The federal solar tax credit is ending. Here’s what you should expect
Written by Evan Nicoles
Updated April 02, 2020
6 minutes read
Categories: Solar financing, Solar incentives
The solar tax credit is one of the biggest incentives for those looking to install solar panels. At the end of 2019, the incentive amount begins to step down and expires completely for residential installations in 2022.
Will homeowners still be able to afford solar?
The sun is setting on the federal solar tax credit
When does the federal solar tax credit expire?
The federal solar tax credit, also known as the solar Investment Tax Credit (ITC), currently allows solar system owners to deduct 30% of the qualified costs of a solar installation from their income taxes. The value of the tax credit is set to decrease at the end of 2019.
At the start of 2020, the solar ITC steps down to 26%. At the start of 2021, it drops to 22%. In 2022, the credit will no longer be available for residential customers and will permanently drop to 10% for commercial customers.
What will happen to solar panel costs as the solar tax credit steps down?
Solar-Estimate.org created the graphs below by using pricing data from the Lawrence Berkeley National Labs (LBNL) Tracking the Sun report to illustrate how past economic trends could impact trends in the future. The LBNL data set covers an estimated 81% of solar systems in the U.S.
In this article, we will be referencing two different types of solar power prices:
- Gross price: The price of solar before the federal tax credit is applied
- Net price: The price of solar after the federal solar tax credit is applied
The grey line represents the gross price per watt of solar. The blue line represents the net price per watt of solar.
Pricing for 2019 and onward was projected using an exponential trendline, based on years 2015-2018.
Since the amount of the federal tax credit varies from year to year, all calculations and projections were based on the gross price (the price before the credit is applied). Further, the median gross price per watt of installed residential systems from 2001-2018 was adjusted to ‘real 2017 dollars’, to account for inflation.
After past and future gross pricing was calculated, we were able to calculate the net price.
The net price (the price after the credit is applied) calculations represent the estimated price that residential customers should expect to pay for a system in each year until 2024.
Based on the pricing data as shown in the graphs, the projected net prices for residential solar power systems are as follows:
|Year||Residential Credit||Net Price|
|2019||30%||$2.21 - 2.45 / watt|
|2020||26%||$2.21 - 2.47 / watt|
|2021||22%||$2.22 - 2.50 / watt|
3 main takeaways based on the solar panel tax credit stepdown
There are 3 main takeaways from this data:
1. The best time to go solar is in 2019.
- Solar power is now cheaper than ever and 2019 is the last year to claim the full 30% tax credit.
- As a general rule of thumb, the best time to make a long-term financial investment is as early as possible.
- It’s reasonable to expect the solar installation market to become extremely busy as 2020 approaches - to the extent that everyone who is interested in going solar might not be serviced in a timely fashion!
2. The net price of solar in 2020 is not going to be significantly higher than the price in 2019.
- Based on the projected trendline, there may not be a difference between the net price of solar in 2019 and the net price in 2020.
- What this means is, if going solar in 2019 is not a viable financial option, you will still be able to get a similar price if you decide to install in 2020.
3. The net price of solar is projected to spike after the expiration of the tax credit in 2022.
- The tax credit reductions at the start of 2020 and 2021 are expected to be offset slightly by projected drops in the gross price of solar.
- However, the complete elimination of the tax credit for residential solar in 2022 will likely cause a notable increase to the price of solar.
Installers to take a hit from the solar tax credit expiration
The increased solar system prices predicted for 2022 might discourage people from making the switch to solar. The less people that go solar, the less money solar installation companies make. In order to stay in business, installers might have to make changes to their prices to combat the effects of the tax credit expiration.
It’s likely that the demand for residential solar panel installations will peak just before the tax credit expires. This also suggests demand will fall right after it expires. Solar installers may lower their margins just after the tax credit is eliminated in order to compensate for the drop in demand.
If installers lower their margins, consumers may not see a significant price hike when the tax credit value steps down. Lower installation costs from installers could encourage homeowners to go solar even without the solar tax credit.
Cost reductions could offset price increases caused by the solar ITC expiration
The total installed price for a solar system can be broken down into two parts:
- Hard costs
- Include the physical hardware of the solar system, like the panels, inverters, and wiring
- Soft costs
- Encompass things like permitting costs, customer acquisition costs, and installer margins
Advancements in solar panel technology have helped hard costs drop significantly from 2008-2012, which led to an overall decrease in solar system prices.
While hard costs have come down substantially, soft costs have decreased at a much slower rate. Future decreases in the overall cost of system prices are likely to rely on reductions in soft costs.
In order for soft costs to fall, the following must occur:
- Installers become more experienced;
- Permitting becomes increasingly streamlined; and
- Customer acquisition becomes more efficient.
Solar tax credit in context: solar power prices around the world
According to the LBNL report, the 2017 price for residential solar was about $1.80 per watt in Australia and $1.50 per watt in Germany. There remains significant room for improvement in the U.S., where the price of solar comes in at about $3.70 per watt.
While it’s not completely fair to expect equal pricing across different countries with varying political regulations and economies, the price differences show that there is potential for solar pricing to drop in the U.S., despite the expiration of the federal tax credit.
New legislation to extend the federal solar tax credit
The Renewable Energy Extension Act of 2019 was introduced in the House and the Senate on July 25, 2019. Currently, the bills are in committee, so there is no exact timeframe of when they will reach the House or Senate floor for a vote.
If the legislation passes, the solar panel tax credit would follow this updated schedule:
|Year||Residential Credit||Net Price|
|Before Jan 01, 2025||30%||30%|
|Jan 01, 2025 - Dec 31, 2025||26%||26%|
|Jan 1, 2026 - Dec 31, 2026||22%||22%|
|On or after Jan 01, 2027||0%||10%|
The extension of the federal tax credit has received both bipartisan support in the House and support from Senate Democrats.
SEIA, the nation’s premier trade association and lobby group for the solar industry, has created a campaign called ‘Defend the ITC’, in hopes to put pressure on legislators to pass the extension.
As part of their campaign, SEIA recently delivered a letter to Congress with signatures from 231 mayors from towns and cities across the country calling for an extension.
The solar tax credit expiration: top takeaways
While going solar in 2019 will ensure you get the best savings on a solar system, the price will not change significantly when the federal tax credit begins to step down in 2020.
However, when the solar tax credit expires in 2022, there will be a spike in the net price of solar systems.
These increased prices may cause solar installers to adjust their margins in order to encourage people to keep installing solar. If this happens, solar prices may actually temporarily fall.
If the House and the Senate pass the proposed extension, solar installers and homeowners will be able to rest easy, knowing they can benefit from the tax credit for another 5 years.
With the increasing bipartisan support in the House, it’s possible the tax credit extension could be voted on by year’s end.