What are Avoided Cost Rates for Solar? (Net Metering and Net Billing)

Avoided cost rates are an important concept to understand when determining the value of the solar power that you generate and share with the grid.

While exact dollar amounts and price structures vary across the country, a few fundamental principles related to avoided cost rates are universally true for solar customers in the US. Knowing how avoided cost rates work, as well as how they affect your electricity bill specifically, may be necessary to determine the overall value of your solar energy investment.

So whether your utility offers net metering, net billing, or none of the above, this article will clearly outline everything you should know about avoided cost rates for solar energy systems.

Avoided Cost Rates Definition

An avoided cost is equal to the incremental cost an electric utility must pay to generate or purchase power. In other words, an avoided cost is equal to the expense that a utility or electricity provider can avoid by not having to generate new power or purchase it from a third party.

Established by the Public Utility Regulatory Policies Act of 1978 (PURPA), avoided costs represent the minimum financial amount that an electric utility is required to pay an independent power producer, such as a home with grid-tied solar panels.

For example, let’s say you generate solar power on your property and “sell” it to the utility at an avoided-cost rate. In this scenario, your solar would be purchased at a rate equal to the utility’s approximate cost to generate the same amount of electricity or buy it from another source or energy producer, like a neighboring power plant.

When are avoided costs paid in net metering?

Although net metering policies for home solar differ from state to state and utility to utility, avoided cost rates typically come into play for net metering customers at the end of their solar billing cycle. Whereas most net metering programs allow excess bill credits to roll over from month to month, after 12 months, credit surpluses are typically cashed in at avoided-cost rates. This is commonly referred to as the “true-up statement.”

For example, let’s say your solar panels are interconnected in a true 1-to-1 net metering agreement, and you are paid retail energy prices for the electricity you share with the grid. If, after one year of operation, your solar system has produced 12,000 kWh of electricity while your property has only consumed 11,500 kWh, the remaining 500 kWh surplus of excess energy would likely be redeemed at avoided-cost rates on your next utility bill.

Avoided Costs in Net Billing vs. Net Metering

California’s Net Billing Tariff (commonly referred to as “NEM 3.0”) represents a shift from traditional net energy metering to a new “net billing” structure. Under NEM 3.0 in California, the value of electricity sent to the grid from new solar energy systems is based on avoided cost rates for PG&E, SCE, and SDG&E utility customers.

While residents with solar panels installed before April 15, 2023, remain unaffected, NEM 3.0 has significantly lowered the value of solar exports for homeowners in California compared to previous California Public Utilities Commission (CPUC) policies.

How much are solar avoided cost rates?

Like many things in life, solar avoided cost rates change constantly and vary greatly depending on where you live. While there is no federal solar avoided cost rate, local utility controlling bodies must calculate and report their own avoided costs. As an opaque system that can be tilted in the utility’s favor, avoided cost rates are significantly lower than the retail energy rates found in traditional net metering structures.

Avoided cost rate range

In general, avoided cost rates for solar exports are very low. Even in California, where electricity prices are some of the highest in the nation, avoided cost rates usually range between $0.04 - 0.05/kWh. Taking a trip around the country, avoided cost rates have also been reported as roughly $0.06/kWh in Georgia, $0.02/kWh in Nebraska, and $0.05 - 0.06/kWh in Wisconsin.

Factors that affect avoided cost rates

Considering that the latest CPUC avoided cost calculator resource is over 100 pages long, it is not an understatement to say that many factors affect avoided cost rate calculations! Although the methodology behind these calculations may be intentionally hard to decipher, here are some of the most predominant factors that affect the value of avoided cost rates for solar customers:

• Time of Day: In a time-of-use (TOU) energy rate structure, solar may be more valuable if exported precisely when local energy demand is at its highest. For most TOU schedules, avoided cost rates for solar exports are typically highest on weekdays in the afternoon and early evening – especially during summer months.
• Fuel Prices: Avoided cost rate values weigh heavily on current fuel prices for electricity generation. Across the American landscape, local average fuel prices may vary greatly depending on the current market rates and availability of fossil fuels and renewable energy resources.
• Operational Costs: In addition to the cost of the electricity itself, operational costs for electric grid infrastructure, transmission losses, energy procurement, and other utility overhead can also influence avoided cost rates.

While avoided costs are calculated differently across the country, most utilities elect to create a predetermined schedule that values avoided costs based on the exact time of day, week, and year energy is shared with the grid. In some areas, homeowners may be eligible for programs like California’s ACC Plus Adders, which compensates solar exports at a few extra cents/kWh beyond the standard avoided cost rates.

With less incentive to send electricity to the utility grid, solar panel system owners can incorporate a battery to increase their energy independence and maximize their solar savings in areas where solar exports are paid at avoided cost rates.

Recap and Looking Forward

In summary, the fundamental principles of avoided cost rates for home solar power systems are as follows:

• Avoided cost rates are the minimum price a utility must pay for the solar energy shared to the power grid from a permitted and interconnected system.
• Avoided cost rates are based on the expenses an energy provider would have incurred if electricity were generated or purchased from another source.
• Usually only a few cents per kilowatt-hour (kWh), avoided cost rates are significantly lower than average retail rates for utility electricity.
• If you live in an area that pays avoided cost rates for solar electricity (i.e., no net metering policy or you are a new solar customer in California), a battery storage system can help you obtain more control over your solar power savings.

To learn more about avoided cost rates and how they can affect the value of your solar installation, feel free to speak with a Palmetto Solar Advisor today or learn more about going solar in our other blog posts.