If you are a homeowner or a business interested in solar energy to power your everyday activities, you have certainly heard of net metering. But you might not have a full picture about its functioning and benefits yet. Therefore, here you find an overview of how net metering works and which advantages it brings.
What is Net Metering?
Let’s say you are a homeowner that owns or is seeking a solar photovoltaic (PV) system in an area where net metering is available. During periods of peak solar irradiation (e.g., around noon and during summer months), your photovoltaic system can generate more electricity than your house consumes in a given point of the day. This is perfectly normal. But where does the surplus electricity go?
Under a feed-in tariff scheme, you would sell the excess to the utility provider for a tariff fixed by the government or regulatory bodies. Although beneficial for the spread of renewable energy, it does not allow for much flexibility and cost-effectiveness. As a consequence, net metering rises as a better alternative.
Under the net metering program, every time your PV system overproduces, the excess energy is fed into the grid and credited to your account for future use. Therefore, in periods when your electricity needs are greater than the power produced by the solar panels (either at night, on cloudy days or in winter), you will use your credits to offset the cost of the electricity you draw from the grid. In other words, this implies feeding excess electricity generated by your solar panels into the power grid, and being able to retrieve this surplus when the PV system is underperforming.
This mechanism prevents you from wasting the excess energy generated by your photovoltaic system. Also, it allows you to meet your electricity needs even when the solar panels are underperforming due to climate conditions. Simultaneously, by pulling the surplus back from the grid, it contributes to reduce your future electricity bills.
Now that you have an overview of what net metering entails, we can explain how it works in practice.
How it affects your electricity bills
The net metering process works thanks to a net meter. This is installed at your property together with the photovoltaic system. When the solar panels generate surplus electricity and supply it to the public grid, the net meter runs backwards. By doing so, it credits the excess energy for periods in which the electricity consumption in the household is higher than the amount generated by the system (e.g., during nighttime, cloudy days or winter). When these times come and the solar panels cannot cover the whole house consumption, you pull the electricity back from the grid. By doing so, the net meter runs forward.
When monthly or yearly electricity payments come due, you will be billed only on the net amount between what you have supplied to the grid and what you have retrieved from the grid. The supplied and drawn quantities offset each other. As a result, you can use the credits earned during periods of surplus generation to offset future costs of electricity use.
Solar developers help you by determining the appropriate size of the photovoltaic system to avoid significant overproduction. At the same time, they ensure that the system is capable of generating sufficient energy to cover almost 100% of your household’s consumption through the use of net metering. If you wish to know the ideal PV system size for your house, click here.
Do net metering credits expire?
Let’s say you have a solar photovoltaic system connected to the grid (on-grid) with net metering.
Let’s assume you receive an electricity bill every four months. When the bill comes due, you will be charged only with the net amount of what you have supplied to and drawn from the grid in that period. The net amount is automatically calculated by the net meter. If in that period your PV system has supplied more than what your house has pulled from the grid, the excess will be credited to the next billing date.
Although it depends on where you live, your credits will pass on from month-to-month and sometimes even from year-to-year. For example, the net metering program in Greece establishes that credits can be passed on for three years before they are reset to zero. This mechanism allows to use credits not only on a day-to-day basis but also on longer terms. You can build up credits by overproducing in summer and use them in winter billing cycles, when the solar panels achieve lower generation.
What are the prerequisites for net metering?
Different countries apply different net metering programs and varying prerequisites for eligibility. Often, a national program can have multiple variations depending on the region. These variations can include:
- the extent to which credits can roll over
- the level of grid usage fee
- the cap to the size of photovoltaic systems eligible to the net metering program
- the type of electric phase (single-phase or three-phase) eligible to the net metering program
You should always contact a solar developer company to know whether net metering is available near you and, if yes, which regulations apply.
Can I still reduce my electricity costs even without net metering?
Of course! Your solar PV system can already decrease your electricity costs by 30-90%, depending on the system size, whether you rely on a battery and how big the battery is. Here it is important to point out that although adding a battery storage requires a higher upfront cost, it leads to greater cost savings over time compared to a system without a battery.
Remember that the true source of cost reduction is your photovoltaic system. This is because the energy it generates reduces the amount of electricity you need to draw from the grid. Net metering is the icing on the cake. Indeed, if you are able to recover from the grid the surplus electricity previously supplied, you can cover nearly 100% of electricity costs. Nearly because it will never be 100% due to the application of the grid usage fee (see Cons of Net Metering).
What are the Benefits of Net Metering?
1. Offset the lack of power
The application of net metering allows to offset the underperformance of the PV system in specific periods of the day and year. These include nighttime, prolonged days without sun, and winter. As a consequence, homeowners don’t have to change their consumption behaviour accordingly.
2. Reduce future electricity bills
When solar panels generate a surplus of electricity and feed it into the public grid, the net meter records this excess and credits it to the household. Homeowners can then use this credit when environmental conditions prevent the solar panels from producing enough energy to meet the house’s needs. At that point, the household draws electricity from the grid, but the cost of this electricity is offset by the credit earned from the previous surplus generation. As a result, the house’s electricity bills are reduced.
In other words, net metering allows to export and import excess power to reduce future electricity bills. This means that in addition to the cost-saving benefits of using a PV system, net metering can help reduce electricity bills even further.
3. Shorten the payback period
By decreasing energy bills even further, net metering boots the return on investment (ROI) on the photovoltaic system. Simultaneously, the payback period becomes shorter than if not taking advantage of net metering.
4. Shield from price volatility
Homeowners can recover the surplus energy from the grid regardless of the energy prices on the market. This allows to hedge against price fluctuations, especially in periods characterized by political and economic turmoil. As a result, net metering provides households with greater energy budget stability and shields them from periods in which electricity prices grow significantly high.
Furthermore, by supply the power grid with electricity generated by renewable sources like solar photovoltaic, grid users reduce their risk and exposure to the volatile fuel prices of conventional generation resources. Self-generated solar energy is not subject to fluctuations in fuel price.
5. Indirect battery storage
Although net metering does not match the benefits of battery storage, it still allows homeowners to use the public grid as an indirect battery storage for their surplus electricity. This is a valuable tool for households and small businesses that cannot afford a battery system, but still want greater consumption control and flexibility.
6. Automated process
The net meter is automatic. It automatically makes PV netting calculation continuously throughout the year, allowing for the transfer of surpluses or deficits to subsequent billing accounts. Therefore, no client intervention from the household is required.
7. A more stable and efficient power grid
Non only consumers with net metering can benefit from this program, but also the entire public grid, including users that do not fall under the net metering prerequisites or do not own a photovoltaic system at all. Accordingly, the first set of societal benefits include lower electricity prices as well as greater electricity stability and reliability.
With its two-way-flow of electricity, net metering helps make the public grid more stable and efficient by smoothing out sudden surges and drops in supply and demand. As a result, the electricity demand curve becomes smoother and utility providers can better manage peak loads.
The influx of photovoltaic-generated electricity into the public grid lessens the utilities’ dependence on expensive coal-fired power plants or other bakcup sources used in periods of high demand. By doing so, it offsets the cost of purchasing electricity from these non-renewable sources. In fact, in periods of peak demand (e.g., summer months), when electricity is usually the most expensive, the inflow of self-generated solar energy helps meet greater the greater electricity needs. And as a consequence, it contributes to:
- bring down electricity prices in the long term
- decrease the strain on distribution systems
- reduce grid congestion
- lower the likelihood of power cuts
Overall, this results in a more stable and efficient power grid.
8. A more sustainable power grid
The second set of societal benefits is environmental.
Firstly, net metering represents a financial incentive to generate electricity from clean, renewable energy sources, such as solar photovoltaic. Therefore, it contributes to a faster deployment of renewables at the residential and small-scale commercial level.
Secondly, when homeowners or businesses inject surplus energy into the public grid, they are reducing the need for utility providers to generate electricity from non-renewable sources (e.g., coal and gas). This lowers the overall carbon footprint of the energy grid. And the more households and businesses generate electricity from renewables under a net metering program, the more the public grid becomes sustainable.
What are the Cons of Net Metering?
1. There is still a grid usage fee
Net metering has two different type of costs. The first is direct one time payment that comes with the installation of the solar photovoltaic system. It involves the installation of the net meter and the related administration paperwork.
The second cost is permanent but indirect. It involves a grid usage fee set by the utility provider. The fee is deducted from the credits that households or businesses earn by supplying excess electricity into the public grid. Usually, it implies that homeowners and businesses do not get back the full 100% surplus they have injected into the network, but a slightly lower amount. Nevertheless, despite the usage fee, they are able to draw a more than enough quantity to cover their consumption needs.
Each European state has its own grid usage fee. If you wish to know what applies to your country, contact us here.
2. The size of PV systems eligible to net metering is capped
In all countries, to a different extent, there is a limit to the PV system size (kW) that can benefit from net metering. For example, in Greece, only systems no larger than 10 kW can benefit from the program. But why is there a cap on PV system size for net metering applications?
Utilities experience fixed costs to cover expenses related to the construction, operation and maintenance of distribution systems. These fixed costs fall upon customers drawing electricity from the grid. Large commercial consumers bear a greater share compared to residential and small commercial users.
In the moment a consumer switches to on-grid solar energy and net metering, it offsets purchased power with self-generated power. This means that the user is not contributing to the utility fixed costs. As a consequence, non-net metering consumers have to bear a higher share of fixed costs.
Now, as long as residentials and small businesses with modest electricity consumption generate energy with solar PV and supply the excess to the grid through net metering, non-net metering consumers are not significantly impacted in the short-term. Furthermore, in the long run, net metering can bring down grid electricity prices by reducing the utilities’ dependence on expensive coal-fired power plants.
On the other hand, if large commercial users benefitted from net metering, small consumers would have to bear too high a share of fixed costs. For this reason, net metering is capped to small PV systems that serve the residential and small-scale commercial sectors.
As a consequence, large commercial consumers (e.g., large businesses, industrial facilities, public infrastructure) as well as residentials in search for greater independence have their best alternative in battery energy storage systems (BESS) and community solar. In concomitance, utility providers should switch to utility-scale solar PV to generate electricity.
Utility-scale solar becomes a valuable investment also for asset management firms and private equity companies. They can commission to solar developers the construction of solar parks and earn a stable return on investment through Power Purchase Agreements (PPAs).
2. Your electric phase type can make a difference
The alternating current power supply is divided into single phase (1-phase) and three-phase (3-phase). Single-phase power can only serve low electricity requirements. Whereas three-phase power carries heavier loads.
In some countries or regions, net metering applies to both phases. But it happens that in others it is valid for only one of the two.
If you wish to take a deeper look into a benefit-cost analysis of net metering and distributed solar PV, we suggest reading a review of the US market conducted by the Inner City Fund in 2018 for the US Department of Energy.
Alternatives to Net Metering
As pointed out by the International Energy Agency (IEA) (2022), net metering is considered a highly valuable policy to support and expand the use of renewable energy. The IEA’s Renewables report and the Solar PV 2022-2026 Market Outlook by SolarPower Europe indicate that the deployment of solar PV energy in many countries has increased thanks to the implementation or expansion of the net metering program.
For example, in 2022, in the Netherlands, the continuous attractive net metering policy drove 1.8 GW of solar capacity additions in the residential sector alone. In Poland, which was the third European largest market by solar PV growth, the backbone of the market was the solar rooftop segment thanks to a supporting net metering scheme. On the contrary, in Hungary, the phasing out of the net metering program negatively impacted solar rooftop expansion in 2022.
But there are other alternatives to net metering, which can be less or more effective. Below you find an overview.
1. Net Billing
Net billing is another way to utilize the power grid as a form of indirect battery storage. However, it differs from net metering in the way the excess energy generated by the solar panels is credited to the PV system owner.
In the net metering program, the surplus electricity is credited directly. This offsets the amount of energy pulled from the grid when the PV systems underproduces because of environmental conditions. The mechanism effectively reduces future electricity bills. But there is no monetary transaction. It is a kWh-to-kWh swap.
On the contrary, net billing involves a monetary exchange. The owner of the PV system feeds the surplus electricity into the network for a monetary remuneration. But the compensation is not based on the retail rate consumers pay for pulling electricity from the grid. Instead, it is based on the wholesale rate.
The wholesale rate is the price for which utility providers buy electricity on the wholesale market before reselling to consumers. Therefore, we could argue that net billing represents the avoided-costs of utility providers for not serving the PV system owner.
Now, the wholesale is rate lower than the retail counterpart. As a result, net billing brings lower compensation compared to net metering. And while net metering is capped to smaller systems, net billing usually applies to commercial or large residential consumers.
2. Battery Energy Storage Systems (BESS)
BESS allow residential and commercial consumers as well as utility providers to directly store electricity. But it does not stop there. Battery storage brings a vast set of crucial advantages and opportunities that go well beyond the ability to store electricity for future use. This technology is key to enhance power system flexibility, as it can increase electricity security while facilitating a faster and smoother transition to renewables. Residential, commercial, public consumers as well as utility providers and asset management firms can benefit from battery energy storage solutions. Accordingly, here you can find an overview of what battery energy storage systems can do for you.
BESS are widely regarded as the best way to make use of clean energy, cut electricity costs and achieve greater consumption stability and energy security. Estimated to be the fastest growing source of power system flexibility in the next three decades, their costs will steadily decline thanks to learning effects, innovation and improved economies of scale. Nevertheless, at the individual level, they still represent an important investment. This does not deeply concern large companies with enough capital at hand, but households and small businesses.
For these consumers there are two options, which are more effective than net metering and less expensive than relying on their own battery storage. Firstly, their utility providers should commit capital to utility-scale solar with a secure, stable and sustainable return on investment. Or municipalities and small communities should create solar energy communities and allow their citizens to subscribe to them.
3. Community Solar & Virtual Net Metering
Solar energy communities have become an extremely effective solution to maximize the power generated by solar panels. They can comprise only a group of households or grow to incorporate businesses and public infrastructure.
In a solar energy community, its members share the output of a large single solar installation. This is usually a solar park that generates electricity and consequently provides credits to the households and businesses that subscribed to the community. The more shares a member owns in the project, the greater the number of credits perceived. These credits will then offset the member’s electricity bills, which sometimes could even result in a negative bill.
The benefits of community solar are multiple. They apply to both the individual and collective level. The most direct one for single households or businesses is the ability to reduce electricity bills even when they do not have enough space and financial resources to invest in a photovoltaic system on their own.
If you are interested in funding a solar energy community, contact us. Our international team can provide you with the consultancy and directory necessary to develop a collective sustainable asset. We also specialize in the design and installation of community solar parks that allow families and businesses to achieve energy costs reduction and independence.