State incentives for residential solar systems

How well does my state government support renewable energy?

OK, so you’re looking into buying a PV system for your home or business. Like any rational consumer, you want to know first and foremost about cost. We totally agree. But before you start investigating prices, you should make sure you understand some of the larger issues at work–namely, government programs that provide incentives for citizens to install renewable energy systems.

As you’ve probably learned, renewable-energy systems, such as PV panels, are eligible for a 30 percent tax credit, with no set limit. This is a pretty good start, but it turns out that many state and municipal governments have taken other, more aggressive steps to encourage the adoption of renewable energy. This means that, depending on where you live, you can receive cash or other benefits for installing a PV system. Some guarantee that you’ll be able to secure a net-metering agreement, which essentially permits you to sell any excess power from your PV system back to your utility. Others simply create standards for utilities, with a view to achieving long-term renewable energy goals. This article provides a brief introduction to the kinds of programs and initiatives going on at the state level. This activity represents the beginning of a long-term trend away from conventional energy sources. While coal, oil and gas are unlikely to disappear any time soon, state governments are playing a key role in paving the way for a more sustainable energy future.

Net Metering
It takes money and resources to produce electricity. So it makes sense to us that we send a check to our utilities in exchange for the energy we consume each month. Well, imagine if you put your money and resources into a PV panel array and hooked it up to the electrical grid. You’d expect to be compensated for any extra electricity that you don’t use that’s piped back into the grid, right? Well, it turns out this isn’t always the case. There are a number of reasons for this.

First, there’s no nationwide law stipulating that utilities must provide net-metering agreements. (This is a lot do with the fact that utilities are typically regulated through Public Utility Commissions (PUCs) at the state level, not at the federal level.) Under net-metering agreements–also often called interconnection agreements–customers receive credit for their extra electricity, called net excess generation (NEG). Typically, the credit for any NEG is applied to your next month’s bill. In the absence of a uniform federal law, net metering laws vary on a state-by-state basis. Our interactive U.S. map outlines the details.

Second, some states have laws stipulating that only certain kinds of utilities–such as investor-owned (private) utilities–must provide net-metering agreements. And third, a lot of states have laws that require utilities to offer net metering for only a year. In these instances, after the first 12-month billing cycle, any NEG that you produce will be automatically granted to your utility–without any compensation.

So, as you can see, the kind of net metering agreement available in your state may not be perfect. Chance are, though, net metering will continue to improve in the future. As of mid-2008, there are only seven states that don’t offer any net-metering laws of any kind: Alabama, Alaska, South Dakota, Nebraska, Kansas, Mississippi and South Carolina. It’s important to know what’s required in your state, as the type of agreement available will determine the expected value of your system.

Renewable Portfolio Standards (RPSs)
RPSs are an increasingly popular way to induce utilities to increase the amount of renewable power they make available to their customers. Generally, it works like this: state lawmakers pass legislation requiring that all utilities must get, say, 15 percent of their electricity from renewable sources by 2025. Some states, like Connecticut and New Jersey, for instance, include minimum levels that must be sourced from specified sources, like solar. From there, it’s the utilities’ responsibility to meet the goal. One way they commonly do so is by investing directly in renewable alternatives like wind, solar and biomass. In this case, the utility will either build a wind farm, say, or purchase wind power from a third party and sell it on to their customers.

In some states, another approach actually creates cash incentives for homeowners and companies to install PV and other renewable energy systems. Under this approach, utilities are able to meet RPS goals by purchasing renewable energy credits (RECs). Essentially, it works as follows. Any net excess generation (NEG) from PV that is sold back to the utility represents a certain number of RECs. The utility can then apply these credits to meet RPS energy goals. So instead of sourcing renewable power from a large-scale outfit, utilities can, in effect, source directly from the roofs of individuals and companies. While not without their flaws, RECs are a clever way to encourage adoption of PV and other renewable-energy systems at the small scale while at the same time increasing the means for utilities to attain broad energy goals at the statewide scale.

Tax Incentives
As a homeowner or a businessowner, you probably don’t need to be reminded that taxes can be a real drag. Luckily, most states provide a property tax exemption for individuals and businesses that install PV systems. As a rule of thumb, PV panels will increase your property value by about 20 times your energy savings in the first year. (This logic stems from the fact that, were you to sell your home, the buyer would be able to afford a larger mortgage because of reduced monthly energy costs.) Depending on the size of your system, and on where you live, your property value could increase by tens of thousands of dollars. So it’s a good thing that your tax liability won’t increase even though your property value will. Some states that have an income tax provide modest exemptions on that front.

Cash Incentives
Last, but certainly not least, we have state-sponsored rebate programs. In other words, CASH. As you know, solar power is still more expensive than conventional forms of electricity. As advances in technology and manufacturing processes progress, we’ll see PV prices continue to drop. Without healthy demand, however, there’s little incentive for producers to pursue such advances. In an effort to encourage demand in the interim, many state governments sponsor programs that provide cash incentives to individuals (and in some states, businesses) that install PV systems. The incentives typically take the form of a per watt rebate, ranging from $1.50/watt to $4.00/watt (New York). Some states, like California, have established a graduated system to achieve statewide renewable-energy targets. In practice, this means that as the amount of installed PV increases overall, the per watt incentive declines in predictable steps. (If you live in CA, this means that if you’re considering a PV system, it’s in your interest to act fast!)

Depending on where you live, these rebates can do a lot to offset costs. It’s not unheard of to see these programs cover 40 to 45 percent of the costs of a PV system. Lets assume, for example, that you live in New Jersey and that you’re installing a 3.6-kW PV system. Through their Clean Energy Rebate, you qualify for a rebate of $3.50 per watt of PV. Bear with us, the math is simple: 3.6 kW x 1,000 watts/kW = 3,600 watts. 3,600 watts x $3.50/watt = $12,600. It’s reasonable to assume that you could get your 3.6-kW system installed for about $24,000 or less, so the NJ state rebate has already taken care of half your costs. Add to this the 30-percent federal tax rebate, and take account of the gains in terms of property value and saved energy costs, and you’ll begin to see the conditions in which solar energy is a favorable investment. (NOTE: due to its popularity, rebate funds have run out for 2008. As such, the NJ rebate program is NOT currently accepting applications. The state’s Board of Public Utilities (BPU) is set to meet in early December, so check back in then–we may know what funding levels will look like for 2009.)

The purpose of this article was to outline some of the larger trends that will effect your bottom line when investing in PV. Moving on from here, you’ll want to look deeper into system costs and performance, financing options, payback period and return on investment.

And for more information on state-based rebate programs and other incentives, see our U.S. map of state-sponsored incentives.