Different Types of Home Solar Incentives: How They Work

Since solar panels can provide clean electricity for decades, many governments and utility companies have incentive programs to encourage their use. These incentives can be classified into many types, but they have a common goal: improving the financial returns for solar panel owners.

via Berkshire Photovoltaic Services Inc

Some incentives offer upfront benefits, while others provide ongoing rewards based on the performance of your solar panels.

Here we will review the main types of solar incentives offered by governments and electric utility companies. Keep in mind that incentives change depending on where you live and finding a place with all types available is unlikely.

That said, solar panels have become more affordable in recent years, and they make sense economically even before applying incentives. In other words, solar incentives improve an investment that is already viable on its own.

Which Are the Main Types of Solar Incentives?

Solar incentive programs can have different names depending on who manages them, but most can be classified into the following categories:

  • Tax credits
  • Tax exemptions
  • Solar rebates
  • Renewable energy certificates
  • Net metering laws
  • Performance-based incentives
  • Low-interest solar loans

Solar Tax Credits and Exemptions

Many governments offer tax credits and exemptions for solar panel systems. While these two concepts are related, there is an important difference between them:

  • A tax credit is a deduction you can claim on your next tax declaration after installing solar panels. Generally, the credit is calculated as a percentage of your solar investment, and there may be a limit.
  • A tax exemption can be defined in simple terms as a tax you don’t pay when installing solar panels. For example, a state government may decide not to charge the sales tax when you purchase a solar power system.

The 26% federal tax credit is perhaps the best-known solar incentive in the US, and it applies in all states. In simple terms, you get back 26 cents for every dollar invested in solar power, and you can claim this benefit from the IRS on your next tax declaration.

For example, if you purchase a 6-kW solar power system for $18,000, you can claim a tax deduction of $4,680. This incentive will remain at 26% until the end of 2022, decreasing to 22% in 2023. The federal tax credit will no longer be available for homeowners after 2023, and only a 10% tax credit for businesses will be available.

Some states offer their own tax credits, which can be combined with the federal incentive. For example, New York will let you deduct 25% of solar costs from your state taxes, up to $5,000. Considering the 6-kW system in the example above, you would be able to claim $4,500 more as a state tax credit (25% of $18,000).

Arizona, Massachusetts, New Mexico, South Carolina, and Utah are also among the states offering local tax credits, according to EnergySage.

Many states also offer tax exemptions for solar panels, and two types are the most common:

  • Sales tax exemptions, which represent immediate savings when buying solar panels.
  • Property tax exemptions, which means you are not taxed for any increase in property value that results from solar panels. For example, if your home value increases by $25,000 after going solar, you will not be charged property taxes on that amount.

To summarize, a tax credit is a deduction you get after purchasing a solar power system, while a tax exemption is a charge you avoid completely.

Solar Rebate Programs

A rebate is a cash incentive installing solar panels, which is subtracted from the installed price of your system. The US does not have a nationwide rebate program for solar panels, but you can find many local programs managed by utility companies, state governments and municipalities.

Solar rebate programs normally have a list of qualified providers, and you must purchase your system from one of them to get the benefit.

  • Solar rebates can be combined with tax credits. However, you must subtract the rebate first, since it represents an amount, you don’t pay.
  • For example, if your solar system cost is $15,000 and you get a $1,000 rebate, all tax credits are calculated with the net cost of $14,000.

Solar rebate programs are constantly changing, and you may find many of them in different regions of the same state. Before going solar, make sure you aren’t missing any rebates from your local government or utility company.

Renewable Energy Certificates

Renewable energy certificates are known by many names, but most US-based programs call them SRECs (Solar Renewable Energy Certificates). If your state has an SREC program, you will normally earn one credit for every 1,000 kWh of electricity produced by your solar panels.

  • SRECs are earned based on solar generation, no matter how that energy is used.
  • For example, if your solar panels produce 10,000 kWh in one year, you get 10 SRECs.
  • This applies even if you only consumed 5,000 kWh and exported 5,000 kWh to the grid.

Each SREC can be considered a proof of having generated 1,000 kWh of solar electricity. Utility companies, large consumers and other organizations that are legally required to cut emissions can purchase these credits, and it counts towards their target.

The price of an SREC changes by state and depending on supply and demand. However, they represent extra cash flow beyond your power bill savings.

As a quick example, assume you’re charged an electricity tariff of 16 cents/kWh, and that each SREC sells for $100. For every 1,000-kWh produced by your solar panels, you save $160 in power bills, and you get $100 for the corresponding SREC.

Favorable Net Metering Laws for Solar Power

Solar panels reach their maximum productivity in the hours around noon, while homes tend to use more electricity in the evening. This means many homes cannot use most of their solar energy directly, but net metering provides a simple solution.

  • Surplus electricity from solar panels is exported to the grid and measured.
  • When the next power bill arrives, this electricity is subtracted from your bill.
  • Generally, if your credit for solar power is higher than the amount charged in a billing period, the difference can be carried over to the next month.
  • Some electricity providers may even pay you for the difference (up to a specified limit), but this benefit is rarely available.

With net metering, all the electricity produced by solar panels reduces your power bill, even the part you don’t consume directly. When net metering is required by law in a state, it improves the payback period and ROI of solar panels. This incentivizes the use of solar power.

Unfortunately, net metering is not available everywhere. Some electricity providers offer the benefit voluntarily, even when not required by law, but in many cases, you get less favorable conditions:

  • You may get credit for surplus electricity at a reduced tariff, not the full retail price.
  • In some cases, you may not get any credit for sending solar power to the grid. This means you need to store surplus electricity in a battery system.

Favorable net metering laws count as a solar incentive, since they ensure that all the electricity produced by solar panels is valuable for homes and businesses.

Performance Based Incentives per Kilowatt-Hour

Some solar incentive programs don’t offer a benefit upfront, and instead they reward you for performance over time. These programs normally pay a specified amount per kilowatt-hour generated, in addition to the power bill savings achieved.

For example, with an electricity tariff of 15 cents/kWh and a performance incentive of 10 cents/kWh, you would be getting a total benefit of 25 cents/kWh (savings + incentive).

The SMART program in Massachusetts is an example of this type of incentive. Solar owners who qualify for the program get a bonus payment for electricity generation, which is added to their power bill savings.

Unfortunately, performance-based incentives for solar power are very rare. State governments that want to support solar power tend to offer tax benefits, while utility companies tend to offer rebate programs.

Low Interest Solar Loans

There are many low-interest financing options for solar panels. Strictly speaking, they don’t reduce the cost of solar panels or increase their long-term savings. However, purchasing solar panels is much easier with a low-interest loan:

  • You can get a solar power system for $0 upfront.
  • Since you legally own the system, you can claim rebates and tax credits.
  • You can start saving on power bills, and those savings can be used to pay the loan.

While you can purchase solar panels with a single payment in cash, the amount is significant. The average cost of home solar systems in the US is around $3 per watt, which means you can expect to pay around $15,000 for a 5-kW system. This amount is reduced if solar rebates are available, and you can claim a large tax credit when your next declaration is filed. That said, a low-interest loan breaks down your project into more manageable payments over time.

Property Assessed Clean Energy or PACE is a popular financing option for solar panels in homes and businesses in the US. A PACE loan is paid back along with property taxes, and it’s bound to the property – not its owner. If you want to sell a home with solar panels that were installed with PACE financing, the loan is easily transferred to new owners.

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3 thoughts on “Different Types of Home Solar Incentives: How They Work”

  1. Thanks for wonderful article dear Roof Guy!

    One question we had about the ITC. If we must replace the roof prior to installing solar panels, can we claim the Federal tax credit of 26%? if so, can we claim the credit for entire roof or only for the portion of the roof where solar panels are installed?

    Please advise and thanks in advance!

    Reply
    • Hi Ashit,

      You can claim 26% tax credit for the entire solar panel system including the cost of installation, as long as it’s your primary residence. Unfortunately, you cannot claim credit for the cost of a new roof, though, unless it’s a solar tile roof like SunTegra, Luma Solar, or Tesla Solar Roof. Those are considerably more expensive though.

      Reply
  2. Watch those “favorable” metering rates erode state by state as solar panel installation rises.

    And shifts to incentives to install time-shifting battery storage.

    Reply

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