What Is Net Metering and how will it be affected by the increasing use of time of use electricity rates?

If you follow the solar industry or have investigated the feasibility of installing solar panels on your home, you've probably heard about something called "net metering".

You may not know exactly what it is or what it means, but it’s been one of the most important and successful incentive programs for homeowners looking to put solar on their roofs. So what is this program exactly, and how can you benefit?

What is net metering?

According to the Solar Energy Industries Association, net metering is "a billing mechanism that credits solar energy system owners for the electricity they add to the grid". In other words, it's the mechanism through which you could actually achieve solar's golden promise—to allow you to run your electrical meter, literally, backwards. Until recently, net metering programs have worked in a way most consumers can understand. If your solar array produced 1 kWh of electricity more than you consumed, the utility would credit you with 1 kWh worth of electricity on your bill. This means that you are effectively getting the full retail value of every kWh of solar power that you produce during the day which is in excess of the electrical loads of your home during that time.

If your solar array produced enough electricity, your bill could theoretically reach zero because excess solar electricity exported to the grid during the day could cover your power usage at night when solar is not producing. That arrangement made sense for both utilities and customers at first. Utilities could relieve some pressure on their grids, particularly at times of peak use. Consumers could reduce their electrical bills. It was a perfectly symbiotic relationship—at least while solar was in its infancy. For an example of a state where net metering is still going strong, read this SolarReviews article.

However, as more homeowners installed solar, utilities began to see their profits shrink, which led them to do what any smart business would do—reduce the expenses that were causing the shrinking. Over the past two years, solar consumers around the country have seen utilities, and often state legislatures (often at the behest of the utilities) attempt to restrict net metering benefits and, in some cases, eliminate them entirely. The results of these efforts have been mixed but in most states net metering has survived.

In Nevada, for example, an unexplained and precipitous elimination of net metering in December 2015 brought the residential solar industry to a screeching halt for nearly a year. In other cases, like California, the state decided to make minor changes to net metering but have left the fundamental concept intact. In 2016 the Public Utilities Commission extended the requirement that investor-owned utilities offer net metering to their customers albeit with some new requirements and the imposition of non by-passable charges on excess solar power credited to bills. These non by-passable charges are only around 2.5 cents per kWh and so the value of net metering has been largely preserved for homeowners in California who are customers of PG&E, SDG&E and Southern California Edison.

You can use our solar panel calculator to see the savings that you can get from installing a solar system for your home based on your utility rates and the amount of power you use. It is likely that around 40% of these solar savings will come from the value of the energy credits net metering provides to you. Without net metering solar panel installation would be uneconomic for tens of millions of homeowners. Those installing solar panels now can get net metering agreements for 20 years, locking in the value of their solar savings for most of the life of their solar panels. For this reason it is very important that homeowners in areas where net metering is currently offered gather their solar quotes now while net metering is available. Most utilities have caps on systems that can be installed and get net metering. It is definitely worth getting solar before your utility reaches its cap and also while the 30% federal solar tax credit is still running.

How is net metering affected by Time-Of-Use Rates?

There are two types of common rate structures for residential electricity tariffs being tiered rates and time of use rates. With a tiered rate plan the amount you pay for electricity goes up as you use more kWh per month. So, for example you may pay 15 cents per kWh (kilowatt-hour) for the first 400 kWh and then 20 cents per kWh for electric use over this amount.

On a tiered rate working out your solar savings is easy as your solar first comes off the higher tier and then off the lower tiers as you produce more solar and your net usage of power falls.

What is a time of use rate plan?

With a time of use rate plan the amount you are charged for electricity depends on the time of the day at which you use it. Generally, afternoon and early evening, when most consumers are using power at home are considered peak periods and charged at the highest rates and other times of day, and weekends, are considered off-peak and charged at lower rates.

Utilities each define their peak and off-peak times of day in slightly different ways but peak times generally reflect the time when there is maximum demand for electricity on the utilities network. Many utilities across the United States are actively trying to drive consumers towards time of use rates as they want to avoid the need for capital investment on their networks by lowering energy consumption in periods of extremely high demand.

The logic is that if power is cheaper at low demand times people who are able will move their energy usage to low demand times and reduce stress on the grid in peak times. In relation to commercial customers, they've tried demand charges, which charge solar consumers more based on their power draw in the sliver of time (often ranging between 15 minutes and one hour) of their highest consumption over the month. Again this is designed to encourage people to move demand to off-peak times. Most public utilities commissions and other regulatory bodies have rejected residential demand charges out of hand as being too confusing for consumers.

Image source: Southern California Edison

Why do we need to consider the effect of time of use plans on solar savings?

The California PUC has decided that for customers of the big 3 investor-owned utilities time of use rate plans will become mandatory by 2019. They are already mandatory for commercial customers of these utilities. Other public utility commissions in other states are also considering mandating time of use rate plans as a way of reducing periods of peak demand that necessitate capital upgrades to grid infrastructure. For a more in-depth on what California is calling "Net Metering 2.0", click here.

How is net metering different on a time of use plan?

When you are on a time of use plan the credits you are given for energy exported to the grid during peak times are credited at the peak rate and excess solar energy exported to the grid during off-peak rates is credited at the off-peak rate.

Because solar generates during the day and the morning and early afternoon are usually considered off-peak times then the value of exported solar power is usually less on a time of use tariff. However, that is not the whole picture as the returns that homeowners are able to get from installing solar panels even with a time of use electricity plan are still very attractive. Depending on the rate structures and peak and off-peak times of your utility some designers are now considering orientating solar panels more towards the west than the south to get more of the solar production to happen in peak times.

Image source: REW and Southern California Edison

So what is the actual difference in solar savings between a customer with a tiered rate plan and a customer with a time of use rate plan?

Overall the difference in solar savings on a time of use plan and a tiered plan, whilst significant are usually less than 20%. For example, a customer of Pacific Gas and Electric with a $200 a month power bill who installs a 6 kW solar system on a time of use power plan will save around $2,200 per year on power in the first year and generate an investment return of 18.2% by going solar.

If a tiered rate plan was available then a smaller system around 5kw would have achieved the same reductions for this customer and the investment return would have exceeded 20%. However, the fact remains that 18% is still an excellent investment return and this is before considering any additional capital value added to your house by installing solar panels.

It is important that consumers in states like California, Massachusetts, Florida, South Carolina, Utah and others realize how good these returns still are, even with time of use rate plans, and install solar while the current tax credit and net metering laws are in place. Full retail value net metering is being rolled back in other countries as it is seen as an overly generous incentive for solar and so consumers should lock in their 20-year net metering contract by installing solar panels as soon as they can.