particularly helpful for solar power generated during the day and wind power generated at night.

Net metering has been one of the major drivers in growing small, distributed generation, especially for homeowners. Take, for example, a homeowner with solar panels mounted on the roof of their home. These panels send power into the grid all day while the owner is away at work. When the homeowner returns and turns on the lights, cooks dinner, or watches TV in the evening, the energy used is offset by the energy generated during the day. As a result, when the homeowner’s energy bill arrives at the end of the month, billable kWh can be close to zero. Sounds like a good deal, right?

Net Metering System Prices & Costs

Electric utility companies might think otherwise. Utilities in both regulated or deregulated states have very high fixed costs used to cover the expense of building, operating and maintaining a distribution system. They must maintain the polls, wires, meters and all other equipment necessary to reliably provide power to all customers, day or night, in good weather and bad, while constantly investing in emerging technologies. Larger utility customers usually pay for their share of these fixed costs in their demand charge (dollar per KW)—a function of their peak usage in any 15-, 30- or 60-minute period, depending on the utility. Most residential and smaller customers, however, pay only a small fixed monthly charge with all other utility costs built into their charge per kWh. So when a customer offsets purchased power with generated kWh to net out at nearly zero kWh billed, that customer is not contributing to the fixed costs required to maintain the system upon which they rely. As more customers take advantage of net metering, fewer fixed costs are paid into the system, resulting in higher rates for non-net metering customers.

With concerns about climate change, and government policies encouraging the growth of renewable energy sources such as solar and wind generation, net metering has been one way of accelerating the development of these resources. Many utilities and state regulatory commissions have, however, recognized the fixed cost dilemma and capped net metering at a percentage of total system load. Still, some utilities have reached or will soon be reaching their cap while demand for net metering continues to rise. If caps are lifted, more customers will add small generation capability, net meter their usage, and reduce their contribution to fixed utility costs. If the caps remain in place, the growth of small renewable generation will slow, contrary to energy policies being promoted by the federal and many state governments. Either way, there are winners and losers. Is there an alternate solution?

The short answer is maybe. Increasing fixed monthly costs for residential customers and lowering the charge per kWh would allow costs to be recovered regardless of how much power is billed. Unfortunately, this strategy would lead to higher monthly bills for lower-income customers and those using less electricity. Lower kWh costs also undermine a primary incentive for conserving electricity. Meanwhile, those who practice net metering—whether customers or equipment providers— would see less benefit and the growth of renewables would slow.

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Another solution could be requiring all small generators to pay for power or sell power into the grid on an hourly basis, so that kWh generated by solar during high-cost hours of the day would be paid for at the hourly market price and kWh purchased during the evening would be paid for at the lower hourly market price associated with off-peak hours. This strategy would support solar power but penalize many small wind projects that supply power to the system during low-cost hours. Wind power providers would obviously object, deterring the future development of small wind projects.

Net metering continues to be confronted by competing policies and needs: the promotion of small, distributed renewable generation versus the need to bill customers equitably and support the costs of maintaining distribution systems. Moving forward, policy makers and regulators will have to make hard choices in order to maximize the benefits of net metering and renewable generation while minimizing the negative impact on other customers and utilities. This debate will not easily be resolved, but it will be fascinating to watch the discussion unfold in the months to come.

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