f you have taken a quick look at the residential solar panel market, there’s a good chance you’ve been spooked by the prices. A 5-kW home solar system can run up to $25,000, which can feel way too steep. But we've got some good news: your solar panels will cost significantly lower after applying renewable energy incentives. Below is an overview of the best policies to help you get into green energy without making too much of a dent in your wallet.
Federal Solar Investment Tax Credit (ITC)
The central energy policy encouraging homeowners to tap into solar energy is obviously Federal Investment Tax Credit (ITC), otherwise known as the solar tax credit.
Created under the George Bush administration in 2005 as part of the Energy Policy Act, ITC was initially set to expire at the end of 2007. ITC offered a 30% credit on the cost of a solar system, but unlike today, it was limited by a $2,000 cap, which held the growth of solar energy back. Additionally, renewables struggled to compete with fossil fuels supported by much more significant tax concessions. The Obama administration removed the cap on the credit amount, thus boosting the development of the solar energy market.
In 2020, the renewable energy tax credit stepped down to 26% and was supposed to drop again to 22% in 2023 before phasing out entirely in 2024. However, the 2022 Inflation Reduction Act, signed into law by President Biden, bumped the tax credit to 30% and extended it through 2032. It will decrease to 26% in 2033 and 22% in 2034.
Today, ITC allows any individual setting up photovoltaic panels on their property to deduct 30% of the total cost of installing a solar system. For example, if you spend $25,000 on a PV system, you can subtract $7,500 from your federal taxes.
What's covered by the Investment Tax Credit?
Let’s look at what expenses ITC covers:
- Solar photovoltaic panels or cells (including solar panels for attic fan, but not the fan itself)
- Installation labor costs
- Inspection costs and permitting fees
- Balance-of-system components (e.g., inverters, controllers, enclosures, disconnects, combiner boxes)
- Battery storage with an energy capacity over 3 kWh (for batteries installed after December 31, 2022)
- Sales taxes on eligible expenses
State solar tax credits and other benefits
On top of the federal tax program, most US states offer solar energy incentives in the form of tax credits, rebates, exemptions, and deductions. New Yorkers, for example, can apply for solar system equipment credit that equals 25% of their solar equipment expenditures and is limited to $5,000. Another benefit is a sales tax exemption under which solar equipment is exempt from the state’s 4% sales and use tax.
Meanwhile, California runs a Single-Family Solar Homes (DAC-SASH) program providing eligible low-income householders fixed upfront rebates to help offset the solar installation costs. The state also offers property tax exclusion for new solar energy systems.
Some states also provide upfront cash rebates for installing solar panels. These rebates typically last for a short period and are capped to a certain number of solar installations in a state. But if you managed to get a rebate, you could cut your solar installation costs by up to 20%.
Performance-based renewable energy incentives (PBIs)
Unlike the previous subsidies calculated based on the solar system's cost, PBIs pay homeowners for the electricity their home energy system generates. Suppose you have a $0.03/kWh PBI offered by your state, local government, or utility. If your solar system generates 800 kWh per month, you will receive $24 under your PBI contract (800 * $0.03 = $24).
One of the most beneficial performance-based programs is solar renewable energy certificates (SRECs). It allows you to earn one certificate for every megawatt-hour (MWh) electricity your solar system generates and later sell your SRECs to another party, transferring the right to make claims about using clean electricity. Homeowners typically sell their renewable energy certificates to the utilities, as they are often required to produce a specific percentage of their energy from renewables.
Net energy metering (NEM)
This list wouldn't be complete without net metering – a billing mechanism that allows homeowners to sell any surplus energy generated by their solar system to the utility company. With NEM, you receive credits for sending electricity to the grid, and they can be used to offset the cost of electricity you pull from the grid in the future.
In most states, net metering is required by law, but some states, such as Arizona, Georgia, and Hawaii, have alternative tools to compensate for surplus energy generation.
How do I know what renewable energy programs my state offers?
Pros and cons of renewable energy? Each state has its own set of renewable energy subsidies, so find out what funding options are available to you as a potential solar owner. Many online resources provide up-to-date information, such as the Database of State Incentives for Renewables & Efficiency (DSIRE).
How much can I save with solar energy credits and rebates?
Federal, local, and utility incentives can add up to significant savings. Depending on what programs are available to you, you can cover up to 50% of the cost of your solar system!