Net metering works by letting your solar panels push surplus electricity onto the utility grid and earning you bill credits that offset the power you pull back later, usually at or near the full retail rate. Roughly 38 states, Washington, D.C., and four U.S. territories require utilities to offer some form of it, though the credit rate, system size caps, and program rules are set state by state.1National Conference of State Legislatures. State Net Metering Policies
The Basic Exchange
Your panels produce direct current electricity. An inverter converts it to alternating current that matches what your home uses, and your appliances draw from that solar power first. When the panels make more than the house needs, typically around midday, the extra flows out through your meter and onto the utility grid, where nearby homes and businesses consume it.
After sunset, or when clouds cut production, you pull from the grid like any other customer. A bidirectional meter, which the utility installs after approving your application, tracks kilowatt-hours moving in both directions. The grid effectively stands in for a battery: it absorbs your surplus and hands equivalent power back to you later.
How the Credits Add Up
Under traditional net metering, each kilowatt-hour you export offsets one kilowatt-hour you later consume, valued at the retail electricity rate.1National Conference of State Legislatures. State Net Metering Policies At the end of each billing cycle, the utility nets the two figures. If you drew more than you sent, you pay the difference. If you sent more, the surplus rolls forward as a credit on next month’s bill.
Credits usually build up through the long production days of summer and get spent down through shorter winter days. Most programs then apply an annual true-up, a once-a-year reconciliation of the full 12-month balance. Any credits still sitting there at true-up are typically paid out well below retail, often at the utility’s avoided cost, which is what the utility would have paid to generate that power itself. Some programs zero out leftover credits entirely. That yearly reset is why installers generally size a system to match your annual consumption rather than aim for heavy overproduction.
What Still Shows Up on Your Bill
Even a system that offsets all of your energy use won’t push your bill to zero. Utilities charge fees that net metering credits can’t touch:
- A basic service charge, a flat monthly fee for meter reading, billing, and account maintenance, often somewhere between $10 and $30.
- Delivery or distribution charges for the poles, wires, and substations that bring electricity to the house.
- State-mandated regulatory surcharges that appear as their own line items.
Some states have layered on additional charges specific to solar customers, including minimum monthly bills and grid access fees for larger systems. The credits only offset the energy portion of your bill, not the cost of staying connected to a grid you still lean on whenever the sun isn’t out.
Equipment and Interconnection
Beyond the panels, a grid-tied setup needs an inverter that produces AC power at the grid’s voltage and frequency. Modern inverters must meet IEEE 1547 and UL 1741 standards, which require the system to shut down automatically if the utility grid loses power.2IEEE Standards Association. IEEE Std 1547-2018 – IEEE Standard for Interconnection and Interoperability of Distributed Energy Resources with Associated Electric Power Systems Interfaces This anti-islanding function keeps line workers safe by making sure your panels don’t energize wires the crew believes are dead.
Before the system can legally run, you file an interconnection application with your utility. It asks for the system size in kilowatts, panel and inverter specifications, and your installer’s certifications. Residential processing fees typically range from about $50 to a few hundred dollars, and some utilities waive them. Simple residential jobs often clear in a few weeks; the timeline can stretch to several months when the utility has a backlog or the local grid needs upgrades to handle the added output. Don’t switch the system on before you get written permission to operate. Running without an approved interconnection agreement can void your net metering eligibility and create liability if something goes wrong.
What Your State’s Rules Control
The federal Public Utility Regulatory Policies Act directs each electric utility to make net metering available on request, but it doesn’t set the credit rate, size caps, or program terms.3Office of the Law Revision Counsel. 16 USC 2621 – Consideration and Determination Respecting Certain Ratemaking Standards Those decisions belong to state legislatures and public utility commissions, and they vary widely enough that checking your own state’s rules before you sign an installation contract genuinely matters.
Individual System Size Limits
States cap how big a net-metered system can be. A few impose no limit at all. Others restrict residential systems to 20 or 25 kilowatts. Commercial caps run from a few hundred kilowatts up to 10 megawatts or more, with nearly half of states with net metering policies capping systems in the 1-to-2-megawatt range.1National Conference of State Legislatures. State Net Metering Policies Some states use percentage-based limits instead, tying your maximum system size to your historical electricity consumption.
Aggregate Program Caps
Many states also set a ceiling on the total net-metered capacity a utility has to support, expressed as a percentage of the utility’s peak demand. These aggregate caps generally sit somewhere below 1% up to around 5%, with a handful of states going as high as 15% or 20%. Once a utility hits its cap, new applicants may land on a waiting list, be offered less generous terms, or get moved to an alternative tariff. If your utility is approaching its cap, applying sooner rather than later can lock in the more favorable rate.
The Shift Away From Full Retail Credits
One-to-one retail credits are no longer a safe assumption. Several states have moved to successor tariffs that reduce what exported energy is worth. The most aggressive reforms have cut export credit values by roughly 75% compared to the earlier retail-rate structure, replacing the flat retail credit with lower, time-varying rates tied to when the power is exported.
For a homeowner, this matters because the credit rate you sign up under today may not last for the 25-year life of your panels. Many reformed programs grandfather existing customers under the original terms for a set period, often 15 to 20 years, so the timing of your installation relative to a policy change can materially shift your lifetime savings. Before you commit, it’s worth checking whether your state has pending net metering legislation or an open proceeding at the public utility commission.
If You Can’t Put Panels on Your Roof
Net metering as described here assumes you own a suitable roof. Renters, condo owners, and people with shaded or structurally unsuitable homes generally can’t participate directly. Where states allow it, virtual net metering through a community solar program is the alternative: an off-site array in your utility’s service territory generates power, and subscribers get bill credits proportional to their share. You don’t own or maintain anything. Credits usually offset only the generation portion of the bill, not delivery or fixed charges, and per-kilowatt-hour savings tend to be smaller than what rooftop owners see under full retail net metering. Not every state with traditional net metering also permits the virtual version.
Taxes and Certificates
Installing a system for net metering typically qualifies you for the federal Residential Clean Energy Credit under Section 25D of the tax code, worth 30% of qualified installation costs including panels, inverters, mounting hardware, and labor. On a $20,000 system, that’s $6,000 off your federal tax bill. The credit is nonrefundable, so it can bring your liability to zero but won’t generate a refund past that; unused amounts carry forward. Net metering credits from your utility do not reduce your qualified expenses for this calculation.4Internal Revenue Service. Residential Clean Energy Credit The 30% rate is scheduled to begin phasing down in 2033, and the credit expires after 2034.
The monthly bill credits themselves are generally not treated as taxable income for residential customers. You’re reducing a cost, not receiving earnings, and utilities typically don’t issue a 1099 for rolled-forward credits. The picture changes if the utility cuts you an actual check for surplus energy instead of carrying credits forward, which can be treated as taxable income depending on the amount and how the program is structured. Most homeowners never hit that point because systems are sized to annual usage, but if your true-up produces a cash payout, it’s worth asking a tax professional.
Separately, every megawatt-hour your system generates creates a renewable energy certificate, or REC. In states with specific solar carve-outs these are called SRECs, and utilities and corporations buy them to meet renewable energy requirements. In active SREC markets, they can be worth hundreds of dollars per megawatt-hour. Who owns them depends on your paperwork. Buy the system outright or finance it with a loan, and the RECs are generally yours. Lease the system or sign a power purchase agreement, and the solar company typically keeps them. Some utility rebate programs and net metering tariffs require you to hand over your RECs as a condition of the incentive, a trade that can outweigh the rebate over the system’s life. The REC ownership clause is buried in the paperwork and expensive to discover after the fact, so read it before you sign.