Going Solar: What are the Economic Incentives?
Category: Solar Policy and Incentives
Everything About Rebates and Credits that You Were Afraid to Ask About
The greatest challenge to the solar movement is the inability of homeowners and businesses to obtain financing for the often-hefty down payment on equipment and installation of their solar energy systems. In an effort to encourage the adoption of renewable energy and jumpstart the solar industry, federal, state and many municipal governments as well as some utility companies are offering cash or other economic incentives to subsidize the cost of solar system installations.
The various incentives can make your head spin or hurt and we get questions about these incentive programs all of the time from homeowners who want to install a solar power system on their roof but do not understand the incentives available to them. We wanted to give a general overview of the many types of incentives offered across the country. To learn more about what is going on in your community, stay tuned for more in our continuing blog series addressing activity in individual states, or visit the Database of State Incentives for Renewables and Efficiency at http://www.dsireusa.org/ for a state-by-state analysis.
In general, the most valuable economic incentives are federal tax credits and state and local rebates. We summarize each of these kinds of programs below and we also discuss lesser-known incentives that may also be valuable, especially as more states look for alternatives to up-front rebates.
Many states, municipalities and utilities offer rebate programs or cash incentives. These rebates usually take the form of a per-watt rebate ranging from about $1.50/watt to $5.00/watt. For example, a rebate for a 5kW system under a program offering $3/watt would equal $15,000. These rebates can offset the cost of a solar installation by as much as 40 to 45 percent.
In most locations, as the state’s renewable-energy targets are achieved, the available per-watt rebate is reduced in size – i.e. a state may offer a $4/watt rebate today, but only a $2.50/watt rebate down the road once a certain number of solar installations have been achieved statewide.
Unfortunately, a finite amount of money is set for rebate programs, and due to high demand the funds are often quickly exhausted. Once the funds are gone, many programs offer waitlists until the next round of funds are made available.
At both the federal and state level, laws have been put in place to credit a percentage of the purchase price of the solar power system against a solar energy system owner’s annual tax bill. A tax credit is generally more valuable than an equivalent tax deduction because a tax credit reduces your taxes dollar-for-dollar, while a deduction only removes a percentage what is owed.
At the federal level, The Federal Investment Tax Credit entitles owners of both commercial and residential renewable-energy systems to a credit of 30 percent of the net system cost, with no set limit, for all systems placed in service before December 31, 2016. The credit can be carried forward 15 years or back three years..
A number of states are also offering tax credits equaling a percentage of the solar energy system’s installed cost. The percentage varies by location.
It is important to note that if a customer receives a rebate, any tax credit is computed on the remaining balance, not the pre-credit total. For example, if the total solar energy system cost is $35,000, and a customer receives a $15,000 rebate, the credit of 30 percent is calculated only on the remaining system cost balance of $20,000 – for a total credit of $6,000.
Property Tax Exemptions
On the exemption side of the equation, most states and some municipalities provide some sort of property tax exemption for individuals and businesses that install solar energy systems.
Though a solar installation has the potential to increase property value by tens of thousands of dollars, states that offer an exemption do not increase your tax liability to match your property’s new value.
Some states offer a 100 percent exemption for the value of the system, while others offer a partial exemption (typically 75 percent or some other percentage of the total system value). Depending on the state, the exemption may apply for 1) the first year of a system’s installation, 2) a pre-set term that typically ranges from 10 to 20 years, or 3) for the lifetime of the solar energy system.
Other states provide an exemption only for the added value of the renewable energy system above the value of a conventional energy system. For example, if a solar energy system costs $10,000 to install, and a conventional system costs $5,000, the property tax will be assessed on an increased value of only $5,000.
It’s important to note that when filing taxes, a customer may only be able to take full advantage of the exemption if the system was installed and operative throughout the 12-month period preceding January 1 of the tax year. If the system was operative for only some portion of the 12-month period, the exemption will likely be reduced proportionally.
Sales Tax Exemptions
Many states do not collect state sales tax on the cost of renewable energy equipment, which can significantly reduce the upfront costs of a solar installation.
Renewable Energy Credits (RECs)
Renewable Energy Credits or RECs are certificates issued by the state for the amount of clean solar energy that a grid-tied solar system produces. In some markets, RECs may also be called SRECs (Solar Renewable Energy Credits/Certificates) or Green Tags.
Utility companies may purchase RECs from clean power generators as one way to meet the Renewable Portfolio Standards (RPSs) that have been put in place by state legislatures to mandate that utility companies obtain a percentage of their power from renewable sources. In addition, a company such as a manufacturer or coal plant may also buy RECs on the open market as a way to offset the greenhouse gases they emit. The value of a REC on the local market varies by state, and fluctuates based on supply and demand. The means by which RECs can be sold also varies by state.
Net metering is the process some utility companies use to keep track of any extra power that a grid-tied solar system produces. During the summer months or during daylight hours, a household or business uses more electricity than at night or in winter. Therefore on a hot summer day, a household might use more energy than its solar system produces, and on a cold winter night it is likely to use less. In a net metering arrangement, the utility both keeps track of energy usage and stores any extra power the solar modules generate. During those times when a solar energy system generates more power than is being used, the extra electricity makes the electric meter spin backwards. At the end of the month or the year (depending on the utility company), the customer receives a bill that reflects the “net” between what the solar panels produced and the amount of electricity the household or business consumed beyond that. With net metering, annual electric costs could be less than $100.
It is important to note than in some states, a utility company will not pay the customer if the solar energy system generates more power than is used during the course of a year. The annual bill will be $0, but all excess power will be donated to the utility company. In other states, utilities will pay for the extra production at various rates. To optimally take advantage of net metering, a solar system should be sized to meet a household or business’ needs, not exceed them.
Feed in Tariff (FiT)
Having jumpstarted the solar industry in countries like Germany and Spain, Feed in Tariffs (FiT) are now being introduced in the U.S. – with states like Vermont and California leading the way. A FiT is an incentive system in which a utility company sets a higher than normal kilowatt rate to compensate a person or business who is generating clean power. Typically the FiT agreement covers a time period of approximately 20 years. Under FiTs, a residence or business that installs solar panels essentially becomes a utility that generates as much power as possible for the grid. Each month, the utility company sends the system owner a check that more than compensates for the electric bill.
Most FiT programs are short term – serving as a quick way to increase solar installations and solar power generation. Currently in the U.S. most FiT programs are reserved for large-scale installations, not residential installations. In addition, FiT guidelines typically stipulate that a customer who participates in a FiT program is unable to participate in any other state incentive program.
Several states and utility companies are leading the way with innovative loan programs that provide low-interest loans to homeowners and businesses for solar installations.
In New Jersey, for example, utility company PSE&G has committed to provide approximately $105 million toward the financing of solar system installations over the next two years. In California, cities and counties are making loans available to consumers, who are then able to repay the loans as part of their property taxes (often referred to as the Berkeley model after the city of Berkeley, California that introduced it). Loan balances are transferred to whoever owns the property if it is sold during the course of the loan repayment period.
Unlike loans, grants do not have to be repaid. Some states offer grant funding for residential and commercial properties for the installation of solar systems. Typically, grants are awarded on an agreed dollar value per watt up to a cap – i.e. $1.25/watt up to $10,000.
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With so many different types of incentives available, and so much variation state-to-state, it is essential for anyone contemplating a solar installation to do his or her homework to ensure all possible benefits are realized. SolarTown will continue to provide guidance through this series of blogs and we endorse the http://www.dsireusa.org/ database for its comprehensive, up-to-date watch on all federal, state and local activity. In addition, our customer service experts and any qualified solar installer should be able to provide a run down of all applicable incentives as part of a qualified estimate.
tags: solar economic incentives, solar rebates, solar incentives, solar credits, renewable energy credits, feed in tarriffs, solar grants, solar loans, net metering, solar property tax exemptions