Solar panels are simple devices, and that is a key factor that has contributed to their success in the energy industry. Having a modular design, solar panels can be used in projects of any scale. They also have a service life of over 25 years, and simpler maintenance requirements that other power generation systems.
However, solar power is a complex business, since many external factors influence the viability of photovoltaic systems. In general, solar power is effective in places with abundant sunshine or expensive electricity, and the return on investment is even better when both are found together.
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Local regulations have a significant impact on the solar power industry. With unfavorable legislation, solar panels have limited usefulness even in sunny places. On the other hand, incentives and favorable laws can make solar power work even with modest sunshine.
There are many types of solar incentives, and it is unlikely that you will find all of them in a single city or state. However, by getting familiarized with how incentive works, you can gain insight on how the solar industry works in your city.
Tax Incentives for Solar Power
When governments want to motivate the use of solar power, a very common solution is reducing the tax burden for photovoltaic technology. Alternatively, governments may introduce tax benefits for homes and businesses that go solar. The two most common types of tax benefits are exemptions and credits.
A tax exemption for solar power consists of removing a tax that would normally apply. This reduces the ownership cost of solar panel systems, motivating their use by homeowners and businesses. The following tax exemptions are applied by many states in the US:
- Sales tax exemption: When you purchase a solar power system, the sales tax is not charged. This essentially acts like a discount, making solar panels easier to afford.
- Property tax exemption: Since building improvements increase value, they raise the corresponding property tax. However, many states have decided not to apply taxes for any increase in property value that comes from solar panels.
A tax credit is a reduction of your tax burden, which is granted as a reward for going solar:
- The 30% federal tax credit is perhaps the best-known example, since it applies for the entire country. However, it will be gradually phased out between 2020 and 2022. If you are considering solar power for your home or business, act quickly to get the full benefit.
- There are also state tax credits, which are added to the federal incentive. For example, the state of New York gives you back 25% of your solar power investment as a tax deduction, with a cap of $5,000.
If you purchase a $20,000 solar power system in New York, you get 30% back as a federal tax credit ($6,000) and 25% back as a state tax credit ($5,000). The net cost is reduced to only $9,000, and you get more than half of your investment back in the form of tax benefits.
Solar Power Rebates
A rebate is a cash incentive for going solar, which is subtracted directly from your upfront costs. Solar rebates are normally granted through programs that are managed by governments or utility companies. Note there are eligibility requirements, so you should make sure that your solar power system is designed and installed by professionals. The NY-Sun program in the state of New York is an example.
When both solar rebates and tax credits are available, the rebate is applied first and the tax credit is calculated for the net cost. For example, if you get a $2,000 rebate for a solar PV system priced at $20,000, the federal tax credit is calculated with the net cost of $18,000. In other words, the federal incentive is $5,400 and not $6,000.
Performance-Based Incentives for Solar Power
Reducing the net cost of solar power systems with rebates and tax benefits is one incentive option. There are also programs that focus on increasing the cash flow of a solar power system. There are two common options:
- Adding a performance payment per kilowatt-hour produced.
- Creating a Solar Renewable Energy Credit (SREC) program.
Bonus Payments per Kilowatt-Hour
When performance payments are available, owners of solar power systems get extra cash for every kilowatt-hour generated. For example, if the local electricity price is 15 cents/kWh and there is an incentive of 5 cents/kWh, the total benefit is 20 cents/kWh. This shortens the payback period of solar panels, while increasing the return on investment.
Since this type of incentive is so good, there is normally a capacity limit that gets filled quickly. One example is the Solar Massachusetts Renewable Target (SMART), launched in 2018. The program will grant incentives for solar power systems until a capacity of 1,600 MW is accumulated. The incentive is higher for the first movers, and it is gradually reduced as the program approaches its target.
Solar Renewable Energy Credits
SREC programs are an alternative to bonus payments per kWh. They can be applied when local governments have introduced clean energy targets for utilities and large energy consumers. These organizations can meet their target by producing clean energy on their own, by purchasing an amount of SRECs equivalent to their target, or with a combination of both. There are hefty penalties for missing the target, which creates a high demand for SRECs.
- Owners of solar PV systems are awarded one SREC for every 1,000 kWh of generation.
- SRECs are then purchased by the organization subject to clean energy targets.
- The SREC price is determined by supply and demand, which means the benefit is variable. However, it represents a cash bonus beyond the savings from solar power.
For instance, a SREC price of $100 is equivalent to an incentive of 10 cents/kWh, since one SREC is awarded for every 1,000 kWh.
Favorable Laws: Net Metering and Simple Interconnection Rules
Legislation that favors solar power can also be considered an incentive, since home and business owners can get more benefits from solar panels.
- Net metering gives full credit for every kilowatt-hour sent from a solar power system to the electricity grid. This happens all the time in solar paneled homes that are empty around noon, since there is nobody to use the electricity. Businesses with large roofs can also reach surplus production if they cover a large area with solar panels.
- Some power companies offer a feed-in tariff instead of net metering. This tariff is normally lower than the electricity price, with the argument that power companies must handle the surplus energy from solar panels.
- Simple interconnection rules help reduce the upfront cost of a solar power system, improving the return on investment. When utilities impose complex connection requirements with high fees, power consumers are less likely to go solar.
Having a Renewable Portfolio Standard (RPS) can also be considered an incentive for solar power. In simple terms, an RPS establishes a minimum renewable energy percentage for investor-owned utilities in the corresponding state. Since clean energy systems owned by consumers count towards the goal, utilities subject to RPS laws normally create incentive programs.
There is a wide variety of solar power incentives, and the business case for going solar improves when many of them are available. With favorable legislation and incentive programs, solar power can work even in places with modest sunshine. The US Northeast is an example of this: the region is not particularly sunny, but favorable laws and incentives have created an excellent market for solar panels.