Solar panels are an exceptional technology that provide clean, renewable energy to countless homes across America. Solar power systems were unattainable for years due to their high cost and relatively low demand until 2016, when advancements in solar technology skyrocketed. Since then, the cost of this technology has dropped tremendously, and now many homeowners have had the opportunity to cash in on solar energy.
Unfortunately, even with the price of solar power systems dropping, they still carry an upfront cost that can be a steep barrier of entry. There are ways to offset this, mainly through the various incentive and cash rebate programs offered by the federal and state governments.
This guide will describe these programs to help homeowners better understand the options for financing a home solar system and hopefully aid in determining whether or not going solar is worthwhile.
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How Expensive Are Solar Panels?
Solar power systems vary in cost depending on several factors, specifically:
- What state you’re in
- The company you purchase them from
- How many solar panels you need to power your home
- The specifics of the panels powering your system
An American homeowner can expect to pay between $12,000 and $25,000 for a solar power system. On average, an American home can be powered completely with a solar energy system costing around $16,000.
What Are Solar Incentive Programs?
Solar incentive programs are initiatives designed to encourage homeowners to invest in solar power. The federal government has one currently active program, the Federal Solar Tax Credit. State governments typically have some form of incentives for going solar, although they vary widely from state to state. On an even more local level, certain municipalities and utility companies have incentive or financing options for homeowners.
The Federal Solar Tax Credit
In 2005, the U.S. government passed the Energy Policy Act of 2005, which established several key laws regarding solar access rights, the most important of which is the Federal Solar Investment Tax Credit (Federal ITC). This tax credit allows homeowners and businesses who install a solar system to claim up to 30% of its installation cost as a credit on their taxes. Since 2005, the tax credit has been continuously extended, with the credit amount often changing. Currently, if your system was installed between 2020 and 2022, you can claim 26% of the total installation cost, and if it’s installed in 2023, you’ll be able to claim 23%. The solar tax credit is set to expire in 2024, but most speculate that it will be renewed.
What is a Tax Credit?
A tax credit is a dollar-for-dollar reduction on the amount of federal taxes you would otherwise owe for a given year. For example, if you installed a solar system valued at $16,000 in 2021, your tax credit would have been $4,600. Then, on your 2021 federal income taxes, you would have owed $4,600 less.
What Are the Eligibility Requirements of the Federal Solar Tax Credit?
To be eligible for the solar tax credit, you must fulfill the following requirements:
- Your solar photovoltaic (PV) system must have been installed between 2006 and 2023.
- Your solar PV system must be located within your primary residence, secondary residence, or offsite community solar project if the electricity generated is credited against and does not exceed your home’s electricity consumption.
- You own the solar PV system. This excludes systems rented through leasing programs or Power Purchasing Agreements (PPAs).
- The system is new or is being used to generate electricity for the first time.
Net Metering
Net metering is a system in which residents sell any excess electricity produced by home solar systems back to utility companies. This electricity is then returned to the grid for credit. These credits are then used to offset times when solar panels do not draw in enough sunlight to power the home, like on overcast days or at night. Credits can be saved and used later during colder months when the solar system can no longer adequately power a home. With a metering system, homeowners only pay the net energy they consume from the power grid.
Is Net Metering Universal Across All States?
Net metering is a state issue, so the laws regarding net metering vary wildly across the country. Some states are generous, providing fair rates for homeowner-generated electricity, while others offer reduced rates or, in worse cases, even fine homeowners for using net metering policies. While most states have a net metering program, not all do. As of writing this article, the only states without net metering laws are Alabama, South Dakota, and Tennessee.
What Are the Different Kinds of Net Metering?
There are two variants to standard net metering, Buy All / Sell All and Net Billing. Here is how they work:
- But All / Sell All: Under this model, you sell 100% of the electricity generated from your solar panels back to the utility company at a predetermined, usually wholesale, rate. You then purchase your electricity directly from the grid at a retail price. This model is typically used by states with less-than-friendly solar policies, as it can be difficult for homeowners to save under this model.
- Net Billing: This model is typically used for large industrial appliances or commercial projects, but it functions similarly to standard net metering. In this system, your home or appliance directly consumes electricity from the solar PV system, and the remaining electricity is sold back to the utility company. The key difference between this system and standard net metering is that you cannot collect credits to use later.
State Incentive Programs
Alongside the Federal Solar Tax Credit, you have various state and local government incentives. Unfortunately, these solar programs vary greatly depending on the state, having different qualifications, payouts, and restrictions across the board. In general, all state incentives can, however, fall into one of the following categories:
State Tax Credits
Some states offer an investment tax credit on solar installations. These programs function similarly to the Federal Solar Tax Credit but apply to your state taxes instead and can be used in conjunction with the federal credit. The amount these programs offer varies wildly by state but usually covers a percentage of the solar system’s total installation cost.
Solar Rebates
Some states, utility companies, municipalities, and solar panel companies offer rebate programs for solar panel installations. These rebates typically have a strict time limit and are only available for a set period after the system is installed. Once accepted, the rebate is sent directly to the solar panel company as a subsidy, reducing the installation cost and payback period. These programs usually equal 10% to 20% of the total cost of your solar panel system.
Solar Renewable Energy Certificates (SRECs)
SRECs (also sometimes called solar renewable energy credits) are a form of special compensation for producing megawatt-hours worth of electricity. In states with a Renewable Portfolio Standard (RPS), there are often policies mandating that utility companies purchase a set number of SRECs. Failing to do so typically results in steep fines, and as a result, homeowners can sell SRECs for a competitive rate.
The exact value of your SRECs will depend on your state’s market for them. Market values for SRECs are determined by the amount of homeowners selling, the number of utility companies buying, and the level of pressure to buy them set by the state government. Homeowners can make thousands of dollars in states with lucrative SREC markets, but all money made from selling SRECs is considered taxable income.
Performance-Based Incentives (PBI)
PBI is a system that directly pays homeowners for the amount of electricity their home solar system produces (in kilowatt-hours). These programs can either work alongside or replace net metering and can occasionally require homeowners to hand over their SRECs to the utility company. The upside to these programs is that they are typically easier to manage and are less hassle than selling SRECs. With PBIs, the process is automatic and does not require you to sell through a marketplace. The amount you’re paid is also a fixed rate determined at the beginning of your contract and typically does not change, unlike SRECs, whose value can fluctuate with the market.
Property and Sales Tax Relief
Some states offer tax exemptions for purchasing and installing solar power systems. These exemptions typically take two forms: sales tax or property tax.
- Sales tax: Most eco-conscious states do not charge sales tax on any solar power system. This reduction may not sound like much, but for states like California, with a sales tax rate of 7%, or New York’s sales tax of nearly 9%, it can save you thousands of dollars.
- Property tax: Whenever you install a feature into your home or make a serious renovation that increases the value of your home, it also increases your property tax. Environmentally friendly states will incentivize installing solar power and energy efficiency systems by waving this tax increase. This tax incentive allows you to see a marketable increase in the value of your home but not the increase in tax associated with it.
Closing Thoughts
While installing solar panels may be expensive, there are plenty of ways to help finance your next solar power system. Finally, solar enthusiasts should be aware of two slightly deceptive programs: Power Purchasing Agreements (PPAs) and low-interest leases. While these programs will help you put solar panels on your home, they do not allow you to own the system.
- PPAs: These allow solar companies to place panels on your home, then sell the electricity generated from them to you at a much lower price than power from a utility company.
- Leases: These are just what their name implies, leases, and you’re only renting the solar panels.
While these programs have their benefits, neither allows you to own the panels and are therefore excluded from the criteria of this article. However, if you want to start producing clean energy and reduce the cost of your electric bill, be sure to take advantage of the incentives in this article that make going solar a fantastic option. We refer you to read our article on the advantages of transitioning to solar for detailed information.
