Thursday, November 19, 2015

The Solar Tax Credit Ends Next Year

On December 31, 2016 the 30% federal tax credit for solar power (solar thermal heating and solar photovoltaic systems) for consumers will end. Given the time it takes to investigate and install a solar system and the anticipated rush to install towards the end of next year, now is the time to consider if you want to install either system before the tax credit expires.

If solar power makes sense for you depends on where you live, your cost of electricity, the orientation of your roof, and if you have to borrow the money or lease the panels to install the solar panels. The price of solar panels and inverter systems has fallen significantly and may continue to fall in the next several years, but solar system cost isn’t the only variable that drives the financial returns you will receive. Rebates, tax credits, incentives and the electric rate structure are important elements in the economics of solar panels. At today’s prices the 30% federal tax credit makes solar panels a reasonable economic decision even in locations like Prince William County Virginia where there are no rebates or other subsidies beyond the federal tax credit and our rural coop electrical rates are about $0.114 per kilowatt hour.

There are several components to the cost and return of a solar system. The first cost is the cost of the system and the second cost is the design, permits and installation cost. The market cost of solar panels and installation costs have been falling for years. When I signed the contract to purchase my roof mounted solar system at the end of 2009 (though it was not installed until May 2010) the cost per kilowatt for the Sharp panels I bought was about $6,700 plus permits and installation. These days that cost is less than $1,800. I could probably have the same system that cost me $58,540 installed for around $19,000 or possibly less. 

The reduction in cost goes a long way to make solar a reasonable purchase today. Back in 2009 I was able to obtain a state rebate of $12,000 which is no longer available in Virginia. (Two other examples where I’ve lived or have family are: California and Massachusetts. California used to have rebates up to $15,000. Today, they are $0. Massachusetts used to have rebates in the $9,000 range. Now, they are around $2,000)

Though I bought my solar photovoltaic system in 2009 and live in a low cost electricity location (for now), my purchase will have paid for itself in 7.5-8 years. Not only was I was able to score a state rebate of $12,000 and use the 30% federal tax credit, I was able to sell my solar renewable energy credits (SRECs).

To calculate the return on a solar photovoltaic system you need to know how much power the solar panels actually make. My solar panels make more power than predicted by the PV Watts model instead of the expected 9 megawatts of power each year my solar panels have produced an average of over 10 megawatts each year even with a period when the system was shut down for repairs. This “bonus” was a pleasant surprise. My current electricity production rate would translate into an almost 9% return on investment (before depreciation but after the federal tax credit) for solar panels bought today. It is not a spectacular return, but respectable and would justify installing solar panels and helping to reduce the summer peak demand on the power grid.

However, because I paid much more for my solar panels, with only the power generated by solar panels my return would have been around 4% before depreciation. To take the risk of buying and installing the solar photovoltaic system a chance for additional return on my investment was necessary. The SRECs were another incentive available to me in 2010, but is no longer available for Virginia residents.

A SREC is a credit for each megawatt hours of electricity that is produced (and used by me). A 10 Kilowatt systems will produce about 12 SRECs a year. SRECs have value only because some states have solar set asides from their Renewable Portfolio Standards, RPS, which require that a portion of energy produced by a utility be produced by renewable power. Utilities in those few states buy SRECs from solar installation producers. It was a way for states to ensure that the upfront cost of solar power is recovered from utility companies (and ultimately from the rate paying consumers).

Most states at this point require their utilities to buy SRECs only from residents of their own states creating a closed market where the prices typically start off high until supply responds to that price. Other states, like Virginia, have no current solar RPS requirement. There are a couple of states, like Pennsylvania allow their utilities to buy their RPS from any resident within the PJM regional transmission organization. The Pennsylvania SREC price collapsed in early 2011 due essentially to oversupply and no Solar Alternative Compliance Payment, a penalty fee. It is to be noted that my electricity provider, NOVEC, would buy my SRECs for $15 each which is exactly what they pay for other forms of renewable energy they buy.

I can sell my SRECs to utilities in Pennsylvania and Washington, DC (because I registered my system before the market was closed to outside systems). I had my solar system certified by both Pennsylvania and Washington though at the time only Pennsylvania was a viable SREC market. Today the Pennsylvania market has collapsed and in Washington DC my SRECs are worth around $400 for the moment. It will not last, all SREC markets get overbuilt in response to a high SREC value, but Washington DC has significant land constraints limiting large commercial solar arrays. So the SREC market may remain viable for a couple of years, I hope so, but I am not depending on it.

The value of SRECs will go up and down depending on the supply and demand and regulations. RPS requirements may increase over time under the Clean Power Plan (which is currently facing court challenges to its implementation), but value created by regulations are subject to change. SRECs in Pennsylvania have ranged from $200-$300 per megawatt hour in 2010 and then collapsed and fell to $13 as the market remained open and became hugely overbuilt. Now, like Virginia renewable energy credits and solar renewable energy credits sell for the same $15. Washington DC is currently undersupplied to meet their mandate so the SRECS are currently worth $470 each. The market will respond (I only hope not too quickly or too much and the penalty for not meeting the SREC goal will fall). There was a time that New Jersey SRECS topped $670, they fell to $65 and are currently $260. 

While it lasts, for older systems like mine, the revenue from the sale of SRECs is higher than the value of the electricity the solar panels make. Today’s pricing with the federal tax credit make the return on investment in a solar photovoltaic system reasonable in almost all locations (if you do not have to borrow the money). There are other locations where various rebates and incentives and higher electricity rates make the return rich enough to support a market in financing alternatives, but it takes time and some level of expertise to optimize the solar incentives markets. Also, the incentives need to be paid for with either tax dollars (Department of Energy loan guarantees, grants and other incentives) or higher electricity rates- the renewable energy to fulfill the RPS and solar carve outs costs more than energy produced from other sources and results in higher electricity rates.
My costs and reurn for my solar pv system 5/10-10/15

One final point is solar systems do not last forever. All solar PV panels degrade and slowly over time produce less power. Solar photovoltaic panels have no moving parts so that the operating life of the solar panels is largely determined by the stability of the coating film, the quality of finish and fit of the panels and the proper sealing of the edging and connectors. Quality control in manufacturing is essential to have a solar panel that will last 25 years in sun, rain, sleet and snow.

However, there are other things that can go wrong and for systems without micro inverters a failure of one panel in an array just looks like a 2-5% reduction in power production and might not be noticed, it could be attributed to decreasing efficiency of the panels or weather variations. In Ed Begley, Jr.’s Guide to Sustainable Living, he said that over the years he had four solar panels fail, his storage batteries were replaced after 15 years and the wiring for the panels were damaged and needed to be replaced at 18 years. So, these systems are not trouble free even in sunny warm California, you cannot just install them and forget it.

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