Twelve Questions About Rooftop Solar and Who Really Pays for Net Metering

A man puts solar panels on his roof, and the utility sends him a check, or at least a credit. His neighbor, who has no panels, pays his bill as usual. Everybody in the story is behaving legally and nobody is a villain. And yet the question of who pays for the wires, the poles and the transformers that connect them has become one of the most expensive fights in state utility politics.

I am a conservative, so I start from two commitments that pull in slightly different directions. A man may do what he likes with his own roof, and that is a fine thing. And no one should get a subsidy hidden inside a rate structure that his neighbors pay without a vote. Both can be honored. The first step is to understand how the arrangement works. These are the questions people actually ask, with answers that are plain and exact.

This page explains policy and what to read. It is not financial advice for your own situation. Your state commission's website and a qualified professional will have the details for your address.

The basics

1. What is net metering?

Net metering is a billing arrangement. Your home is connected to the utility's grid. When your panels make more electricity than you use, the extra flows out to the grid, and your meter records it. When your panels make less than you use, such as at night, you draw power from the grid. At the end of the billing period you are billed for the net: what you took minus what you sent. In the simplest version, one kilowatt-hour sent out cancels one kilowatt-hour taken in.

2. Why does the rate matter so much?

Because "one for one" hides a price question. The power you take from the grid at 7 p.m. is billed at your retail rate. The power you send out at noon is credited at some rate, and which rate it is determines who wins. If your export is credited at the full retail rate, you are being paid the same price a customer pays for delivered power, including the cost of the poles and wires and the billing department. If it is credited at a lower rate, you are being paid closer to what the power is worth to the utility at that moment.

3. What is the difference between the retail rate and the avoided-cost rate?

The retail rate is what the utility charges you per kilowatt-hour. It bundles several things: the cost of generating or buying the power, the cost of moving it across transmission lines, the cost of the local distribution grid, and various programs and taxes. The avoided-cost rate is roughly what the utility saves by not having to generate or buy that power itself. It is usually lower, because it does not include the cost of the delivery system that the utility still has to maintain.

Here is a hypothetical, with invented numbers, so you can see the arithmetic. Suppose the retail rate is 20 cents per kilowatt-hour and the avoided cost at midday is 6 cents. A household exports 300 kilowatt-hours in a month. At the retail rate, the credit is 300 times 0.20, which is $60. At the avoided-cost rate it is 300 times 0.06, which is $18. The difference is $42 a month, or $504 a year, for one household. Multiply by tens of thousands of households and you can see why commissions argue over it. Whether the hypothetical numbers are close to real ones depends on the utility, the state and the hour of the day, so look up your own utility's tariff.

4. Where did this policy come from?

Two layers of law. At the federal level, the Public Utility Regulatory Policies Act of 1978, known as PURPA, was passed after the oil shocks of the 1970s. It required utilities to buy power from certain small and renewable producers, called qualifying facilities, at the utility's "avoided cost." That is where the avoided-cost idea enters the story, and it is a federal rule that still shapes the industry.

At the state level, net metering itself is mostly a creation of state law and state commission rules. States began adopting net metering policies in the decades after PURPA, and many expanded them over time. Each state set its own rules on the size of systems allowed, the crediting rate and the cap on how much total solar the program would allow. So there is no single national rule. There are fifty approaches, and the details of yours are on your state commission's website.

The grid's fixed costs

5. What are "fixed costs," and why do they matter here?

A grid has costs that do not change much whether or not you use a lot of electricity: the poles, the wires, the substations, the transformers, the meters, the line crews and the billing system. These are fixed costs. Most utilities recover a large portion of them through the per-kilowatt-hour charge, because that is how rates were designed in an era when every customer was a net buyer of power.

Now put rooftop solar into that picture. A solar household still uses the grid. It draws power at night and in the winter, and it relies on the grid as a backup when the sun is low. But it buys fewer kilowatt-hours, so it contributes less to fixed costs through the usage charge. If the total fixed cost does not change, the rest of the customers make up the difference over time. That is the heart of the cost shift argument.

6. Is the cost shift real?

It is real in principle, and its size is disputed. Here is the fair summary. The argument says that when rooftop solar customers are credited at the retail rate, they avoid paying their share of grid costs, and the costs are spread over customers without panels. The counter-argument says that rooftop solar also delivers benefits to the system, such as power that is produced near where it is used, which can reduce strain on lines at certain times and may defer the need for new plants or upgrades. Studies commissioned by different parties reach different results, and they often depend on the assumptions about those benefits and about time of day.

A conservative should be comfortable saying both things. The shift is real to the extent the credit exceeds the value delivered. And the value is not zero. The honest approach is to measure it and set the price to match, rather than assume the answer. That is what the regulated process, discussed in Your Power Bill Is Going Up, So Here Is How to Speak at the Rate Case, is for.

7. Why not just let the market decide?

Because the grid is a regulated monopoly, and the price of export power is not set by a free market. The utility is both the buyer and the only connection. If you want a true market in rooftop power, you would also want a true market in the use of the wires, with prices that vary by time and location, and with a fair charge for the grid. That is a large reform, and a few states are moving toward parts of it. Until then, the regulator has to approximate the price, and the argument is over how.

What California did

8. What changed in California?

California was the largest solar market in the country and the center of the net-metering fight. In December 2022 the California Public Utilities Commission voted to move new rooftop solar customers away from the older net-metering arrangement to a new structure often called net billing. Under net billing, the credit for exported power is based on the utility's avoided costs, which vary by time of day, rather than on the full retail rate. The new structure took effect in 2023 for new customers, and existing customers were generally kept on their old terms for a transition period. The decision was disputed by solar installers and defended by those who argued that the older design shifted costs. Read the commission's decision and your own utility's tariff for the exact rules, because details such as the length of the grandfathering period are specific.

The California experience matters outside the state because other commissions have been watching. The same dispute, in different clothes, has come up in many places.

Contracts before you sign

9. What does a solar lease or loan add to the picture?

Contracts. You can buy a system with cash, finance it with a loan, or sign a lease or power purchase agreement (PPA) in which a company owns the panels and you pay for the electricity or a monthly fee. The details of each differ, and the question that matters in every case is: what happens if the rules change? Because the economics of a system often rest on the crediting rate, a change in the rate can change the payback.

10. What should I read before I sign?

Read the whole contract, including the parts that are dull. At minimum, look for these.

1. The assumed credit rate. What export credit rate does the savings estimate rely on, and is that rate guaranteed by anything other than the current tariff?
2. What happens if the tariff changes. Is there any protection, and for how long are existing systems kept on their current terms under your state's rules?
3. Escalators. In a lease or PPA, does the monthly payment or the per-kilowatt-hour price rise each year? By how much, and what are the dollar totals over the whole term? Do the arithmetic yourself.
4. Who owns the system and what lien or filing attaches to your home. Some leases and loans involve a recorded filing against the property. Ask what it is.
5. What happens when you sell the house. Can the contract be transferred, what does the buyer need to do and who pays if the buyer will not take it?
6. Roof and maintenance. Who pays to remove and reinstall panels if the roof needs work, who covers damage and what does the warranty cover?
7. Production guarantees and the monitoring of output. Is there a guarantee, and what is the remedy if the system underproduces?
8. Incentives. Tax credits and rebates change often, and the rules depend on current law and on who owns the system. Check the Internal Revenue Service's guidance and the text of the statute, and be wary of any salesperson who tells you what you will get without showing you the source.

Compare at least two written quotes. Take the paper home. A good deal survives a night's sleep.

11. How does a state commission set the rules?

Through the same kind of public proceeding that sets all utility rates. The commission may open a docket on net metering, take testimony from the utility, solar companies, consumer advocates and customers, and issue an order. Often, the legislature sets the outline in a statute and the commission fills in details. This matters to you because that process is open to comment. If you are a solar owner worried about losing your terms, or a customer worried about subsidizing someone else, the commission is where to say so. The steps for finding the docket and being heard are in Your Power Bill Is Going Up, So Here Is How to Speak at the Rate Case.

Where a conservative lands

12. Where do I come down on the principle?

Here is the verdict, in numbered form, since this is a question of principle as well as arithmetic.

1. Property rights. A homeowner may put a generator on his own roof. Government has no business forbidding it. Rules that make it needlessly hard, such as slow interconnection or arbitrary fees, deserve the same suspicion as any permit delay. See We Raised the Empire State Building in About a Year, So Why Not a Power Line for what a country can do when it is willing to move.
2. Pricing. Export power should be credited at what it is worth to the system, no more and no less, and the fixed costs of the grid should be recovered in a way that is fair to everyone who uses it. That is a pricing question, and it can be settled with evidence.
3. Subsidies in the open. If lawmakers want to subsidize rooftop solar, they should do it openly, in a bill with a number and a sunset, and not through a credit buried in a rate structure. The The Wind Tax Credit Was Temporary in 1992 and Kept Coming Back for Decades shows how temporary subsidies tend to become permanent. A subsidy that the voters can see is one that they can end.
4. Reliability. The grid has to work at night and in a cold snap, and who pays for that backup is part of the bargain. The lessons of Seven Things People Said About the Texas Blackout of 2021, Tested apply to every power source.
5. Honesty in sales. A homeowner deserves a clear contract and an honest estimate. Solar is neither a scam nor a miracle. It is an investment whose return depends on a rate that a regulator can change.

For the broader picture of why power is cheap in some places and costly in others, see Four Pieces of Every Gallon and Why the President Controls the Fewest, which breaks down a price into its parts in a different market, and Willis Carrier's Machine Remade the South, and Made the Case for Cheap Energy for what cheap electricity once built.

The case in brief

1. Net metering credits rooftop-solar owners for power they send to the grid, often at the full retail rate, and the argument is over whether that rate exceeds what the power is worth.
2. The retail rate bundles the cost of delivery, while the avoided-cost rate, an idea from the Public Utility Regulatory Policies Act of 1978, reflects what the utility saves, and the gap can be large.
3. The grid's fixed costs must be paid by someone, so a credit above value shifts costs to neighbors without panels, and a credit below value penalizes a homeowner who generates.
4. California's 2022 decision to move new customers to net billing shows where the debate is heading, and every state commission sets its own rules in a public docket.
5. Before signing a lease or loan, read the assumed credit rate, the escalators, the lien, the transfer terms and what happens if the tariff changes.

What you can do: Find your utility's net-metering tariff on its website or your state commission's site, and read the credit rate and the effective dates before you talk to any installer.