Tax Incentives for Solar Power

“The amount of sunshine energy that hits the surface of the Earth every minute is greater than the total amount of energy that the world’s human population consumes in a year!” – Home Power Magazine

Solar energy, heat and light from the sun, has long been used by humans. Solar power, which is the conversion of sunlight into electricity, is a newer technology. Electricity is generated directly by using photovoltaics, by using concentrated solar power, or by creating hydrogen fuel by splitting water using artificial photosynthesis.

A tax incentive is a tax provision designed to encourage a certain type of behavior. Congress has provided various incentives to encourage the development of solar power. These incentives include direct financial incentives at both the federal and state government levels as well as indirect incentives, including the requirement mandated by many states that conventional electric utilities purchase excess electricity generated by private solar energy systems.

The current tax breaks last until 2016. Commentators say this gives the solar power industry “policy certainty” “that will attract investment, expand manufacturing and lower the cost of solar energy for consumers.”

Direct Financial Incentives

Internal Revenue Code Section 48 (IRS§48) provides a tax credit equal to 30% of the cost of certain energy property including “equipment which uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat…[and] equipment which uses solar energy to illuminate the inside of a structure using fiber optic distributed sunlight…”. This credit applies “with respect to periods ending before January 1, 2017”. The credit can be used by businesses that install solar equipment, and to individuals who install qualifying systems on homes they use as a residence (it does not have to be the homeowner’s primary residence, second homes are eligible). These credits are also available for geothermal heat pumps and small residential wind systems. There is no cap on the amount of credit.

The American Recovery and Reinvestment Act of July 2009 established the Section 1603 Treasury Grant Program. This program allows qualified taxpayers to receive a cash grant equal to the tax credit amount as defined in IRC§48 in lieu of the tax credit. This program (as extended in 2010) applies to projects that are begun in 2009, 2010, and 2011 and completed by 2016. Therefore, individuals and entities that cannot use the tax credits, or can only use them over a period of years, can derive an immediate benefit. There is no dollar limit to either the tax credit or cash grant programs. Thus, the federal government is effectively subsidizing 30% of the cost of all solar energy projects placed in service by 2016.

To take advantage of the credit, file Form 5695, Residential Energy Efficient Property Credit, with your 1040.

Effective July 2009, Pennsylvania established the Pennsylvania Sunshine Solar Rebate Program which grants cash rebates to certain residential and commercial owners of solar photovoltaic and solar water heat systems. The program was funded with a special issue of $100 million of state bonds. The program will expire when these funds are fully used. Residential customers receive $.75 per watt up to the lesser of $7,500 or 35% of installed costs. Commercial customers receive $.50 – $.75 per watt up to the lesser of $52,500 or 35% of installed costs. Work must be performed by a program-approved installer. The installer must apply for the rebate.

Indirect Incentives

In 2004 Pennsylvania promulgated the Alternative Energy Portfolio Standards Act (AEPS). This law requires that an annually increasing percentage of electricity sold to retail customers in Pennsylvania is from alternative energy sources. The program requires that retail energy suppliers utilize Alternative Energy Credits (AECs) – sometimes referred to as Renewable Energy Credits (RECs) – to demonstrate compliance with the standard. An AEC is created each time an alternative energy facility produces 1,000 kWh (or 1 megawatt-hour) of electricity.

The AEPS creates two tiers of alternative energy sources that qualify for credits. Tier I includes energy derived from solar photovoltaic energy and solar thermal power. For each reporting year (which runs from June 1 – May 31) retail energy suppliers are required to meet a Base Tier I Requirement, a Solar Photovoltaic Requirement, and a Tier II Requirement. This means that energy suppliers have a separate minimum requirement related to solar specific AECs /RECs which are sometimes referred to as Solar Renewable Energy Credits (SRECs). The price of AECs and SRECs fluctuates with the market. In the 2010 energy year (June 1, 2009 – May 31, 2010) the weighted average price for SRECs was $325.00 with a price range of $235 – $415. In contrast, the weighted average price for base Tier I AECs was $4.77 and the price for Tier II AECs was $0.32. Solar energy system owners can sell their RECs by using an approved broker/aggregator. There is currently considerable uncertainty about the likely future price of SRECS.

The Pennsylvania Utilities Commission established net metering rules in 2006 pursuant to the AEPS. In Pennsylvania, investor-owned utilities must offer net metering to residential customers that generate electricity with systems up to 50 kW in capacity and nonresidential customers with system capacity up to 3 megawatts. Systems eligible for net metering include those using solar photovoltaics, solar thermal energy, wind energy, geothermal energy, biomass energy, and fuel cells, among others.