Federal Policies
FEDERAL TAX INCENTIVES
In the Energy Policy Act of 2005, Congress created new and expanded federal income tax credits (ITC) for solar energy projects. As a result, the federal government now plays a much more significant role in supporting both commercial and residential PV systems.
Specifically, the Act increased the federal ITC for commercial PV systems from 10% to 30% of system costs and also created a new 30% ITC, capped at $2000, for residential solar systems.
For businesses, when combined with incentives for accelerated depreciation of solar equipment, these credits help reduce the capital cost of new solar energy equipment by up to 60%. For homeowners, these credits provide the first federal incentives for solar power since 1985.
The new ITC provisions went into effect on January 1, 2006 for an initial period of 2 years, and were extended for an additional year. Unless extended, the residential ITC will expire and the 30% commercial ITC will revert back to 10% on January, 1, 2009.
The economic value provided by the federal tax credits has implications for state and utility PV grant programs. Based on analysis by Lawrence Berkeley National Lab and the Clean Energy States Alliance, the economic value of the federal tax credits is strongly dependent on PV system size as well as the type and tax status of the system owner. See: CESA Case Studies of State Support for Renewable Energy, Exploring the Economic Value of EPAct 2005 PV Tax Credits, by Mark Bolinger and Ryan Wiser, Berkeley Lab and Edwin Ing, Law Offices of Edwin T.C. Ing (2007) at http://www.cleanenergystates.org/CaseStudies/LBL_Exploring_Value_PV_TaxCredit.pdf
Commercial PV system owners with tax liability benefit greatly from the current ITC as do owners of small residential systems. On the other hand, larger residential systems and systems owned by entities with limited or not tax liability (municipalities, non-profits) gain little from the federal credits. The resulting implications for state grant programs is that they can reclaim some of the ITC’s value by reducing the size of grants, and still leave system purchasers no worse off then before the EPAct. Reducing state solar grant size can help to stretch program budgets over a larger number of PV installations, without unduly suppressing growth in the market. Furthermore, by targeting state grant reductions at those specific system sizes and types that stand to benefit most from the ITC – commercial and small residential systems – state solar program managers can help to level the playing field and ensure that the ITC does not favor certain market segments while disadvantaging others (such as tax-exempt and larger residential systems).
However, state programs should take note that reducing solar grant size by the increased value provided by the ITC may not be ideal for several reasons. First, demand for solar modules and increased silicon feedstock costs have increased PV module costs higher in recent years. Finally, unless extended, the expanded PV tax credits will expire at the end of this year.
To date, several state PV programs, including
The Solar Energy Industries Association created the Guide to Federal Tax Credits for Solar Energy to provide comprehensive information as to how the incentives for both commercial and residential applications may be claimed. The guide is available at http://www.seia.org/SEIAManualversion1point2.pdf.