Net Energy Metering


Installing rooftop solar at your home lowers the electricity portion of your utility bill. You are compensated for electricity that you export to the grid. Net Energy Metering (NEM) policies set terms for this compensation.

What is Net Energy Metering?

NEM is a means for utility customers to be compensated for renewable electricity they export to the grid. NEM was originally developed to encourage private investment in renewable energy resources, and NEM legislation requiring utilities to compensate customers for renewable electricity that they export to the grid is in place in 38 states. California passed NEM legislation in 1996 (SB 656).


If you have rooftop solar that was installed before November 2016, or if you submitted a NEM 1 Reservation before January 1, 2018, you may be part of the NEM 1 program.



If your system was or will be installed after January 1, 2018, and you did not submit a NEM 1 Reservation before January 1, 2018, you may be part of the NEM 2 program.


Historical Context

The intent of the original California Net Energy Metering (NEM) legislation (SB 656) was to compensate customer-generators for electricity generated by installed solar that "offset part or all of the customer's own electrical requirements." In other words, the legislation did not intend for utilities to compensate customers for electricity generated in excess of the customer's electricity needs.

At each annual settlement date, customers would "use or lose" any Net Surplus Electricity (NSE) generated during the previous year.

In 2009, additional legislation was passed (AB 920) requiring utilities to compensate customer-generators for NSE, either by paying customers for NSE at a rate – called the Net Surplus Electricity (NSE) compensation rate – that is just and reasonable for the net surplus customer-generator but that does not create a cost for other bundled service customers, or by applying a kilowatt-hour credit that is rolled forward to the next year for that customer.

The Net Energy Metering cap

NEM was developed to encourage private investment in renewable energy resources. Palo Alto's original NEM program compensates solar customers for export electricity at retail rates. When customers are compensated for export electricity at retail rates, over the course of one year they may pay zero for the electric portion of their utility bills — even while using the grid — if the total amount of electricity that they import from the grid during the year is matched by the amount of electricity that they generate and export to the grid. In this scenario, a solar customer is using the grid as free electricity storage, and the cost of maintaining the grid is borne by non-solar customers. For this reason, state law requires each electric utility to offer this original type of NEM only up to a certain amount of installed solar generating capacity (a NEM cap) within the utility's service territory. The NEM cap was set by California legislation (AB 510) to be “5 percent of the electric utility's aggregate customer peak demand.” The Palo Alto City Council determined the cap for Palo Alto to be 10.8 MW of installed solar capacity (Staff Report #7346).

As Palo Alto approached its NEM cap in November 2016, the City opened a NEM Reservation program to enable customers to sign up on a first-come-first-served basis (as outlined in CA legislation) for the City's original NEM (also called NEM 1) program. At the end of 2017, Palo Alto reached its NEM 1 cap. Starting January 1, 2018, new solar customers are served by the City's NEM 2 program.

Solar rates in Palo Alto

The rate at which you are compensated for the electricity you export depends on which NEM program you are served by. Solar customers served by the City of Palo Alto's (CPAU) original NEM program, also called NEM 1, are compensated at retail rates for electricity they export to the grid. Solar customers served by NEM 2 (effective after the City reached its NEM 1 cap at the end of 2017) are compensated at the Export Electricity Compensation (EEC-1) rate for exported electricity.

Solar and Your Utility Bill Graphic

Frequently Asked Questions

Is there still capacity in the city of Palo Alto Utilities (CPAU) original Net Energy Metering 1 (NEM1) Program?

CPAU reached its NEM 1 program cap on December 31, 2017. Any solar customers who did not submit and receive approval for a NEM 1 Reservation application before January 1, 2018 are automatically served by CPAU's NEM Successor (NEM 2) program, as part of the PV permitting process.

What is the PV interconnection approval process?

In Palo Alto, the Building Inspector issues interconnection approval (also known as “permission to operate”) of the PV system at the final inspection. Please note that you must schedule electric meter inspection with the City of Palo Alto Utilities prior to the final building inspection.

What are the permit requirements?

For more information see:

Or contact Palo Alto Development Services at (650) 329-2496.

What if I want to add capacity to my existing, installed and interconnected PV system that is currently on the NEM program, BEFORE CPAU reaches the NEM program cap?

 Customers participating in the NEM 1 program were able to expand their systems and include additional capacity in NEM so long as there was capacity available in NEM 1. These customers needed to submit and receive approval for a NEM 1 reservation application for the additional capacity. The remaining NEM 1 term for the new total system is based on a formula listed in Rule and Regulation 29: New remaining NEM 1 Term = (Original system’s remaining NEM 1 term) x (Original system size in kW/ New total system size in kW) 20 years x (system size of the addition in kW/ New total system size in kW) The entire PV system (original and new capacities) switches to the NEM 2 rate on the NEM 1 expiration date.

What if I want to add capacity to my existing, installed and interconnected PV system that is currently on the NEM program, AFTER CPAU reaches the NEM program cap?

Existing solar customers participating in the NEM program may still expand their systems, but if after the NEM program cap was reached CPAU adjusts the amount of time the customer is allowed to remain on NEM 1. The adjustment is based on the ratio of the expanded and original system sizes, according to the following formula: New Remaining NEM Term = Original system’s remaining NEM term X (Original system size in kW / New system size in kW).

If I am a NEM 1 customer, how long is my NEM 1 term?

 As stated in the City of Palo Alto’s Rule and Regulation 29 on Net Energy Metering, the original Net Energy Metering (NEM 1) program serves eligible Customer-Generators through a period of twenty (20) years following the date of interconnection of their eligible renewable energy (in this case, solar) generating facility. For more information on the setting of the NEM 1 term, refer to the City’s Staff Report from April 2016.

What if I need to replace my system at some point during the NEM 1 term (because the existing system is no longer functioning properly, was damaged in some way, etc.)?

A replacement system can stay on NEM 1 for the remainder of your 20-year NEM term (for example, if you have been on NEM 1 rates for 5 years, your new system can stay on NEM 1 for 15 more years), so long as the new system is the same size or smaller (measured in kW CEC-AC) compared to the previous system. If the replacement system is larger than the existing system, the remaining NEM 1 term is decreased following the formula in FAQ #5, above. Any time you make adjustments to an existing NEM 1 system size or inverter, you must sign a new Interconnection Agreement and file it with the City. Please contact to obtain a new copy of the Interconnection Agreement.

What is the process for adding battery storage to my rooftop solar system?

Work with a licensed professional to add battery storage to an existing rooftop solar system or to include battery storage as part of a new solar installation. Refer your contractor to these Energy Storage Systems Submittal Guidelines. The steps for submitting a permit application for energy storage systems are similar to those outlined on our Residential PV Permitting web page.

As a solar customer, I still use some electricity from the grid. What are the sources of the electricity that the City of Palo Alto supplies from the grid?

The City of Palo Alto’s electricity supply has been 100% carbon neutral since 2013. The City receives an estimated 32% of its electricity from utility-scale solar PV systems located within California. Hydropower, wind, and landfill gas (biomass) power supply the remainder.

CPAU will continue adding solar power to the electricity it supplies as new solar PV projects come online, including a 26 MW solar project in Los Angeles County that is scheduled to begin operating in 2021.