California’s NEM 2.0 works by letting your rooftop solar system send excess electricity back to the grid through a bi-directional meter and crediting you at the full retail rate for every kilowatt-hour you export, with those credits offsetting the grid power you pull later. You stay on a time-of-use rate plan, your monthly statements track the running balance, and the utility settles everything once a year at a true-up. The program closed to new applicants on April 15, 2023, but customers already enrolled keep their rate structure for 20 years from their Permission to Operate date.1California Public Utilities Commission. Net Energy Metering and Net Billing
Retail-Rate Export Credits
When your panels produce more than the house needs at a given moment, the surplus flows out through a bi-directional meter that measures import and export separately. For each kilowatt-hour exported, the utility credits your account at the retail electricity rate in effect for that time period.2San Diego Community Power. Net Energy Metering
Those credits accumulate and offset grid electricity you pull at night or on cloudy days. A kilowatt-hour exported in the afternoon can cancel a kilowatt-hour consumed that evening, apart from the small fees covered below. Retail-rate crediting is the single biggest financial advantage NEM 2.0 holds over the newer Net Billing Tariff, where export credits are usually worth far less than retail.
Why Time-of-Use Rates Matter
Every NEM 2.0 customer sits on a Time-of-Use rate plan, so the price of electricity shifts with the clock.3Southern California Edison. Net Energy Metering – Section: Mandatory Time-of-Use Rate Requirement for Residential Customers Peak hours, when rates are highest, generally run from 4 p.m. to 9 p.m. every day. Off-peak and super off-peak periods fill the rest, and midday rates are often the lowest because solar flooding the grid pushes prices down.
Two consequences follow. Energy you export during peak hours earns a higher credit than energy exported at midday, and energy you consume during peak hours costs more. The ideal pattern is to export heavily between 4 and 9 p.m. and shift large loads to midday or overnight. Most homes do the opposite without help: cooking dinner and running AC in the evening, producing most solar at noon. That mismatch is why battery storage has become so popular with NEM 2.0 customers, since a battery lets you store cheap midday solar and discharge it during the expensive peak window.
Non-Bypassable Charges
Even if your system covers everything your house uses, you still owe Non-Bypassable Charges on every kilowatt-hour you draw from the grid. These per-kilowatt-hour fees fund public purpose programs, nuclear decommissioning, competition transition costs, and Department of Water Resources bond charges.4Pacific Gas and Electric Company. Net Energy Metering Electric Statement Your export credits cannot offset them.5Southern California Edison. Guide to Reading and Understanding Your Net Energy Metering 2.0 Monthly Bill – Section: Types of Bill Charges
The total runs a few cents per kilowatt-hour, varying by utility and rate schedule. For most solar homes it adds up to a modest amount each month, often under $10 to $15. You will never see a true zero-dollar bill, even in months when your production outruns your consumption in every time period.
The Annual True-Up
NEM 2.0 billing operates on a 12-month cycle. Monthly statements show your energy use and credits, but you do not owe anything for net energy charges until the annual true-up date.6Southern California Edison. Understanding Your NEM Bill Surplus credits from high-production months in spring and summer roll forward to cover high-consumption winter months. At the end of the 12-month period, the utility tallies the year and sends a settlement statement.7Pacific Gas and Electric Company. NEM True-Up Energy Statement with Base Services Charge
Consumed more than you produced? You pay the balance. Produced more than you consumed? You receive Net Surplus Compensation, paid at a rate comparable to what the utility pays wholesale generators.8Pacific Gas and Electric Company. Net Surplus Compensation That rate fluctuates monthly and is typically only a few cents per kilowatt-hour, far below the retail credit value your exports carried during the year. Oversizing a system well beyond annual usage makes poor financial sense because those extra kilowatt-hours earn pennies on the dollar.
System Sizing Rules
NEM 2.0 requires your system to be sized to match your home’s annual electricity consumption, not exceed it.1California Public Utilities Commission. Net Energy Metering and Net Billing Utilities review your past 12 months of usage during the interconnection application to confirm the fit. Planning to add an electric vehicle or swap a gas furnace for a heat pump? You can factor that expected load increase into the design, but you generally need to justify the sizing.
Most installers aim to offset 90% to 100% of annual usage, leaving a small buffer rather than aiming for a surplus. The rule exists because Net Surplus Compensation pays so little, and because a consistently overproducing system shifts costs onto non-solar ratepayers.
Keeping Your NEM 2.0 Status
If your system received Permission to Operate before April 15, 2023, you remain on NEM 2.0 for 20 years from that PTO date.1California Public Utilities Commission. Net Energy Metering and Net Billing The 20-year clock runs from your specific interconnection date, not from any program-wide deadline. You can voluntarily switch to the current tariff at any time, though there is rarely a reason to do so.
You can modify or expand your existing system without losing NEM 2.0 status, as long as the addition does not increase generation capacity by more than the greater of 10% of your original system size or 1 kilowatt, and the expanded system still does not exceed your annual electricity consumption. The total system also cannot exceed 1 megawatt.9California Public Utilities Commission. CPUC Decision 14-03-041 For a typical 6 kW residential system, that works out to 1 kW of additional capacity (1 kW is greater than 10% of 6 kW). Go beyond that limit and you trigger a new interconnection agreement under the current Net Billing Tariff for the entire system.
If Your Application Is Still Pending
Homeowners who applied for NEM 2.0 interconnection before the April 2023 cutoff but have not yet completed installation face a hard deadline. PG&E requires final electrical clearance by 11:59 p.m. on April 14, 2026, or the project moves to the utility’s Solar Billing Plan instead of NEM 2.0.10Pacific Gas and Electric Company. Net Energy Metering Program A stalled installation should be treated as urgent.
Adding a Battery
Battery storage pairs well with NEM 2.0’s time-of-use billing. Rather than exporting midday solar at low off-peak credit rates, a battery lets you store that energy and either use it during the 4–9 p.m. peak window (avoiding expensive grid purchases) or export it when credits are worth the most. Adding a battery alone does not trigger a new interconnection agreement or jeopardize your NEM 2.0 grandfathering, provided the battery does not push total generation beyond the expansion limits above.
California’s Self-Generation Incentive Program offers rebates for residential battery installations. Qualifying low-income households can receive $850 per kilowatt-hour of storage under the Equity category, or $1,000 per kilowatt-hour under the Equity Resiliency category.11California Public Utilities Commission. Participating in Self-Generation Incentive Program On a typical 13 kWh home battery, those rebates are substantial.
One change affects anyone installing in 2026: the federal Residential Clean Energy Credit under Section 25D, which previously covered 30% of solar and battery installation costs, is no longer available for property placed in service after December 31, 2025.12Office of the Law Revision Counsel. 26 USC 25D Residential Clean Energy Credit A battery installed before that cutoff can still be claimed on your 2025 tax return. Batteries installed in 2026 or later no longer qualify.
NEM 2.0 Compared to the Net Billing Tariff
Understanding how NEM 2.0 works is partly a matter of knowing what it is not. The Net Billing Tariff that replaced it treats several core mechanics differently, and the gap is why protecting NEM 2.0 status matters financially.1California Public Utilities Commission. Net Energy Metering and Net Billing
- Export credit value: NEM 2.0 credits exports at the retail electricity rate. The Net Billing Tariff uses values from the CPUC’s Avoided Cost Calculator, which are usually much lower than retail, though they can spike above retail on summer evenings.
- Billing frequency: NEM 2.0 settles charges annually at true-up. The Net Billing Tariff requires monthly payment of charges, with only excess credits rolling forward.
- Rate plans: NEM 2.0 customers choose from standard TOU rates. Net Billing Tariff customers must use specific electrification TOU rates with steeper peak-to-off-peak price differences.
- Legacy period: NEM 2.0 customers are grandfathered for 20 years. Net Billing Tariff customers receive only a 9-year legacy period.
- System sizing: NEM 2.0 systems are limited to the customer’s annual load. The Net Billing Tariff allows sizing up to 150% of annual load if the customer attests to a need for the additional capacity.
Retail-rate export credits alone make NEM 2.0 worth thousands of dollars more per year than the Net Billing Tariff for most solar homes. That is the practical reason the expansion limits and grandfathering rules deserve close attention. Losing NEM 2.0 status is a financial hit that cannot be undone.