It’s not Sunset for Solar Subsidies…Yet.

By Deane Hinton

Installing rooftop solar panels is costly, inefficient and offers a poor return on investment. At least that would be the case were it not for large government subsidies and favorable policies that create incentives to make rooftop solar a viable, but not quite lucrative, investment. This is made possible by the Solar Investment Tax Credit (ITC) offered by the federal government, which reimburses a portion of the cost of purchasing and installing solar panels, as well as net-metering policies, which set favorable rates for the excess energy generated that goes back into the grid.

The Solar ITC first became law in 2006, was renewed in 2008, and was set to expire at the end of 2016. It currently allows taxpayers to receive a one-time credit for up to 30 percent of the cost of installing rooftop panels and/ or wind turbines, which are much less popular than solar panels. Between 2008 and 2014, property owners received an estimated $24 billion in federal subsidies.

Congress extended the Solar ITC in December with adjustments, including a “step-down” schedule. The ITC will remain at its current rebate allowance of 30 percent through the end of 2019. Thereafter, it decreases to 26 percent in 2020 and 22 percent in 2021. In 2022, it will decrease to the original levels proposed for 2017 – 10 percent for businesses, with no rebate for individuals. Additionally, the extension includes a “commence-construction” clause, which means that entities undergoing the process of installation that have interconnected systems by 2023 will still qualify for tax credits.

The idea behind the subsidy is to spur growth in renewable energy and reduce demand for fossil fuels. While well intentioned, the policy has had some unforeseen consequences and has been less beneficial than expected. For example, makers and installers of solar panels have used the ITC to take advantage of consumers.

Buying and installing solar panels is not cheap; on average, it costs twenty to thirty thousand dollars to purchase and install a set. Further, it is a one-time tax credit, meaning that the rebate would only apply for that year’s tax bill. Most Americans would not be able to afford the upfront cost of purchasing and installing panels and even if they could, odds are their income tax liabilities would be smaller than the full rebate for which they would qualify.

Therefore, most households that have installed solar panels have done so by leasing them from the companies that makes them. These companies claim the tax credit and charge low interest rates for the length of the lease (20 or so years). This creates several complications for consumers. It makes it harder for them to move or sell their houses, as it is difficult to move the panels and transferring the lease on the panels can be complicated. Also, while current policies and energy prices in most states make it so that consumers still come out ahead while leasing, this can change. The price for electricity might go down, or the metering policy in the area might change, making it so that the consumer is actively losing money on the panels rather than benefiting.

Another issue is that solar energy companies are not soluble without the ITC. The Solar Energy Industries Association estimated that if Congress had permitted the ITC to expire at the end of 2016, it would have cost 80,000 jobs and the installation rates of new panels would have plummeted. These companies are just not economically viable without subsidies and while reducing carbon emissions is a worthwhile goal, adoption rates have been small and the actual production of panels creates a significant amount of pollution. The Institute of Electrical and Electronics Engineers points out that manufacturing solar panels, as in all manufacturing, requires energy and it can take anywhere from six months to two years of use for a panel to offset the amount of energy used in its creation.

Net metering is another major point of contention. This refers to the system by which electric utilities “buy back” excess energy generated by rooftop solar panels. Specific implementation varies by state, but in general, electric utilities buy solar-produced energy from households at the same price the household would pay utilities for an equivalent amount of conventionally produced energy.

In most cases, depending on the amount of sunshine, household electricity use, and the individual state’s policy, someone with rooftop paneling should come out ahead. It is the main economic incentive for installing panels.

The problem, as power utility companies assert, is that paying net meter rates does not take into account the cost of maintaining the energy grid. In other words, the rate people pay utilities for conventionally produced electricity includes the cost of generating the electricity and the cost of maintaining the grid, while those who sell back solar energy through the grid are doing so at that same rate without a price reduction to offset grid maintenance costs. Given the potential strain on the grid caused by solar energy sellers, utility companies may end up charging everyone higher rates in order to account for the gap in maintenance revue.

However, it is not that simple. The Solar Electric Power Association (SEPA), argues that the value of the electrical grid is not really clear, nor is the value of how solar buy- backs affect it. Due to this uncertainty, individual states, which regulate the metering rate, are seeking compromise solutions. Many are looking into adding a flat fee charged on each utility bill for access to the grid, others are looking for a middle ground between the current net retail rate and utility-established wholesale rate, and yet others are proposing capping the amount bought back at the net metering rate.

For example, Nevada has lowered the buyback rate and instituted fees to help the utility companies cover their costs. This has led to rooftop solar companies fleeing the state, as it is no longer a viable option for their business model; it has also created a backlash from those who already had panels installed, as it is no longer economically profitable for them. Other states have taken a more measured approach and have only made small changes.

There is no doubt that consumers are being asked to carry an added burden, brought about by subsidies and other incentives, which benefit only those who can afford to buy rooftop solar panels and the companies that make and sell or lease them. The rooftop solar industry is simply not economically viable on its own.

Then again, the entire point of government subsidies and financial incentives like these is to nurture an industry (and eventually make that industry self-sustaining), lead to further innovation, and create a greater reliance on renewable energy sources. Will the rooftop solar model ever become viable? Is it fair for many to shoulder a burden that currently benefits only a few, in the hopes of a future breakthrough? The answers to these questions require proper consideration in order to chart a way forward.

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