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ST 2008 JA Paying for It
May 11, 2009, 9:49 pm
Filed under: Solar Electric PV

Paying for It


Know what incentives apply to make financing your solar electric system as affordable as possible.

By Claudia Eyzaguirre

SolarCity houseThe industry continually rolls out new financing mechanisms to bring more solar energy online. For instance, this spring SolarCity launched SolarLease, a PV system-leasing program for homeowners. Photo courtesy of SolarCity

With nearly 40 percent of carbon dioxide emissions produced by electricity generation, many of us yearn to produce our own pollution-free power from the abundant sunshine that lights our roofs. Still, installing your own photovoltaic (PV) system requires careful attention to rebates, tax credits and financing. A good solar installer will help you through this process. But here’s a primer on how residential grid-connected PV systems are financed.

The cost of a PV system is measured in dollars per watt installed. For small PV systems, the average cost is $8 to $10 per watt before incentives. The total cost depends on the system size, which is determined by the electricity load of your building or by available roof area. Some homeowners will want to produce all their energy from solar panels; others choose a smaller system size for economic, roof space or shading reasons.

As you calculate the appropriate size for your system, it’s important to upgrade the energy efficiency of appliances, lighting and weatherization to reduce your power consumption. A typical home PV system is 2 to 5 kilowatts in size. The average U.S. home uses 10,000 kilowatt-hours of energy each year. To meet the full energy needs of the average household, a PV system would need to be 5 kilowatts, depending on the solar resource. Assuming $9 per watt, the pre incentive cost would be approximately $45,000. But an energy-efficient household can use half that amount of electricity and do well with a 2.5-kW system costing approximately $22,500.

This price might seem out of reach. No doubt about it, small-scale solar energy today is more expensive than dirty conventional power. However, recognizing the public benefits of solar power, many states offer incentives that reduce the upfront cost of installing solar. Favorable incentives can reduce the cost of solar energy by half or more.

Start by Assessing State Incentives

States offer solar incentives in any combination of rebates, state tax credits, tax exemptions and renewable energy certificate payments. (Renewable energy certificates, also known as “green tags” or “green credits,” allow the environmental value of the renewable generation to be quantified and traded as a commodity-like product.) The biggest incentives generally exist in states having renewable portfolio standards (RPS) requiring electric utilities to develop or purchase renewable power including solar energy. To support the RPS goals, these states created laws that incentivize solar power. Incentives typically come from the utility, although in a few cases the state agency provides them.

The incentive may be in the form of an upfront payment or a fixed price per kilowatt-hour for, say, five years. Rebates are calculated on a per-watt basis. For example, California offers a rebate of $1.90 per watt (down from $4 per watt years ago), Connecticut offers $5.00 per watt and Colorado has a $4.50-per-watt rebate. It is worth noting that the price per watt can refer to watts DC, watts AC or may be a performance-based incentive. As a rule of thumb, the AC rating of your solar panels is calculated as 77 percent of the DC rating. Performance-based incentives take into account the total PV system, including inverters, shading and panels, and are awarded based on the expected output.

A few states award incentives based on actual PV production for small systems. Washington state offers a production incentive that ranges from 12 to 54 cents per kilowatt-hour. These incentives come annually from the utility company with a maximum payment of $2,000 per year and $25,000 total.

Most state solar incentives originate from one of two progressive state policies. Either the state mandates the electric utilities to meet a minimum of renewable energy production and therefore the utility is required to help offset costs of customer-owned solar resources, or a state public benefit fund levies a small fee on every electricity ratepayer to create a fund for disbursing solar incentives.

In No-Incentive States, Try Selling RECs

If you install solar in a state having no RPS, however, state incentives are likely to be minimal. In that case, you can receive a production incentive by selling “green tags,” the buzzword for voluntary RECs. Bonneville Energy Foundation will purchase the renewable energy attributes of your system for 3 cents per kilowatt-hour. Green tags are sold to private companies and individuals looking for green offsets. Since green tags represent a voluntary purchase, the value of the renewable energy attributes is much less than under mandated renewable energy profiles.

Offset Costs with Tax Credits

The federal government and individual states also offer tax credits to incentivize citizens and businesses to invest in solar. State personal tax credits range from 10 percent in Utah to 35 percent in Hawaii and 50 percent in Oregon. Large state tax credits function much like the state rebates described earlier. These tax credits may apply only to the equipment costs or toward the total cost of the system. Many state solar tax credits limit the maximum amount the solar system owner may receive and over how many years the system owner may amortize the credit. A state corporate tax credit is available in certain locations and is worth looking into. Many states also offer a property tax exemption, which means that for property tax assessment purposes, PV systems are considered to add no value to the property.

The federal government offers one credit, the federal solar investment tax credit. Through this incentive, an individual receives a tax credit of 30 percent of the system cost, up to $2,000, and a commercial entity can take 30 percent of the system cost with no cap. Solar advocates are working hard to get the tax credit, set to expire Dec. 31, renewed.

Earn Credit On Utility Bills

Generating your own solar power greatly reduces your monthly electricity bill — that is, it can, if your state has good net-metering rules. Net metering is a billing arrangement by which the customer generator receives utility bill credit for electricity generated but not used on site. Net metering allows for unconsumed power to be sent back to the electricity grid and “banked” for later use. During sunny months, the PV system may generate extra credits that can be carried over to darker months, like rollover minutes, with an annual true-up with the utility. The rules vary by state as to how much the credits are worth and as to whether and for how long you can bank credits, so electricity savings also vary.

Part of getting the most value from your PV system is obtaining an electricity rate that rewards solar energy generators that make power during afternoon peaks. This monthly payback determines how many years it will take to pay back your initial investment in a PV system.

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