Rebates, Solar Incentives & Tax Credits for PV Solar Systems

Federal and state governments, as a matter of policy, have made it a priority to promote the adoption of renewable energy technologies, which they do primarily through tax incentives and cash rebates. Fortunately, some of the most aggressive incentives have been reserved for solar energy which can help significantly reduce the up front cost of solar. The following is a summary of some of the different solar incentives a consumer should keep in mind when considering how to finance a solar system.

Please note that it is important to keep in mind that the economic crisis has left federal, state and local governments strapped for funding. As a result, the funding that backs many solar incentives is not guaranteed. It’s important to act sooner rather than later to maximize the amount of government incentives you receive.

Federal Tax Incentives

The primary mechanism that the U.S. government uses to support solar power is through the Investment Tax Credit (ITC). Under the ITC, individuals are allowed to deduct 30% of the cost of a solar system from your federal taxes through a tax credit. For those individuals or businesses that invest in renewable energy technologies, the ITC allows you to recapture the cost of your investment through the tax credit by directly reducing your federal income tax liability. The ITC is the United States government’s principal mechanism to help incentivize clean energy adoption. It is effective through December 31, 2016. Key provisions of the law include:

  • 30% tax credit on the cost of solar energy systems through 12/31/2016 including the actual solar installation;
  • No maximum on the dollar amount of tax credit for solar electric, solar water heaters, wind turbines or geothermal heat pumps placed in service after 12/31/2008;
  • Ability to offset alternative minimum tax (AMT) liability; and
  • Ability to carry unused credits into the next tax year.

Please note that if you receive a state rebate in addition to the federal tax credit, the rebate amount will be deducted from the basis from which the ITC is calculated.

State Tax Incentive and Rebate Programs

Across the United States, there are a wide-range of state programs to encourage the adoption of solar energy. The following is an overview of the most common and most important types of state solar rebates. Please note that state incentives change frequently so you should always consult with a solar professional who should be up to date on any changes or you can read about them by visiting DSIRE.org.

  • Personal Tax Credit: Similar to the ITC, some states (including New York, Oregon and Arizona) also provide a tax credit that can be deducted from your personal state taxes. The structure of these credits varies by state, with some states offering the incentive as a percentage of the cost of the solar system and others offering the incentive based on the installation’s capacity to generate power. Most programs cover both solar electric and solar thermal systems.
  • Property Tax Exemption: These incentives ensure that the additional value a solar energy system adds to your home does not raise your annual property taxes. For example, in areas with a property tax exemption, if a new solar pv system adds $30,000 to the value of your home, that $30,000 will be exempted from the total assessed value and your property taxes will not increase as a result of the new system.
  • State Rebates: State rebate programs for solar energy exist in various forms across the country. In general, the agency responsible for administering the program will issue you a check as a rebate for the cost of solar. Depending on your location, these rebates may be offered as a one-time up-front payment or as an ongoing installment over a set number of years. The total amount of the rebate is most often calculated based on the system’s generation capacity. California has one of the best-known examples of the state rebate programs, the California Solar Initiative. The average incentive provided by the California program for completed residential systems is approximately $7,700; however, the amounts of the incentive rebate payments are declining as more and more people access the California Solar Initiative.

It is important to note that state rebate programs are usually restricted, and the amount of rebates they can provide is budgeted. This makes it even more crucial to confirm that key state rebates are still available for your project before you begin your installation.

  • State loans: Several states offer loan programs for qualifying renewable energy and energy efficiency improvements on owner-occupied homes. Usually these loans have lower interest rates and may have other favorable terms when compared to bank loans. In North Carolina, the state offers an interest rate of 1% for renewable energy projects, including solar (North Carolina Energy Improvement Loan Program). The structure and funding sources for the programs varies by state. In Oregon, for example, the state sells bonds to fund their loan program. Other states commit money from their annual budget to programs that help fund homeowners’ renewable energy projects.
  • State Grants: Although not as common as the other programs we have already covered in this section, various grants do exist for renewable energy and energy efficiency upgrades.  Keep in mind that you will need to apply for grant funding and that the process of receiving a grant can be more difficult than securing a loan.

For detailed information on relevant state rebate programs, and how they may apply to your solar energy project, please visit the DSIRE website.

Utility & Municipality Programs

In addition to federal and state incentives, there are also utility and municipality incentive programs. These local incentives are more common in certain states, such as California and Oregon, but most states have at least some local programs available to homeowners considering solar energy.

Professional solar energy installers in your local area are an excellent resource to learn about these programs. Experienced and reputable installers are knowledgeable about program eligibility, the application process, and the current status of these programs, including any recent changes. The DSIRE website is also another excellent resource to explore individual programs available in your area. Each of these programs should have a contact person who can answer your questions and provide you with application materials.

Solar Financing

Solar energy has become much more cost effective over the past 30 years, but it remains a sizeable investment for the average homeowner. Fortunately, there are financing and leasing options that make the process much easier to manage financially. These new payment options are a great way to experience the benefits of solar energy with minimal impact on your pocketbook.

In fact, new payment options are one of the key reasons the residential solar industry has grown exponentially in the last 2 years. With the latest financing and leasing opportunities, you can make monthly payments on your solar system, just like financing a car. The best part-the monthly payments, in many cases, are less than the amount you save each month on your electric bill.  There are a variety of solar financing and solar lease options available depending on where you live and your credit history.

Benefits to Financial a Solar Power System

  • Avoid out-of-pocket expenses: The single biggest benefit of solar financing is that it allows you to avoid a large out-of-pocket expense up front. This is very similar to financing a new car – only the interest rate you pay and the length of the term are closer to a home mortgage, which is more favorable. As a result, the monthly payment for a solar system is considerably lower than a typical car payment.
  • Install the optimal home solar system: Say you have $10,000 of savings that you can commit to paying for a solar system, but the solar system recommended for your home costs $20,000. Financing allows you to bridge that gap and get exactly the right system for you.
  • Lock in a low interest rate: Another major benefit of financing in today’s economy is that it allows you to lock in a low interest rate for 20 or more years. Considering that interest rates are near all-time historic lows, financing can be especially affordable and desirable. This will especially benefit you if interest rates rise in the future. If you qualify for a state or local government loan, you may be able to receive loans with interest rates as low as 1%!

Financing Options and Trade-Offs

If you decide that financing your solar system is your preferred option, you have a handful of opportunities to choose from. These financing programs are readily available to all homeowners who have good credit and are installing a qualifying solar system:

  • Home Loan or Home Equity Line of Credit: Similar to taking out a bank loan to finance a remodel of your home, some banks will offer loans to finance solar systems. Homeowners with higher credit scores will find it easier to receive these loans. The bank may have requirements that the system is permanently attached to the home so it remains part of the property which allows the bank to treat the system as a secured loan and therefore offer a lower interest rate. Average interest rates for these types of loan are similar to or slightly higher than a home mortgage.
  • Installer Loan: Many solar energy installers have developed partnerships with their own third-party loan providers that allow them to offer financing programs to their customers. In fact, one installer’s loan options can actually be a selling point versus a competing installer. Although your installer will coordinate the loan and may help you with many of steps in the process, the third-party (usually a bank or national loan provider) will provide the cash to pay for the system. You will then make payments to the third party rather than the installer. The interest rates for installer loans are similar to or slightly higher than a home mortgage.
  • PACE Financing: PACE programs provide a way for homeowners to borrow the cost of a solar system from a local or municipal government and then repay that amount through a special assessment (or addition) to the homeowner’s annual property taxes. Unfortunately these programs are relatively rare in the U.S. – currently only a few pioneering municipalities such as Berkeley, California offer them – and federal home loan insurers have presently refused to accept loans subject to PACE financing.
  • State or Municipal Loan: Some states and municipalities offer loan programs to encourage the installation of renewable energy technologies and energy efficiency technologies. An advantage of these programs is that they often offer lower interest rates than bank and installer loans. A potential disadvantage is that many may have more restrictive requirements. On top of this, the approval process often takes longer than a conventional loan.
  • Solar Lease: Solar leases allow homeowners to effectively ‘rent’ solar panels for their home. Under this arrangement, a third-party pays for the system and retains ownership of the system while it’s in use at your home. You simply agree to make a monthly lease payment to that third party (the “lessor”). The lessor even agrees to pay for scheduled maintenance of the system including panel cleaning and inverter replacement (typically after 10 years). A handful of companies offer solar leases nationally, all of which use a network of approved solar panel installers.
  • Power Purchase Agreement: A power purchase agreement (PPA) is similar to a lease agreement in that a third-party pays for and owns the solar system. In a PPA, instead of paying a fixed monthly lease amount for a system, you agree to pay for the electricity that the system produces at an agreed-upon rate for a set number of years. In this instance, the purchaser receives the benefit and security of a predictable electric bill for a number of years despite continuing increases in utility prices.