How Do Renewable Energy Credits Work

How Do Renewable Energy Credits Work – While the initial cost of solar installation may seem high, it is important for your customers to know that once you take advantage of the credits and discounts, the total cost can be reduced significantly. The federal government and many states have implemented policies to reduce solar installation costs to encourage investments in solar energy.

In this article, we’ve provided an overview of common incentives and how they work so you know what benefits may be available to customers in your region. It should be noted that these policies benefit customers who purchase their solar installations and are not available to customers who use their systems through leases or PPAs.

How Do Renewable Energy Credits Work

Perhaps the best-known solar incentive, the Investment Tax Credit (ITC), is US federal policy. This gives home and business owners a tax credit of 30% of the cost of a solar installation. This allows homeowners to deduct 30% of the cost of solar installation from their federal taxes (their tax liability). For example, if a solar installation costs $10,000 and the owner owes $5,000 in taxes, the owner can deduct 30% ($3,000) of the cost of the solar installation and pay only $2,000 in taxes that year.

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If the amount of the tax credit exceeds the owner’s tax liability, the excess amount can be applied to the following year’s tax. Referring to the example above, if the homeowner just borrowed $2,000 instead of paying $5,000 in taxes, the $3,000 in tax deductions would be returned to them the following year, allowing them to avoid paying taxes in the first place. year and save $1,000 in taxes the following year. It should be noted that the ITC can only roll into the next year and not beyond.

Figure 1. Graph showing how the value of the Investment Tax Credit (ITC) has decreased over time.

The ITC was originally scheduled to expire in 2016 but has been extended and will be completed within the next 6 years. In Year 2020, ITC will be reduced to 26% of system cost and to 22% in 2021. Effective January 1

In the year In 2022, credit for new homes will drop to zero, while commercial and consumer credit will be reduced to a fixed 10%. For homeowners who are planning to install solar and have the necessary income tax obligation to benefit from the ITC, it may be worth investing upfront before this incentive expires.

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For business customers, the federal government allows business owners to amortize their solar installation costs over the years through the Modified Accelerated Cost Recovery System (MACRS). Although the name sounds complicated, the concept is very simple. Depreciation refers to the reduction in value over time associated with an investment project, primarily due to wear and tear. For tax and accounting purposes, companies may depreciate their long-term assets, such as solar installations, over time. In the case of MACRS, companies can reduce the cost of their solar projects in the short term.

MACRS allows companies to deduct solar installation costs from their taxable income for 5 years. This helps the company save money and allows them to quickly recoup the cost of solar installation.

Congress also allowed something called “bonus depreciation” for the first year. This “bonus” allows the company to deduct 50% of the cost of the system from its taxable income in the first year and continues to decrease under the MACRS standard.

An important note to note in MACRS is that if ITC is claimed on a solar installation, the total amount that can be deducted must be halved from the 30% of the ITC (so a company can only claim 85%). system cost).

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Many states, counties, and municipalities offer additional incentives to residents who install solar, although the incentives available vary widely by location. Below, we explain the most common policies that states and local governments use to encourage solar energy.

The DSIRE database is a good starting point for determining whether your state offers such incentives. The Department of Energy provides a database of financial incentives for clean energy projects, which can be filtered by state, type of clean energy, and which customers are eligible. – must.

Many states use a policy called the Renewable Portfolio Standard, which requires utilities to generate a certain percentage of their total electricity from renewable energy. A solar renewable energy credit (SREC) is a purchasable credit generated by solar installations that utilities can purchase to meet that percentage. For every 1,000 kWh generated by a solar plant, a SREC of electricity is generated, which the owner can sell on the SREC market in his state.

A typical 5 kW load generates five to eight SRECs per year. The cost of these SRECs depends on the market value in the customer’s state (which changes over time). For example, between March 2018 and February 2019, the price of a SREC in the Washington, DC market. It’s between $420 and $290. In markets with high SREC rates, solar customers can generate hundreds or even thousands of dollars in additional revenue. Talk about motivation!

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SRECs are a type of performance-based incentive (PBI) – a category of incentives based on the performance of the solar system. Other examples include Feed-In-Tariffs and certain discounts that pay solar customers based on the amount of energy they install and return to the grid.

In addition to the federal income tax credit available under the ITC, many states offer state tax credits and rebates for solar installations that can save customers hundreds or even thousands of dollars. These incentives can be fixed amounts based on taxpayers or the number of people in the household, or they can reimburse the owner based on the amount of energy produced by the facility (another performance-based incentive). For example, Montana residents are eligible for a $500 tax credit.

Many states exclude the cost of a solar project from property or sales taxes. A total of 38 states offer property tax exemptions for solar installations. Therefore, even if the customer benefits from the added value in their property with the installation of solar energy, the property tax will not increase. Additionally, 29 states offer sales tax exemptions for solar PV components and/or installation work that reduce the initial cost. These incentives make solar energy more affordable for businesses and homeowners.

Taking the time to understand the incentives available to your customers is important for any solar professional, as these options can significantly reduce customer costs without hurting your margins. We hope this discussion of the most common incentives will help educate potential customers about programs that can help them go solar!

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Solar Finance 101 Part 4 of a five-part series that serves as an introduction to the financial aspects of solar installations: Our Fall Campaign Ends Tomorrow Our goal is to raise 5,000 donations before September 30th. Gifts to the reader help us to be free, whether it’s adding critical context to unexpected events or covering important but not new ideas. Make a gift today to help us achieve our goals. x

When people find out I’m an energy journalist, I often ask how ordinary people can support clean energy. I’ve learned from frequent experience of killing conversations that people who ask this question don’t want to hear about politics or politics. They want to know how they express themselves through their purchases.

So can you afford clean energy? The answer is yes! In fact, there are all sorts of ways to do this, some of which I plan to cover in my next post.

But to understand and evaluate them, one must first grapple with the tedious but important mechanism at the heart of nearly all US clean energy purchases.

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RECs aren’t what you’d call an exciting topic, but if you want to buy clean electricity in the US, you’ll have to admit it. So let’s go in.

RECs are primarily a response to a need: the need to buy green electricity. Why should people buy? The main reason is that policy in many states requires utilities to purchase green electricity through the Renewable Portfolio Standard (33 states now have some version of the RPS). In addition, government agencies often seek to obtain a certain percentage of their electricity from clean suppliers. In addition, companies often want to buy green electricity for popular purposes – “Powered by 100 percent clean electricity!”

In addition, concerned individuals often want to show their support for a clean energy transition by purchasing green electricity directly.

Remember an important fact about electricity: when

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