What is impact of the expiring solar tax credit?

Some people have expressed concerns about the expiring solar tax credit. Let’s have a look at the impact.

SCTY is probably the most efficient installer in the US. Every quarter they report their per watt installation cost. Last quarter it was $2.91 per installed watt. However, this number (for residential) was higher than the true cost because of the increasing contribution of the higher cost commercial installations. The true figure for residential installations is probably more like $2.80 per installed watt.

The tax credit is 30% for residential and it is set to disappear on January 1, 2017 (not in 2016 as some people seem to think). So it currently costs $7000 to install a $10,000 system. Please check to make sure that the entire $10,000 is eligible for the credit (maybe only some parts of the installation costs get the credit…all materials and all labor costs may not be entirely eligible for the credit). Note: if the entire installation cost is not eligible then the cost lowering effect is less now.

SCTY has stated a goal of achieving a cost of $2.50 per installed by 2017 when the credit is set to expire. So let’s assume inflation is 2% per year and they achieve their goal. $10K divided by $2.80 times $2.50 is $8928. $8928 in 2017 dollars is $8660 in today’s dollars. So while some people may have assumed that going from $7000 to $10,000 at expiration of the credit is an 42.9% price increase, they have not figured in the change in installation efficiency and inflation between now and then. The increase would only be $23.7%. Again, this assumes that the entire installation cost is subject to the credit; if it is not then the impact of the tax change will be even less.

We should also remember that with each passing year, SCTY will get more efficient, we will have more inflation, and the utilities will increase their rates more than SCTY’s 2.9% annual increase. Considering these additional factors, I think it’s highly likely that the real dollar cost of solar installation in 2020 without the tax credit will be about the same as the cost of today with the tax credit.

Chris

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Thanks Chris, excellent discussion!
Saul

Chris
This is great! Really solid analysis.

The tax credit is 30% for residential and it is set to disappear on January 1, 2017 (not in 2016 as some people seem to think).

This is what I have always heard…even commercials on the radio saying you must be up and running by “December 31” to get your tax credit.

Do you know the reason for the discrepancy?

Brian

Do you know the reason for the discrepancy?

Brian,

My guess is that when people hear that it expires in 2016 they assume the beginning of the year and not the end.

Chris

We should also remember that with each passing year, SCTY will get more efficient, we will have more inflation, and the utilities will increase their rates more than SCTY’s 2.9% annual increase. Considering these additional factors, I think it’s highly likely that the real dollar cost of solar installation in 2020 without the tax credit will be about the same as the cost of today with the tax credit.

Nice post, however, I think the impact of the tax credit goes beyond the dollar amount and has a large psychological impact, same as for any retailed consumer good. You attract more people if they think they are getting a discount, and part of what makes a discount more compelling is if it has an expiry date. That’s a fuzzy-wuzzy thing that’s hard to quantify, but I would expect the sales impact to be higher than the adjusted price would suggest.

Obviously it’s still a big ticket item, so more rationality will be applied when deciding to commit, but it’s a big ticket credit as well…

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This is what I have always heard…even commercials on the radio saying you must be up and running by “December 31” to get your tax credit.

Some states have their own solar credits, which would have their own expiration date. Perhaps that is the issue? This site might shed some light: http://www.wholesalesolar.com/solar-information/state-solar-…

First, I am the one sloppy with the expiration date and have said “expires in 2016” - which is vague enough that I will claim I really meant 12/31/2106. (Truly, I did not think it was expiring Jan 1, 2016, but I was sloppy).

Second…
We should also remember that with each passing year, SCTY will get more efficient, we will have more inflation, and the utilities will increase their rates more than SCTY’s 2.9% annual increase. Considering these additional factors, I think it’s highly likely that the real dollar cost of solar installation in 2020 without the tax credit will be about the same as the cost of today with the tax credit

Not necessarily true, the only inflation that counts for utilities is generally the price of fuel. More are converting to NatGas, maybe that lowers price over time. Who says oil will recover much in two years? Who says they won’t hedge out at these extremely low prices. In regards to Solar City, installation labor inflation could just as easily hurt them.

Will there be more competition to SEDG products in a year or two, thus driving down margin? (different debate).

That said, I am very tempted to start a position on Monday (after it jumps 10% pre hours for not reason).

Pete

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Nice post, however, I think the impact of the tax credit goes beyond the dollar amount and has a large psychological impact

Most of the solar companies I’ve gotten information from are heavily pushing leases and/or power purchase agreements, neither of which entitles the homeowner to the tax credit.

I’ll be paying for my system up front, so I will be getting the credit. But that’s not the main reason. Mostly, I wanted to own my system, just like I own my house and my roof. And also because I don’t want to waste money on finance charges. I don’t think that lack of a credit would stop me from buying.

The presence of a credit (and that it has an expiration date) probably did spur me to action a little sooner than I might have otherwise. (Though the real spur to action was that my grandson is old enough to enjoy our pool, so we wanted to add solar pool heating. We thought it was best to get that and solar electric installed at the same time so that both would be considered when figuring out where to place the panels.)

-Mark
… pool solar goes in next week
… still waiting for a confirmed schedule for solar electric

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As one who has installed home solar, I feel a few words of caution are in order for those interested in having their own systems.

Before you do anything, check to see if any local rebates have strings attached. For example, if you’re in the city of Austin and want a rebate from Austin Utilities (wholly owned by the city), then you have to agree to sell all your power to the city. Yes, they give you a good rate - but your home bill will be figured based on the total power you use plus taxes and fees, and then you will get a credit for the power which you’ve contributed to the grid. This allows the city to get the max revenue.

You have to be careful “mixing” your grid electric with that of your solar PV system. Both the municipality and utility may require inspections and permits.

Lastly, if you do decide to go this way, then it’s a great time to have them put in a whole-house surge protector. The part’s only about $50 and they can put it in while the box is opened to install the solar PV breakers.

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