Since 2006, the U.S. Government has offered a Solar Investment Tax Credit (ITC), a credit of 30% of the costs of installing a solar energy system on a residential or commercial property. It’s a huge reason solar has been so successful in the U.S. in the last decade. So what happens if it is allowed to expire, as it’s scheduled to do on December 31, 2016? Calamity, maybe.
With the current cost of solar energy systems around $3,500 to $4,000 per kilowatt, an average 5 kW system costs between $17,000 and $20,000. The ITC reduces that burden to between $12,000 and $14,000 at tax time the year after installation. That’s a huge savings! In many states without good solar tax credits and rebates of their own, the ITC is the only way to reduce high system costs.
The most important factor here is that the ITC makes the numbers make sense for solar wherever you are in the country. Without it, payback times for solar power systems increase by 4 to 5 years, and the internal rate of return of an investment on solar decreases by about half.
In most states, solar makes sense on purely financial grounds. According to our recent survey of all 50 states and the District of Columbia, the internal rate of return for an investment in solar outpaces the S&P 500 in 33 states. That means that residents in 33 states would do better investing in solar than they would investing in a mutual fund pegged to the S&P index.
Without the ITC, there would be only 6 states where a solar investment beats the S&P, and only 5 states where payback times would be less than 10 years. That’s bad, and it doesn’t even consider the fact that other state and local incentives are set to expire soon, too. Here’s how that would look:
So will it really be that bad if the ITC goes away as scheduled on December 31, 2016? Maybe.
According to a 2014 study of solar energy in the U.S.(PDF), published by the Lawrence Berkeley National Laboratories, the “installed” prices for solar energy systems have been falling by about 5% per year for the last 15 years (see the figure from the LBNL report below), and that trend is likely to continue into the future.
So that $20,000 system from above will only cost around $17,000 in 2017. It isn’t enough to offset the missing ITC, but it’s enough to make payback times and IRR look a little better.
Then again, the pace of dropping installed prices might increase, considering that so many other places around the world, like Germany and Australia, have super low prices for solar, about half the cost of U.S. prices. For now, though, in the United States, the only way to be sure you’re getting the best deals now is to take advantage of the 30% ITC while you can.