Solar panels generate electricity on the roof of a house in Rockport, Massachusetts, the United States, June 6, 2022. Image captured by a drone.
Brian Snyder | Reuters
When Josh Hurwitz decided to solar-power his home in Connecticut, he had three big reasons: to reduce his carbon footprint, to eventually store electricity in a solar-powered battery in case of a power outage, and — most importantly — to save money.
Now he’s on track to pay for his system in six years and save tens of thousands of dollars over the next 15 years while hedging against inflation in utility rates. It works so well that he’s preparing to add a Tesla-made battery so he can store the energy produced. At the core of the deal: tax credits and other benefits from both the state of Connecticut and Washington, DC, he says.
“You have to get the money to work,” Hurwitz said. “You can have the best of intentions, but if the numbers don’t work, there’s no point in doing it.”
Hurwitz’s experience points to one benefit of the Anti-Inflation Act passed in August: the expansion and extension of tax credits to encourage the spread of home solar power systems. According to a report by Wood Mackenzie and the Solar Energy Industry Association, adoption is expected to grow 26 percent faster because of the law that extends tax credits, which were due to expire in 2024, to 2035.
Those credits cover 30 percent of the system’s cost — and for the first time, there’s a 30 percent credit for batteries, which can store newly generated electricity for use when needed.
“Most importantly, the law gives industry and consumers peace of mind that the tax credits are in place today, tomorrow and for the next 10 years,” said Warren Leon, executive director of the Clean Energy States Alliance, a bipartisan coalition of state energy agencies. “Rooftop solar systems are still expensive enough to warrant some subsidies.”
California’s decision to net meter solar energy
Certainty is what is elusive in the solar space, where frequent policy changes are making the market what one industry leader put it, “a solar coaster coaster”. Just as the expanded federal tax credits went into effect, on December 15 California cut another major incentive that allows homeowners to sell excess solar energy generated by their systems back to the grid at attractive rates, which does the math in the largest US state and its states will once again confuse the largest solar power market – although the changes will not come into effect until April next year.
Taking state and federal changes together, Wood Mackenzie predicts that California’s solar market will actually shrink sharply in 2024, by as much as 39%. Before the Inflation Reduction Act stimulus was factored in, the consultancy forecast a 50% drop with the change in California policy. According to Wood Mackenzie, residential solar comes out of a historic district with 1.57 GW of installed capacity, up 43% year over year, and California accounts for just over a third of the total.
For potential switchers, tax credits can quickly cover some of the upfront cost of making the switch to being green. Hurwitz took the federal tax credit for his system when he installed it in 2020 and is preparing to add a battery now that it, too, comes with tax credits. Some contractors offer deals where they pay the upfront cost — and claim the credit — in exchange for arrangements to lease the system back.
Combined with electricity savings that homeowners don’t have to purchase from utilities, the tax credits can pay for themselves in as little as five years for rooftop solar systems—and save $25,000 or more in two decades after the initial investment is recouped.
“Will this growth have legs? Absolutely,” said Veronica Zhang, portfolio manager of the Van Eck Environmental Sustainability Fund, a green fund that’s not exclusively focused on solar. “With utility rates rising, if you’ve even thought about it, it’s a good time to move.”
How to calculate installation costs and benefits
This is how the numbers work.
Nationally, the cost of solar power in 2022 ranges from $16,870 to $23,170 after tax credit for a 10-kilowatt system, the most common bid solicited on EnergySage, a Boston-based solar panel bid comparison site batteries. Most homes can use a six or seven kilowatt system, said EnergySage spokesman Nick Liberati. A 10-12-kilowatt battery costs about $13,000 more, he added.
There is significant variation in these numbers by region, size and other factors specific to the home, said EnergySage CEO Vikram Aggarwal. For example, in New Jersey, a 7-kilowatt system costs an average of $20,510 before credit and $15,177 thereafter. In Houston it’s about $1,000 less. In Chicago, this system costs nearly $2,000 more than in New Jersey. A more robust 10-kilowatt system costs more than $31,000 pre-credit in Chicago but $26,500 in Tampa, Fla. All of these average prices are as reported by EnergySage.
The effectiveness of the system can also vary based on home-specific factors, including the placement of trees on or near the property, as we discovered when we asked EnergySage’s online bidding system to look at specific homes.
Bids for a home in suburban Chicago after the federal loan were as low as $19,096 and as high as $30,676.
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These costs are offset by electricity savings and government tax breaks that, according to bids, will recoup the cost of the system in just 4.5 years. Contractors claimed that power savings and government incentives could save an additional $27,625 over 20 years on top of capital costs.
Alternatively, consumers can fund the system and still own it – we’ve been quoted interest rates ranging from 2.99 percent to 8.99 percent. That eliminates consumers’ upfront costs but reduces savings because some of the avoided incidentals go towards paying off interest, Aggarwal said.
The key to maximizing savings is knowing the specific regulations in your state — and getting help understanding the often complex contracts, said Hurwitz, who is a doctor.
Energy storage and excess power
Some states have more generous subsidies than others and more consumer-friendly rules that dictate that utilities pay higher prices for excess electricity that home solar systems generate during peak production times or even take from homeowners’ batteries.
California, up until this week, had one of the most generous rules of all. However, state utility regulators agreed to make utilities pay much less for excess electricity they need to purchase after energy companies argued that tariffs were too high and raised electricity prices for other customers.
Wood Mackenzie said the details of California’s decision made them appear less onerous than the company had anticipated. EnergySage says the payback period for battery-less California systems will be 10 years instead of six after the new regulations take effect in April. The company estimates that the savings in subsequent years will be around 60 percent less. Systems with a battery that pays for itself in 10 years will be little affected, according to EnergySage, as their owners keep most of their excess electricity rather than selling it to the utility.
“The new [California rules] certainly extend current payback periods for solar and solar-plus storage, but not by as much as the previous proposal,” Wood Mackenzie said in the Dec. 16 report. “By 2024, the real impact of the IRA will begin to bear fruit.”
The more expensive the electricity from a local supplier, the more sensible it is to use solar energy for your home. And some contractors back claims of energy savings with agreements to pay part of your electricity bill if the systems aren’t producing as much energy as promised.
“You have to do your homework before you sign,” Hurwitz said. “But energy costs keep going up. That’s another hidden incentive.”