What net metering actually is
Net metering is the rate structure that determines what your solar panels are worth when they produce more electricity than your home is using. On sunny afternoons, a typical residential solar system produces more than the home consumes, that excess electricity flows backward through your utility meter onto the grid. Net metering decides what compensation you get for that exported electricity.
Under any net metering structure, three flows of electricity happen at your home: solar production (panels generate), home consumption (you use), and grid exchange (you import from or export to the utility). The financial result depends on how each kWh of import and export is priced. The Department of Energy's net metering overview covers the general framework, though specifics vary widely by state.
The three eras of California net metering
NEM 1.0 (1996 to roughly 2016)
California's original net metering program was straightforward: every kWh your system exported to the grid earned a credit equal to one kWh you could pull back during another billing period. Effectively a 1:1 retail-rate swap. This was extraordinarily favorable to homeowners and made solar payback periods shorter in California than almost anywhere else.
NEM 2.0 (2016 to April 2023)
NEM 2.0 was a modest tightening of the original program. Solar customers were moved to mandatory time-of-use rate schedules (paying more for evening electricity), small non-bypassable charges were added (a few cents per kWh that solar couldn't offset), and a one-time interconnection fee was introduced. Net export was still credited at near-retail rate, though, so the basic economics of solar didn't change dramatically.
NEM 3.0 / Net Billing Tariff (April 2023 to present)
NEM 3.0 was a fundamental change to the rate structure. Instead of crediting exports at retail rate, exports are now credited at the utility's "avoided cost", which is roughly 75% lower than retail. The CPUC Net Energy Metering page documents the official tariff structure.
What NEM 3.0 actually changed
The single biggest change: export credit value dropped about 75%. Under NEM 2.0, exporting 1 kWh to the grid at noon earned you roughly $0.30 of credit (retail rate). Under NEM 3.0, that same kWh now earns roughly $0.08 to $0.10 of credit (avoided cost rate).
Three other notable changes:
- Hourly export pricing, Under NEM 3.0, the value of each exported kWh varies by hour based on the utility's avoided cost. Exports during high-value evening hours are worth more than exports at noon when the grid is already saturated with solar.
- True-up moved to monthly, Under NEM 2.0, your net credits trued up annually. Under NEM 3.0, they true up monthly, which limits seasonal banking.
- 20-year grandfathering, Systems installed before April 2023 stayed on NEM 2.0 terms for 20 years from interconnection. Systems installed after that date are on NEM 3.0.
The general framework here is documented by the Department of Energy's solar policy overview, but California's specific implementation under NEM 3.0 is unique among states.
What the export credit math actually looks like
Consider a typical Central Valley home on PG&E's time-of-use rate schedule under NEM 3.0:
- Importing at peak (4pm-9pm summer): approximately $0.55/kWh
- Importing off-peak: approximately $0.42/kWh
- Exporting at noon (high solar): approximately $0.08/kWh
- Exporting at 6pm (peak demand): approximately $0.35/kWh
The asymmetry is the key insight. Sending 1 kWh to the grid at noon and pulling 1 kWh back at 6pm under NEM 3.0 nets out to a loss of roughly $0.47/kWh. Under the old NEM 2.0, the same exchange was essentially free.
The arithmetic that follows is straightforward: if you can shift your solar production into evening hours when both your home's load is high and the export credit value is highest, you avoid the noon-export penalty. Battery storage does exactly this, it captures excess midday solar production and discharges it during evening peak hours.
The practical bottom line for solar design
Under NEM 2.0, oversizing a solar array slightly was beneficial, excess production earned full retail credit. Under NEM 3.0, oversizing has minimal value because excess production gets the low export credit rate. The best system design under NEM 3.0 is sized closer to your actual annual consumption and paired with battery storage that handles the daily timing mismatch.
Why battery storage shifted from optional to default
Before NEM 3.0, battery storage was a luxury add-on for most California solar systems. The grid effectively functioned as your "battery", send excess solar to the grid at noon, pull it back at 6pm, no real loss. Storage was useful for outage backup but didn't significantly improve solar economics.
Under NEM 3.0, the math flipped. Battery storage shifted from optional to the default recommendation for most homes pulling $200+ monthly bills. The reasons:
- Stored solar discharged during evening peak hours avoids the import rate (~$0.55/kWh) entirely
- SGIP rebates remain active and can cover meaningful portions of battery cost
- Many Central Valley addresses qualify for the High Fire Threat District tier of SGIP, increasing the rebate further
- PG&E PSPS events have made outage backup a practical concern, not just a nice-to-have
The full breakdown of battery sizing, hardware specifications, and SGIP eligibility is on our battery storage page. The short version: under NEM 3.0, most Central Valley homes installing solar today should plan for at least 10 kWh of battery storage as part of the original system design.
SMUD operates differently
One important regional nuance: Sacramento Municipal Utility District (SMUD) is a publicly-owned utility, not regulated by the CPUC. SMUD's net metering program is currently more favorable to solar customers than NEM 3.0.
SMUD customers on solar see:
- Closer-to-retail export credit value compared to NEM 3.0's avoided cost pricing
- Lower overall electricity rates compared to PG&E (SMUD's retail rates are significantly lower)
- Simpler rate structure with fewer time-of-use bands
- No mandatory shift to NEM 3.0 (because SMUD isn't bound by CPUC decisions)
This means solar economics in Sacramento on SMUD look meaningfully different from solar economics in Fresno or Stockton on PG&E. Battery storage is still beneficial for SMUD customers but is less critical to the math. The SMUD solar resources page has current program details. We model the specific rate structure for your utility during the assessment, full breakdown of utility differences is on the Sacramento page.