- Renewable & Alternative Energy
Types of Incentives for Residential Solar Photovoltaic Systems
Incentives for Solar PV Systems
Installing a solar photovoltaic system for your home is a sizable investment. You can expect to pay around $4,000 dollars of every installed kilowatt, but with favorable conditions you can get a payback period of less than 5 years. After that, you will get free energy from your PV system for decades.
Solar power offers carbon-free energy, and urban areas typically have a huge rooftop area available for it. Governments have realized that providing incentives for homeowners to go solar is a great way to increase the adoption of renewable energy, and these incentives typically take one of the following forms:
- Solar rebates
- Tax credits
- Tax exemptions
Solar rebates are cash backs for installing a solar PV system, typically offered by electric utility companies trying to meet renewable energy goals (PV systems installed by homeowners count toward their goals).
For example, if your local utility company offers a 15% rebate and you spend $16,000 on a solar PV system, they will give you back $2,400. Your initial investment has just been reduced to 85% of its original value!
As you might guess, rebates are common in countries with a strong renewable energy policy. Electric utility companies are given a deadline to get a specific percentage of their energy from renewable sources, and it is cheaper for them to incentive homeowners than to install all of that solar power capacity themselves.
A tax credit allows you to deduct a portion of your solar PV system's cost when you file your next tax declaration. In the USA, the best-known example is the 30% investment tax credit from the federal government. As its name implies, the ITC allows you to deduct 30% of your PV system's cost from your taxes. For practical purposes, all solar PV systems only cost 70% of their sale prices until 2020, which is the current expiration date for the ITC.
The good thing about tax credits is that you can use them even if you purchased your PV system with a loan. If you have access to favorable loan terms, you can install a solar PV system with no cash out of your pocket and still get a huge tax deduction within one year!
This term is self-explanatory: a tax exemption means that a specific tax does not apply when you purchase a solar PV system. Unlike tax credits, which allow you to deduct a portion of the investment from taxes you would normally pay, tax exemptions are not paid at all.
With solar PV systems, two types of tax exemptions are common:
- Sales tax exemption
- Property tax exemption
The good thing about tax exemptions and tax credits is that you can combine them! For example, you still get the 30% federal tax credit even if the PV system in question was purchased free from taxes.