Net metering allows an owner of rooftop solar panels to participate in the electric grid as a distributed energy producer. Solar panels first supply power to the home, and at times when the solar panel produces more power than the home is using the power is sent back onto the grid to be used by other customers. The meter “spins” backwards, subtracting the power sent onto the grid from the total power used by the consumer. That is how net metering gets its name—it means that at the end of the month the consumer is charged only for net electricity used.
Policymakers enact net metering policies to encourage consumers to install rooftop solar by increasing the return on investment from solar panels. The justification for this is based on the potential benefits of having solar power as part of the grid.
A wealth of academic research on net metering, however, suggests that net metering is ineffective as an environmental policy and creates serious regressive effects. For example, compared to utility scale solar, distributed solar is an expensive means of lowering carbon emissions and can discourage other environmentally conscious choices.
Net metering also imposes a regressive cost-shift from solar adopters onto non-solar adopters. Although part of net metering’s appeal is its simplicity, when rooftop solar owners net to zero, that is, when they do not pay a bill because their production equals their consumption, they do not cover the costs of maintaining the wires and transmission lines. This cost-shift is estimated to be between $45 and $70 per month per rooftop solar owner that nets to zero. Wealthy households therefore benefit disproportionately from this hidden subsidy because they tend to be the ones who are able to pay the high upfront cost of installing solar panels.
We examine several reforms that reduce or eliminate the cost-shift without restricting an interested individual from installing solar panels. These include:
- Compensating homeowners who export electricity to the grid at the rate that producers receive (wholesale) rather than what consumers pay (retail)
- Reforming rate design to more closely reflect the types of costs that consumers impose on the grid
- Removing barriers to solar adoption, such as tariffs and burdensome regulations, that artificially increase the price of rooftop solar
- Restructuring electricity markets to allow more competition between electricity providers and provide retail choice to consumers
Electricity’s value is dependent on the time and place it is generated. The simple one-to-one retail rate that net metering relies on is an inefficient, regressive, and expensive way to advance environmental policy goals. Policymakers should consider these, and other reforms, to more accurately compensate the full costs and benefits of rooftop solar.
This paper first explains how electricity markets work, how net metering works, and then offers multiple suggestions for reform.