What is “net metering” and why are people arguing about it?

Net energy metering (NEM) is a policy adopted in more than 40 states and the District of Columbia that allows electricity consumers to sell excess electricity generated from their solar panels (or other source) back onto the grid. A standard two-way electricity meter keeps track of the power flowing out of and into the grid. The ability to keep track of "net" electricity flows, and have access to the grid for sell excess solar electricity generated, or when needed to supply electricity beyond what a solar system produces, is critical for residential and commercial solar projects to be economically viable.

While calculating the two-way flow of electricity is straightforward, determining the appropriate price for the electricity that is bought and sold is much more complicated and controversial. Solar homeowners and advocates typically argue that they should be paid the retail rates for the solar power they contribute to the grid because they are usually providing power during higher demand periods that cost more to supply electricity. Solar owners say that the excess electricity they put onto the grid is effectively used by their neighbors that the local utility charges retail rates for, and that solar energy provides environmental and other ancillary benefits like voltage support, avoided distribution system and plant maintenance, and less need for reserve capacity that are not incorporated into electricity prices.  

Some utilities on the other hand claim that the current NEM policies in certain states are unfair to them and do not adequately compensate them for the costs of maintaining the grid that solar owners are effectively using as a giant battery to balance out their solar system production and meet their electricity needs. That is why some traditional electricity suppliers are calling for a fixed monthly fee for anyone who uses the electricity grid that they maintain, regardless of how much electricity they use. Utilities also argue that the rates they charge are set by state regulatory commissions that assume a certain number of customers that both guarantees them a fixed rate of return and enough revenue to pay for the investments they made in long-lived centralized generation facilities. In other words, when solar owners generate their own electricity they are no longer paying utilities as much as they expected, upsetting the underlying business proposition the utilities previously agreed to with their regulators.  

Making this issue more complicated is the fact that electricity laws, regulations, and markets vary significantly among the states, and many were established decades ago with little or no consideration for customers generating their own electricity. In addition, most retail customers pay a flat fee for their electricity no matter what the underlying generation costs are. This price rigidity dampens market signals, which otherwise would better allocate resources and valuate new products like locally generated solar electricity.