Navigating Solar Power Incentives

From an economic perspective, solar power is a smart investment. Over the lifetime of your panels, the money you save on your energy bill will allow you to easily earn back the money you spent on installation. Still, those up-front costs can be intimidating. Fortunately, there are lots of financial incentives available to help you get started.

One such incentive is the Renewable Energy Investment Tax Credit, or ITC. The ITC reduces your federal income tax burden based on the investment you put into your project. Using the ITC, you can claim a tax deduction of up to 30 percent of the cost of your solar energy system. As long as your system is operational by Dec. 31, 2023, you can claim the deduction as soon as the system is turned on.

The credit is currently available to both homeowners and businesses through 2021. But you’d better act fast if you want to take full advantage of the ITC deductionthe current 30 percent deduction will drop to 26 percent in 2020, then to 22 percent in 2021, and then finally to just 10 percent in 2022 and beyond.

One caveat about the ITC: If you don’t own your own system, and instead lease it from a solar installer, you won’t be able to claim the ITC. In a lease arrangement, the solar installer will take the ITC on your behalf and use it to reduce your monthly payments.  This can be a great option for retirees or other folks who don’t pay enough in taxes to take full advantage of the ITC on a new system.  Talk to your financial advisor or accountant to learn more about how you can get an ITC for your solar power system.

Another major solar incentive is the Solar Renewable Energy Certificate (or Credit). Think about SRECs as representing the environmental benefits of electricity that comes from renewable energy sources.  SREC programs are run by states that have renewable portfolio standard (RPS) regulationsin other words, states that require a certain amount of renewable energy production each year. States that have RPS regulations award businesses and individuals who create solar energy systems with SRECs after they register their system with the state regulatory agency. When energy companies can’t meet the RPS regulations, they are forced to pay a fee and/or buy SRECs from homeowners and businesses with solar arrays.

The number of SRECs you’ll be awarded depends on the energy generated by your solar system. If you produce 10,000 kilowatt-hours per day, for instance, you’ll receive fewer SRECs than your neighbor who produces 15,000 kilowatt-hours daily.

SRECs are priced differently depending on which state awards them. In Maryland, for instance, the price is capped at $400 per megawatt-hour. In 2010, some New Jersey SREC sales reached $680. SRECs typically follow the laws supply and demand: as the need for renewable energy increases in various states, the price of the SRECs tends to rise.

Most states have online exchanges to help consumers sell their SRECs back to interested buyers. Since SREC programs are run by individual states, your state’s program might have some quirks that other programs do not, so investigate your local SREC regulations for more information.  Your solar installer is also a great resource for learning about your state’s specific requirements.

Rebates are another common incentive structure. Under a rebate system, your local electrical utility will distribute an up-front payment to you based on how much power your solar system is expected to produce.

Rebates are one of the most common forms of solar incentives, but their generosity has dropped considerably as the solar market has grown over the past couple of decades. In 2003, rebates were distributed at the rate of around $4 to $6 per watt; by 2008 the average rebate hovered around $3.50 per watt. In California and Arizona, rebates have slipped to $0.20 per watt.

Rebate levels in your area depend on local electricity prices and the amount of solar energy your home will receive. If you’re in a sunny region with relatively expensive energy costs, your rebate will likely be lower than it would be for a home where the opposite is true.

While rebates are great because they subsidize the up-front costs, they do require that you install your solar power system responsibly. Rebate programs typically require that you use high-quality modules and inverters, and the rebate agreement might reduce your payment if you position your panels in a shaded or sub-optimal location.

A common alternative (or addition) to the rebate system is the performance-based incentive (PBI). PBIs can be  awarded in the form of a discount on your energy bill from your local electricity utility, or as a check coming from the relevant regulatory body. While the rebate system is based on an estimate of how much energy your system is expected to produce, the PBI is based on your actual production multiplied by the PBI rate. The more solar energy you produce, the greater the PBI you’ll receive.

As is the case with SREC pricing, PBI rates vary considerably depending on your location. In Oregon, you might see a PBI of $0.411 per kWh, while in New Mexico, the rate could be as low as $0.02 per kWh. In many areas, if your PBI is greater than your monthly electricity bill (in other words, if you produce more energy than you use), the excess PBI will roll over into the next month’s bill.

PBI programs have traditionally been offered for non-residential systems, since most homeowners want a large lump-sum financial incentive like that offered by a tax credit or a rebate. Large energy companies or commercial entities are better able to evaluate how PBIs will impact their costs in the long-term, and more capable of designing systems that maximize their PBI payouts. But as PBI rates increase, they are becoming increasingly common in residential solar systems, too.

Multiple programs might be available in your area. For instance, many electrical utilities offer modest rebates alongside PBI programs. This ensures that homeowners will not be intimidated by excessive up-front installation costs and that they will take steps to keep their solar panels in good working order over the long term. Contact your state and local energy agencies for more information about the incentives available to you.

To find out more about your energy solar panel options, compare installers in our network right away. We take your individual situation into account, and we match you with a solar panel provider that helps you to meet your financial goals.