Rapid solar growth has put the future of rate design in the spotlight – but what’s the answer?

Net metering is on the way out in some markets – but what’s next? Find out why the successful subsidy is being phased out and how #LocalEnergy markets could fill the gap…

By Scott Kessler  |  Follow us on Twitter or LinkedIn for more industry insight and company updates

It’s now just over 40 years since net metering was introduced to help encourage the development of solar and wind power across the US.

The concept is relatively simple. Whenever a consumer with a solar panel produces more electricity than they consume, that excess is fed to the grid and their meter runs backwards, reflecting in savings on their monthly bill. 

The aim of this was to help offset the high sunk costs of investing in solar panel systems and make them more appealing.

And in many areas, it did its job so well that there is now high penetration of distributed solar. 

Since net metering was introduced, however, the cost of installing solar panels has reduced, rocketing downwards in recent years, and there are increasing question marks over the future of solar rate design.

Read on to find out why….


The first use of net-metering was back in 1979, when a 28-year old architect in Massachusetts called Steven Strong put solar panels in his two building projects – an apartment complex called Granite Place and a solar house funded by the Department of Energy called the Carlisle House.

The system was adopted by utilities in Idaho in 1980 and Arizona in 1981, the first state law for it was passed in Minnesota in 1983 and by 1998 some 22 states or utilities had adopted net metering.

California now leads the way with 26,232MW of installed solar and in Q3 last year nearly 300MW more was installed, breaking its quarterly record. Outside of California, 14 additional states, both leading and emerging in solar installation, had record quarters according to a report on seia.org.

In Hawaii, one in three single family houses now has rooftop solar and with additional distributed renewables such as solar farms and wind farms, the state produces up to 60% of its electricity using renewables on good days. 

In total, more than 1.8 million US households now have their own solar power, up from just over 137,600 households in 2010, according to the Energy Information Administration.

Adoption of residential solar is continuing at pace thanks to lower installation costs for PV panels and increasing awareness of climate change issues that are persuading consumers to invest in their own energy future.

However, at a certain saturation point, unchecked growth in renewables could actually be more harmful than good. 


Hawaii has been one of the most progressive states in terms of solar adoption, thanks in large part to its introduction of net metering in 2001. 

But rapid growth caused major challenges for the electricity network.  

By the early part of the 2010s, solar penetration on some of the Hawaiian islands had grown to more than 16 percent – well ahead of the curve in other states – and it was doubling every year.   

Clearly, with solar panels, any electricity that is not used on site must be fed into the grid – and with the increasing saturation of residential solar, the state’s main electricity provider, Hawaiian Electric Company (HECO), struggled to cope.

Although the networks struggled to cope in areas where solar penetration was high, in other locations where there were fewer installations there was still plenty of capacity to add further resources. However, net metering could not specifically encourage location-based addition of residential solar.

Equally, there are times when excess generation could be beneficial to the grid and times when it was problematic – but again, net metering could not differentiate on time of supply. 

Finally, the extra costs and/or benefits associated with net metering – such as the distribution costs and the price difference between the retail and wholesale rates – had to be covered, and were therefore allocated across the entirety of their customer base.

So, for these reasons, Hawaii became one of the first to explore alternative options to net metering.


Many existing net metering markets are now looking at or have already introduced alternatives to the original approach.

These include capping the size of installations that can receive the benefits; shrinking contract lengths; reducing rates for excess electricity below the full retail rate; or even charging solar owners more for grid-fed electricity to offset net metering costs.

Beyond that, there are now many markets where net metering has gone altogether; in some States, it is literally no longer the law of the land.

By 2017, a study showed that only three percent of US utilities offered full retail value for net metering.


And in 2018 alone, 47 states considered or implemented a combined 264 policy actions or rate design changes according to the 50 States of Solar Report published by NC Clean Energy Technology Center.

Just removing net metering alone, however, is dangerous for renewables – and achieving a smooth transition to a new type of market is not easy.

That has been evidenced, in places like California, Nevada, and Hawaii, where swift policy changes triggered a downturn in the solar market. 

In Hawaii, for example, the complete cancellation of net metering led to a 70-75% reduction in the amount of solar installations – but that reduction that has now recovered due to a new emphasis on encouraging solar plus storage installations.


At their peak, most net metering programs were providing incentives of $4-8/W (in real 2018 dollars). Over time, incentives have been largely phased-out in the larger state markets for distributed PV (including California, Arizona, Massachusetts and New Jersey) and have dropped to below $0.50/W in most other locations.

As of October 2019, mandatory net metering was still in place in 39 of the 50 US states and also in Washington DC and Puerto Rico, American Samoa, Guam and the US Virgin Islands.

However, six States already have alternative compensation rules in place and five others are now in transition. There are regulatory proposals for significant retail compensation reductions in Louisiana, Kentucky, Indiana and Michigan, to name a few.

But this is not the end goal, this is just the transition.

Ultimately, utility-operated local energy markets can provide the answer by giving consumers the choice to buy or sell local energy based on market based pricing by bidding at auction. 

That generates premium pricing, and those premiums can be used in place of fixed incentive mechanisms such as net metering.

In doing this, local energy markets can deliver fair, market-driven compensation for energy fed onto the grid; compensate utilities for the transmission costs; automatically reward flexibility and location through market forces; and still deliver prosumers who own solar panels a good return on their investment.

Platforms like LO3 Energy’s local energy market solution, Pando, make it easy for utilities to harness locally distributed energy resources.

And this not only provides new customer choice, it turns prosumer generation into a valuable, flexible and vital part of the energy delivery network.

To find out more visit www.LO3energy.com/pando.