Brightening the Future: How Solar Incentives are Powering the Green Revolution

Solar power, a key factor in the struggle against climate change, has been receiving amplified support from lawmakers across the USA and the globe in general. The majority of this support often stems from legislative initiatives. A large number of state legislatures have enacted Renewable Portfolio Standards (RPS) laws that obligate utility companies in the state to source a specified portion of their energy sales from renewable sources. To help residential and commercial property owners adopt solar power, these laws frequently incorporate funding for incentive programs. Let’s explore the available solar energy incentives in the US to make the process easier and more accessible.

Types of Solar Energy Incentives

The primary types of solar energy incentives include tax breaks, rebates, and performance-based payments. A tax credit, in general, refers to a reduction, dollar-for-dollar, in the amount of income tax one would owe. For instance, a $1,000 federal tax credit would mean a reduction of the same amount in your federal income taxes. Solar tax credits significantly alleviate the financial burden for individuals and businesses intending to invest in solar panels. The federal and state governments both offer these tax credits, which can be claimed when filing taxes in the year following the installation. Rebates, on the other hand, are cash-back programs, while performance-based incentives reward homeowners for the solar energy they produce. Among these are feed-in tariffs and Solar Renewable Energy Certificates (SRECs). 

The amount and availability of these solar energy incentives vary based on factors like location, income, and the size of your solar system. Utility companies often offer rebates to encourage the use of solar technology, which can provide direct cash payment or be based on the solar system’s energy output. Moreover, property and sales tax exemptions may apply, relieving homeowners of additional tax burdens due to the installation of solar panels or the purchase of solar equipment.

Net metering allows homeowners to gain billing credits for surplus electricity generated by their solar panels and sent back to the grid, and some homeowners may qualify for grants or subsidized loans to assist with the costs of solar panel purchase and installation. Applying for these rebates and credits usually involves following the instructions and forms provided by each program. While your solar energy installer typically handles this process, understanding it is beneficial. Keep all relevant documentation and correspondence for your records.

Maximizing the benefits of solar energy incentives requires you to research your options thoroughly, understand the eligibility criteria, work with an experienced installer, and keep thorough records. By exploring the incentives provided by your state, local government, utilities, and solar equipment manufacturers, and ensuring your system meets all qualifications, you can significantly reduce the cost of going solar. Let’s have an in-depth look at the major solar energy incentives in the USA.

The Federal Solar Tax Credit

The federal residential solar energy credit is a unique form of financial relief designed to incentivize the adoption of renewable energy technologies. It is a tax credit that a taxpayer can claim on their federal income taxes, based on a percentage of the cost of a solar photovoltaic (PV) system that they paid for.

The tax credit can be applied to a range of costs associated with the installation of a solar PV system. This includes not only the purchase of the solar PV panels or PV cells themselves but also the contractor labor costs for onsite preparation, assembly, and original installation, including associated costs such as permitting fees, inspection costs, and developer fees. The tax credit can also be applied to the cost of balance-of-system equipment, such as wiring, inverters, and mounting equipment. This consideration helps to further defray the total cost of installation, making solar energy systems more affordable and accessible. Additionally, energy storage devices with a capacity rating of 3 kilowatt-hours (kWh) or greater are eligible for the credit, as long as they were installed after December 31, 2022. If the storage is installed in a subsequent tax year to when the solar energy system is installed, it is still eligible, though it must still comply with the installation date requirements. Finally, any sales taxes on eligible expenses can also be included in the calculation of the tax credit, providing further relief to the taxpayer.

The federal solar tax credit isn’t a constant value; its percentage rate has been adjusted over time by legislative decisions. For solar PV systems installed in 2020 and 2021, the applicable tax credit was 26%. However, this changed in August 2022 when Congress passed an extension of the Investment Tax Credit (ITC). This legislative change raised the credit rate to 30% for systems installed between 2022 and 2032.

Historically, installations on or before December 31, 2019, were eligible for a 30% tax credit. However, starting from 2033, the tax credit will undergo reductions: 26% for systems installed in 2033, and 22% for those installed in 2034. Unless renewed by Congress, the tax credit will expire starting in 2035. It’s noteworthy that there’s no maximum claim limit, making the tax credit a substantial financial incentive for substantial investments in solar energy.

Eligibility Criteria

While the conditions to claim state tax credits depend on the state you’re in, the eligibility to claim the federal solar tax credit is bound by several conditions:

Installation Period: The solar PV system must be installed between January 1, 2017, and December 31, 2034. This period is the eligible time frame for which tax credits can be claimed. The installation must be completed within the tax year for which the claim is being made.

Location: The solar PV system must be located at your residence within the United States. This restriction ensures the tax credit only applies to domestic renewable energy projects.

Ownership: Ownership of the solar PV system is crucial. This can be through direct purchase or through solar financing. However, you are not eligible if you’re leasing the system or have an arrangement with a solar company where you pay for the electricity generated by the system.

Community Solar Project Participation: Alternatively, you can claim the tax credit if you’ve purchased an interest in an off-site community solar project, but only if the electricity generated does not exceed your home’s consumption. This provision accommodates those who cannot install a solar system at their residence but are still investing in renewable energy.

New System: The system should be new or being used for the first time. The tax credit is meant to incentivize new installations, so it only applies to the “original installation” of the solar equipment. This means used or second-hand systems do not qualify.

To claim the credit, taxpayers need to fill the appropriate IRS form (Form 5695, Residential Energy Credits) when filing their annual income tax return.

Impact of Other Solar Energy Incentives on the Federal Solar Tax Credit

The federal solar tax credit operates in conjunction with other incentives, but these other solar energy incentives can influence how the credit is calculated. For instance, if your utility provides a rebate for installing a solar PV system, this is typically excluded from income taxes due to a federal law exemption. When this is the case, the utility rebate is subtracted from your system costs before you calculate your tax credit.

Payments from a public utility to compensate for excess electricity generated but not consumed by the taxpayer and delivered to the utility’s electrical grid (such as net metering credits) do not count as subsidies for installing qualifying property and do not affect your eligibility for or the amount of your federal solar tax credit. If you receive cash or an incentive in exchange for renewable energy certificates or other environmental attributes of the electricity generated, the payment likely will be considered taxable income. While it may increase your gross income, it won’t reduce the federal solar tax credit.

State Incentives and the Federal Solar Tax Credit

State solar energy incentives, like rebates from state governments, usually do not reduce your federal tax credit. For example, if your solar PV system was installed in a given year, and your state government offered a rebate for installing the system, this wouldn’t reduce your federal tax credit.

However, claiming a state tax credit might result in a higher taxable income reported on your federal taxes, as you would now have less state income tax to deduct. The Tax Cuts and Jobs Act of 2017 placed a $10,000 limit on state and local tax (SALT) deduction through 2025, making this a crucial consideration for taxpayers. Therefore, if a homeowner is still paying more than $10,000 in SALT after claiming a state tax credit, the state tax credit benefit wouldn’t be effectively reduced by the federal tax rate, as it wouldn’t impact federal taxes due to the SALT limit. Thus, the end result of claiming a state tax credit is that the amount of the state tax credit is effectively taxed at the federal tax level.

State Tax Credits

State-level solar tax credits provide additional financial incentives for homeowners and businesses looking to transition towards renewable energy. Unlike federal tax credits which are standard across the country, the structure, value, and availability of state tax credits can vary greatly from one state to another. Some states offer solar tax credits that can significantly decrease the cost of solar system installation, making them a key component in solar affordability. Notably, when combined with the federal tax credit, these state-level solar energy incentives can sometimes cover more than half of the total costs of a solar system.

Let’s examine some state-specific solar tax credits to illustrate the diverse nature of these solar energy incentives:

Arizona: The state of Arizona offers a solar tax credit that covers 25% of the cost of a solar system, capped at a maximum of $1,000. This credit can be claimed in the tax year following the solar system’s installation.

Idaho: Idaho has a unique approach to its solar tax credits. It allows a deduction of 40% of the solar system’s cost in the first year, up to $5,000, followed by a 20% deduction in the subsequent three years. This staggered incentive ensures ongoing tax benefits, encouraging more residents to invest in solar.

Massachusetts: Massachusetts offers a solar tax credit of 15% of the costs, up to $1,000. Although not as high as other states, it still provides substantial savings to solar consumers when combined with federal tax credits and other local incentives.

New York: New York provides a solar tax credit covering 25% of the system costs, capped at $5,000. With the high electricity prices in the state, this incentive makes a solar system an attractive investment for many homeowners.

South Carolina: South Carolina offers a particularly generous solar tax credit covering 25% of the system’s costs with no upper limit. However, the credit cannot exceed 50% of the taxpayer’s liability in any given year. Unused credits can be rolled over for up to 10 years, providing an extended benefit.

For more information on state-level tax credits, visit the The Database of State Incentives for Renewables & Efficiency (DSIRE).

Tax Exemptions

Many states offer additional tax exemptions for homeowners and businesses that invest in solar energy systems, which include sales tax exemptions and property tax exemptions.

Sales Tax Exemptions: These exemptions mean that you do not pay any state (and possibly local) sales tax on your solar panel system. Given that sales tax rates vary across different states, this exemption can lead to substantial cost savings during the initial purchase and installation of the solar energy system.

Property Tax Exemptions: While the installation of a solar energy system is likely to increase the value of your property, some states offer a property tax exemption for the added value. This means that you won’t be charged extra property taxes even though the value of your house increases due to the addition of a solar system.

Solar Rebates

Solar rebates are another form of incentive that directly reduces the cost of your solar system. They are typically offered by state governments, utilities, or sometimes even manufacturers. A rebate is a lump sum paid to the customer after the installation of the solar system, reducing the overall cost of the system. For example, if a $10,000 solar system has a rebate of $2,000, you would ultimately only pay $8,000.

Performance-based Incentives (PBIs)

Performance-based incentives (PBIs) are designed to reward solar energy system owners for the electricity their panels produce over time. This type of incentive is usually offered by utilities and paid out over a certain number of years. The actual incentive is typically based on the kilowatt-hours (kWh) or megawatt-hours (MWh) of solar energy that the system produces. It encourages not only the installation but also the efficient operation of the system. Here are some popular types of PBIs:

Net Metering: This policy allows homeowners and businesses to receive full compensation for each kilowatt-hour of electricity their solar power system exports to the grid. For instance, when a residential solar-powered property is unoccupied during peak sunlight hours, the excess energy generated is fed back into the grid. Similarly, commercial buildings with large roof spaces may also generate a surplus if they install extensive solar panel arrays. Net metering ensures this surplus power is not wasted but contributes towards offsetting the owner’s energy costs.

Feed-in Tariffs: Some utilities adopt feed-in tariffs as an alternative to net metering. Here, solar energy producers are paid a fixed rate for the surplus power they export to the grid, usually at a rate lower than the retail price of electricity. This lower rate is justified by the utility companies on the basis that they need to manage the excess energy received from solar producers.

Streamlined Interconnection Procedures: Simple and clear interconnection rules significantly reduce the upfront costs and bureaucratic hurdles associated with solar power system installations, thereby enhancing their return on investment. In contrast, if utilities implement complex connection requirements with hefty fees, consumers may be discouraged from adopting solar power.

Renewable Portfolio Standard (RPS): An RPS can also act as an indirect incentive for solar power. Essentially, an RPS mandates a minimum percentage of energy that investor-owned utilities must source from renewable energy. As consumer-owned renewable energy systems contribute towards achieving these set targets, utilities operating in states with RPS laws often establish incentive programs to stimulate more widespread adoption of renewable energy sources, such as solar power.

Solar Battery Incentives

Solar battery incentives are aimed at encouraging the adoption of solar-plus-storage systems. This is because, while solar panels can generate electricity during the day, a battery storage system is needed to store excess power for use during the night or on cloudy days.

One of the notable solar battery incentives is California’s Self-Generation Incentive Program (SGIP), which provides rebates for installing energy storage technology at both residential and non-residential facilities. This rebate effectively lowers the cost of installing a battery system. In addition to state-specific programs, the federal solar tax credit also applies to battery systems as long as they are charged by solar power a majority of the time. This can significantly decrease the overall costs of a solar-plus-storage system.

Remember, solar energy incentives can vary widely from state to state and among different utilities, so it’s important to research the specific incentives available in your location when considering a solar energy system. The Database of State Incentives for Renewables and Efficiency (DSIRE) is a helpful resource for this.

Purchase Power Agreements (PPAs)

A significant development in the realm of solar energy incentives is the emergence of Purchase Power Agreements (PPAs). PPAs are contractual agreements between solar project developers and energy consumers, typically commercial or industrial entities. In a PPA, the developer installs, owns, and operates the solar energy system on the consumer’s property or nearby land, while the consumer agrees to purchase the electricity generated by the system at a predetermined rate over a specified period.

PPAs are advantageous for consumers who may not have the financial resources or desire to invest in the upfront costs of installing a solar energy system. Instead of purchasing the system outright, consumers can enter into a long-term agreement that allows them to benefit from solar energy without the burden of ownership and maintenance. This arrangement enables businesses to access clean and affordable energy, reduce their carbon footprint, and potentially achieve long-term energy cost savings.

Under a PPA, the consumer typically pays for the electricity generated by the solar system at a rate that is potentially lower than their current utility rates. This can provide potential savings on electricity bills while also offering price stability over the contract term, protecting against future utility rate fluctuations. However, it’s important to note that PPAs may not always result in lower electricity costs compared to traditional utility rates, especially in regions where utility rates are relatively low or stable. The potential cost savings are often dependent on the specific terms of the PPA and the trends in local utility rates. The developer, on the other hand, benefits from the predictable revenue stream generated by selling the electricity and may also receive tax incentives and other financial benefits associated with owning and operating the solar energy system.

PPAs can be structured in different ways to suit the needs and preferences of both the developer and the consumer. The contract term can vary, ranging from 10 to 25 years or more. The rate at which the consumer purchases the electricity may be fixed throughout the term, or it could be structured with escalations or adjustments over time. Some PPAs also include provisions for the consumer to potentially purchase the solar energy system at the end of the contract term, allowing them to take ownership and continue benefiting from solar power.

One of the key advantages of PPAs is their flexibility and scalability. They can be tailored to accommodate various project sizes and energy requirements, making them suitable for a wide range of consumers, from small businesses to large corporations. PPAs have gained popularity in commercial and industrial sectors where there is ample roof or land space available for solar installations. It’s worth noting that PPAs are subject to applicable regulations and policies, which can vary by jurisdiction, and may not be legal or available in every state. Consumers interested in exploring PPAs should consult with solar developers and legal professionals to understand the specific requirements and benefits in their region.

Wrapping Up

The advantages of solar power extend beyond environmental benefits. With the right solar energy incentives and a supportive legislative framework, solar power can be an attractive financial investment for homeowners and businesses alike. Federal tax credits, state-level incentives, solar rebates, performance-based incentives like net metering, and solar battery incentives all contribute to reducing the initial cost and increasing the return on investment for solar power systems.

However, it’s important for potential solar adopters to conduct thorough research and consult professionals to understand their eligibility and potential benefits from these solar energy incentives and policies. Each state and utility company may have different programs and the landscape of solar energy incentives can change rapidly with shifts in policy. Nonetheless, the message is clear: there has never been a better time to consider solar power. Harnessing the power of the sun has become not just a viable option, but also an economically sound decision that provides energy independence, contributes to a cleaner environment, and promotes a more sustainable future.

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