Shrinking state rebates: A worrisome trend?

In recent weeks, a number of state governments have announced plans to cut back the per-watt rebate offered to residents who purchase a solar energy system. In October, the Connecticut Clean Energy Fund (CCEF) announced a downward revision ranging between $1.00 and $1.80 per watt, depending on system size. Xcel Energy, Colorado’s largest investor-owned utility and biggest provider of solar energy rebates, recently reduced the amount paid to solar owners in exchange for solar on-site renewable energy credits (SO-RECs). The level was cut by a dollar, from $2.50 to $1.50 per watt. The rebate, which stands apart from the SO-REC payment, will remain at $2.00 per watt, meaning that Colorado homeowners can expect to receive about $3.50 per watt of installed DC solar power. Not bad at all, but a far cry from the $4.50 ($2.00/watt rebate + $2.50/watt SO-REC payment) that was available up ’til now. (Details are outlined in a recent letter (PDF) from Robin Kittel, Director of Regulatory Administration at Xcel.)

Following the actions of Connecticut and Colorado, California and New Jersey have opened the issue for debate, and lawmakers from New York are also considering a reduction in that state’s juicy $3-$5/watt rebate. For individuals looking to make a solar purchase, it may be fair to ask, “What the heck is going on here?” And, “Should I be worried about my ability to finance a solar energy system?”

An answer to the first question is offered by the Connecticut Clean Energy Fund:

On October 3, 2008, President Bush signed into law the “Energy Improvement and Extension Act of 2008,” which extended for eight years the 30 percent Federal Personal Income Tax Credit on qualified solar systems, but eliminated the $2,000 incentive limit.  The federal tax incentive benefits Connecticut’s electric ratepayers by increasing the allowable federal contribution, thus decreasing the need for the CCEF’s ratepayer funded contribution for residential solar systems in Connecticut.

To maintain the same percentage of “out-of-pocket” expenses for residential solar systems as was previously offered to applicants under the CCEF’s Solar PV Rebate Program, the CCEF Board has approved reductions to the solar rebate cap levels (excluding solar lease applications) as follows:

Previous Rebate Level: $5.00 for the first 5kW; $4.30 for the next 5kW

New Rebate Level: $4.00 for the first 5kW; $2.50 for the next 5kW

These new solar rebate levels will apply to all solar systems commissioned on or after January 1, 2009. The previous rebate levels will continue to apply to those solar systems commissioned prior to January 1, 2009.

The extension in October of the Investment Tax Credit (ITC) means that you can claim a tax credit representing up to 30 percent of the costs of your solar energy system. For a 3-kW residential system costing $27,000 (at $9.00 per installed watt), the eligible credit would be worth over $8,000. There are limits on how much of the credit you can take in a given year, but it’s clear that the new federal rules are a real boon for buyers of solar energy systems. So, from the state lawmakers’ perspective, it makes sense to reduce the rebate levels available. As Barron’s blogger Eric Savitz notes,

… Xcel said that because customers will get a bigger boost from Uncle Sam, it could cut its own discount without much of a change in overall consumer system costs. The [Denver Post] story notes that Xcel now estimates that a typical rooftop solar system of 4.5 KW will cost customers $14.175 after all credits and rebates, versus $13,750 before Xcel’s credit reduction. While not a big change in overall costs, the move does have the effect of sharply increasing upfront costs, since the tax credit is not received immediately.

What does all this mean for you, a potential solar buyer? Should you be worried? As noted in the preceding quotation, a lower per-watt rebate need not sink your solar aspirations. Bolstered by tax support at the federal level, you can still reduce the financial burden associated with purchasing a solar PV system. A lower per-watt rebate does mean, however, that you’ll likely need to foot a bit more of the upfront costs. Of course this is a pain in the butt for many of us, but there are many new financing options and lenders available.

In the end, the move by states to reduce individual rebate payouts shouldn’t be viewed as a new era of doom and gloom for renewable energy. As solar technologies continue their upward march in efficiency (and downward march in price), prospects will continue to brighten. And as the market for renewable energy credits (RECs), like New Jersey’s, are strengthened, there will be increased opportunities for PV owners to derive cash value from their system’s output.