Solar Incentives Explained: Tax Credits, Rebates, and Other Incentives

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Solar electricity is now the “cheapest electricity in history,” with its price dropping 89% between 2010 and 2020. Yet hurdles still make it hard for ordinary consumers to install solar energy systems, as the cost of a rooftop solar system can be out of the reach of many homeowners. According to EnergySage, at an average of $2.81 per watt as of 2021, a 10-kilowatt system sufficient to provide power to the average American home costs $28,100, without incentives. That's why the median income of a new rooftop solar purchaser was about $113,000/year in 2019, nearly double the U.S. median.

Yet lower- and moderate-income residents stand to gain the most from the shift to cleaner, cheaper energy, because they spend three times more of their income on energy than upper-income residents. Fortunately, the income gap in solar ownership is decreasing not only because of declining costs for solar, but also because of government incentives. While the average solar customer still earns more than the average American, 42% of new solar owners in 2019 earned less than 120% of their area's median income—a key threshold to include low and moderate incomes.

Government incentives can significantly lower the upfront costs of a solar system and decrease the amount of time it takes for the system to pay for itself. Without government subsidies, the cost of a kilowatt-hour (kWh) from a rooftop solar system was between $0.11 and $0.16 in 2020. With federal incentives but not including variable state incentives, that cost dropped to between $0.07 and $0.09 per kWh. With the average price of utility-supplied electricity at $.13/kWh in the United States, rooftop solar with federal incentives becomes cost-competitive, nearly halving the cost of electricity. If Americans consume on average 11,000 kWh of electricity per year, that's the difference between spending $1,430 and between $770 and $990 a year for electricity.

What Is a Kilowatt-Hour?

A watt is a unit of power, whereas a watt-hour is a measure of how much power is used. If you leave a 100-watt light bulb on for one hour, you have used 100 watt-hours. If you leave the light on for 10 hours, you have used 1000 watt-hours, or 1 kilowatt-hour, abbreviated as kWh.

Solar Incentive Options for Homeowners

The Database of State Incentives for Renewables & Efficiency (DSIRE) lists 2,387 federal, state, municipal, and utility-based incentives for renewable energy and energy efficiency—everything from special property tax assessments of solar energy systems given by the state of Illinois to rebates for the installation of renewable energy offered by Montana's NorthWestern Energy utility company. Some incentives apply to commercial-scale installations, others to residential customers, still others to solar installers.

Federal Incentives

The most important incentive for installing residential solar is the Federal Tax Credit for Solar Photovoltaics, which has its origins in the first Residential Energy Credit created by the Energy Tax Act of 1978, which gave a tax credit of 30% of the cost of solar equipment. The current investment tax credit was established by the Energy Policy Act of 2005 and has been renewed and extended multiple times, including most recently in December 2020. Under the policy, until the end of 2022 taxpayers can claim up to 26% of qualified expenses for investing in a solar system for their home. Eligible costs include labor, assembling and installing the system, and the cost of all related piping and wiring. The credit percentage decreases to 22% for 2023, after which it disappears for residential solar systems.

Tax Credits vs. Rebates

A tax credit is not a rebate. A rebate is a reduction in the price of a good or service, either at the time of purchase or as a refund after purchase. A tax credit is a reduction in the amount of taxes you need to pay. In order to qualify for a tax credit, you need to owe enough in taxes to be able to apply the credit. If, for example, you qualify for a $5,000 solar tax credit but only owe $3,000 in taxes, you only receive $3,000 in tax credits. This makes some tax credits out of reach for lower- and moderate-income earners. The Federal Tax Credit for Solar Photovoltaics can be carried forward to the next year if the full amount exceeds the homeowner’s tax liability.

State and Municipal Incentives

States and municipalities offer incentives for solar installations as well, including grant programs, low-interest loans, performance-based incentives, personal tax credits, property tax incentives, rebates, renewable energy credits, and sales tax reductions. For example, the state of New Mexico exempts solar systems from property tax assessments, while the Solar Loan Program from the city and county of Honolulu offers zero-interest loans designed to assist low- and moderate-income homeowners. DSIRE's search engine allows potential solar customers to find applicable incentives not mentioned in this article.

Many states have requirements in their renewable portfolio standards that mandate that a certain percentage of the electricity that utilities provide to their customers comes from renewable sources. In order to meet those requirements, utilities sometimes purchase renewable energy credits (RECs) from owners of solar systems. Solar customers earn one REC for every megawatt of electricity generated, and earnings from those RECs can reduce the total cost of their solar system. The price of RECs varies from state to state, depending on the state's REC policies, and as states give higher and higher priority to clean energy, the price of RECs is likely to increase.

Perhaps the most important state incentives are net metering programs. Net metering began in Massachusetts in 1979 when architect Steven Strong discovered that when his solar panels were generating more power than he was using, his electricity meter ran backwards, as his excess power was being fed back into the grid. Starting with Arizona in 1981, states soon began adopting net metering policies to incentivize the adoption of solar energy by allowing solar system owners full or partial credit for the energy they produce. Those savings can run into the tens of thousands of dollars. Since then, net metering has been “one of the main policy drivers behind the widespread and rapidly increasing adoption of distributed solar photovoltaic (PV) across the United States.”

Net metering programs vary from state to state, with some states requiring utilities to credit the energy solar customers produce on a one-to-one basis at retail rates, others at wholesale rates, and still others at various percentages of the retail or wholesale rate. It should come as no surprise that the states with the most robust net metering programs generally have the highest levels of residential solar installations. Among them are California, Texas, North Carolina, and Florida, the top four states in solar installations. The exception to the rule is sunny Arizona, fifth in solar installations but with a relatively weak net metering program.

Utility Incentives

Across the United States, there are over 1,100 different incentives offered by utilities to encourage energy efficiency and the adoption of residential solar or other forms of renewable energy. Austin Energy in Texas offers a $2,500 rebate to customers who take a solar education course and install a solar system on their home. The Colorado division of Xcel Energy has a Solar Rewards Program that commits to purchasing RECs from solar customers for up to 20 years. The Long Island (NY) Power Authority has a feed-in tariff program that guarantees that it will pay a fixed price of $0.1649 per kWh for residential solar energy for 20 years. Of course, $0.1649 per kWh may be more or less than retail rates for electricity over the 20-year period, so solar customers may or may not benefit from this fixed-rate arrangement. Other utilities offer grants, loans, performance-based incentives, net metering in states without their own statewide net metering programs, and other incentives. Check with your local utility.

Incentives for Non-Residential Solar

There is more than one way to bring solar electricity into one's home, however. Community solar programs are an increasingly popular alternative to putting solar panels on one's roof. Incentives to community solar customers can vary depending on their relationship to the community solar project as a whole. The Federal Tax Credit for Solar Photovoltaics applies to customers in shared-ownership situations, where the customer purchases a portion of the solar array to provide for their residential needs. Depending on the state, RECs also may accrue to the owners of a community solar farm on a proportional basis. Neither apply, however, to customers in leasing arrangements, where they pay a monthly fee to the owners of community solar project. (The owner receives the tax credits and any RECs.) Other incentives may also apply, again depending on state policies or utility company practices.

As the price of solar energy continues to drop and as the urgency of climate change increasingly drives state and federal policies, incentives for the adoption of solar energy are likely to increase, allowing the economics of going solar to fall within the budgets of more and more people. Residential and community solar have a bright future.

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