Net metering

Net metering is widely regarded as having an important role in scaling of distributed generation (DG), especially solar PV. DG represents electricity generation capacity located on customer property (commercial, industrial or residential). Net metering policies determine how electricity customers with their own distributed generation capacity are compensated for electricity they deliver to the grid.

Under the net metering scheme every kWh of energy produced by consumer’s DG system goes toward reducing their electricity bill by the same amount. Customers offset the energy volume exported to the grid against their own energy consumption on 1-for-1 basis. Therefore, the energy sent to the grid is compensated for at the same rate as retail electricity tariff and is called the retail-parity compensation.

Together with DG system, new bi-directional meter, which can record energy export to the grid and energy import from the grid, is installed. At the end of each billing period, the utility totals up the energy that was injected to the grid and energy used from the grid. If the consumer used more electricity than sent, the utility bills for the difference. If the consumer sent more power than used, the utility records a credit balance that will be applied to the next period’s bill. Usually, the surplus (kWh credits) can be banked for a predefined period of time (credit rollover period), thus facilitating the offset. Unused credits at the end of that period are either compensated by the utility (at preset rate) or are lost.

Net metering programs may differ by their credit rollover period and redemption value of unused credits. Some net metering programs allow to carry over the credit indefinitely, but most often the accumulated credits are reconciled and settled on annual basis. The excess credits left at the end of rollover period are usually redeemed by utility company at a greatly reduced rate close to the wholesale price of electricity. This limits DG owners’ incentives to install systems considerably exceeding their self-usage.

Net metering is a very popular policy instrument used to encourage households, commercial entities and industrial facilities to invest in their own RE systems by enabling them to sell surplus electricity to the grid. The application of net metering proliferated strongly worldwide after year 2010, when around 70 countries have adopted this payment arrangement. By year 2023 end, a total of 92 countries had net metering policies in place[1].

Net metering is generally considered more favourable for distributed energy producers (compared to net billing or gross metering) because of typically higher compensation rate received for electricity sent to the grid. Net metering has helped to drive RE market by markedly lowering its customers’ electricity bills and shortening payback periods for investments into DG systems. However, the application of net metering remuneration schemes leads to the following challenges:

• Compensation at retail-parity rates encourages high-tariff-paying consumers to deploy DG, and in many cases, this is achieved at the expense of other customer groups
• Net meters distort revenue recovery and creates financial pressures for utility companies.

The alternative mechanisms to net metering, which measure and price the energy consumed from the grid separately from that of the energy fed to the grid, are gaining increasing popularity, including:

• Net billing, under which electricity delivered to the grid is compensated at a pre-determined rate, which is typically lower than the retail price or may vary based on the time of day
• Gross metering (buy-all, sell-all arrangement), under which a utility buys all electricity generated by the customer at one (usually, lower) rate and sells all the electricity consumed by the customer at a different rate (usually the same retail rate charged to any other customer).

In recent years, many countries were gradually moving away from net-metering-only programs by:

• materially amending, scaling down or even eliminating net metering
• shifting to (or adding) net billing and gross metering schemes
• introducing support policy features that incentivise the installation of energy storage systems.

[1] REN21 Policy Database, 2024