Sun’s Setting on Solar Tax Incentive
Updated: Mar 30, 2020
If you’re considering solar panels for your home, the time to move forward with planning and installation might be sooner rather than later. The federal Solar Incentive Tax Credit will phase out over the next two years. This significant credit has historically provided a 30% credit on your tax bill for the cost of installing a residential solar panel (PV), based on the year construction commences. Beginning in 2020, this credit drops down to 26%, then to 22% in 2021, before disappearing in 2022. If you’re considering solar panels as an option for your home, you might want to make a decision while there’s still time to take advantage of these important tax credits.
To start, the financial benefits of solar panel installation include monthly savings on utilities, potential solar credits based on where you live, and an increase of home value (average is $15,000). Pair that with a reduction in greenhouse gas emissions, water consumption, and taking advantage of a renewable source of energy (thank you, sun), and you’ve got a environmentally and financially sustainable investment.
But you shouldn’t start your lowering-energy-consumption journey with a several-thousand-dollar investment in solar panels. Before you take the plunge, focus on smaller projects. Use high efficiency lighting and appliances, improve weatherizing on your home, and invest in smart technology to lower your energy consumption.
You should also consider site selection. To be effective, you’ll need at least 300 square feet of unshaded roof. Shade negatively impacts the effectiveness of solar panels. Southern exposure is ideal, followed by western and eastern exposure. A shade analysis is highly recommended to evaluate potential output from your chosen site. PVWatts can estimate potential solar output in remarkable detail based on your location.
If your roof is in poor condition or needs to be replaced, you should replace your roof before installing solar. Last, if you have a Homeowners Association, make sure solar panels are permitted in your neighborhood. Last, the upfront investment may need to be paid in cash or financed with a solar loan. If you’re interested in the energy savings without the upfront cost, you may want to consider leasing equipment. However, purchasing a system outright helps you maximize the financial benefits.
To determine what size system you need, check out your energy bill to estimate your annual energy consumption (in kilowatt hours). You’ll want a system that meets your annual consumption. Systems are sized by kilowatts. You can expect 1100 kWh/kW of production in the shade and 1500 kWh/kW in the sun. Keep in mind that your energy consumption will never perfectly match your generation.
Example: At my house, we generate 625 kWh per month on average, or 7500 kWh per year. To produce enough energy from solar panels on our sunny south-facing roof, we need a 5 kW system.
Since this is a pretty pricey project, you should receive bids from at least 3 companies. Compare the size of the system (in watts) with the total price and find the price per watt. This may range between $2.20-$4.00 per watt, but the average in Texas is $2.87.
Example: I should expect bids on my system to fall between $11,000 and $20,000 on my 5 kW system.
To figure out the value of the system and the expected payback period, we need the gross cost of the system, annual savings on energy consumption, savings credits and rebates (local and federal), and the impact from solar credits. Your combined costs of the system set up is the gross cost less the value of local incentives and rebates less the federal solar incentive tax credit. Compare the combined costs with the annual energy savings and rebates. A typical payback period is 8 years for a solar system with a life of about 25-35 years.
At my house, the payback period is 12+ years, longer than average, but still within the first half of the equipment’s useful life.
All in all, there are lots of considerations involved in installing solar at your residence. But if it’s on your mind, you may want to make a decision while federal incentive tax credits are still available.