CEA Report: States Are Seeking More Economically Efficient Solar Incentives

by | Sep 9, 2016

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As part of Consumer Energy Alliance’s (CEA’s) Solar Energy Future campaign, the 400,000-member nationwide advocacy group on August 8 released a new report, “Incentivizing Solar Energy: An In-Depth Analysis of U.S. Solar Incentives,“.”

Conducted on behalf of CEA by Borlick & Associates, a management consulting group, the study is intended to inform policy makers by quantifying the total incentives as a percentage of the installed cost of a typical residential solar facility located in each of 15 states: Arizona, California, Connecticut, Florida, Georgia, Illinois, Louisiana, Maine, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, Nevada, and North Carolina.

These states, CEA explains, “were selected to capture diversity in location, state-level incentive policies, retail tariff designs, and wholesale electricity prices.”

Why quantify incentives?

Today, federal, state and local governmental incentives, combined with those offered by many electric utilities, have reduced residential customers’ net, out-of-pocket costs for installing solar PV systems to very low levels, CEA said. Indeed, in many states, the total incentives exceed the facility’s total cost. In light of these dramatic cost reductions, many states are now reviewing the need for such generous incentives and considering incentive regimes that rely more on the competitive marketplace to provide the incentives needed to bring about economically optimal levels of solar PV adoption.

One of the key drivers in the assessments that these states are making is cost of energy produced by residential solar PV installations compared with the much lower cost of energy produced by utility scale solar projects. Given that solar energy delivers essentially the same societal benefits, in terms of carbon and emissions reductions, independent of how it is produced; some states have begun to look for economic efficiencies in their solar regimes. The report is geared to inform policy makers considering such changes.

Types of incentives studied

While a number of financial incentives exist for rooftop residential solar PV users, this report explores the four most prominent and substantial types of incentives:

  • Incentives provided to residential customers who own solar PV facilities, through tax credits and monetary payments from federal and state governmental entities and electric utilities,
  • Incentives provided through state net energy metering (NEM) policies,
  • Incentives provided to third-party owners (TPOs) of residential rooftop solar PV facilities that either lease them or sell the energy they produce to their residential customers through long-term contracts, and
  • Incentives provided through Renewable Energy Certificates (RECs) that can be sold.

Of the states looked at by the researchers, three stand out as the most generous in terms of incentives: California, Massachusetts, and New Jersey.


The quantitative results of this report lead to the following conclusions, according to CEA.

Existing incentives for residential solar PV are significant. The combined effect of the direct and NEM incentives in many states collectively exceeds the total cost of installing a solar PV facility – particularly for third party-owned facilities. Although the federal tax credit constitutes a substantial incentive for customer-owned residential solar PV in all of the states, it is less than the sum of the other incentives in all but one state – Georgia.

Incentives are even more significant for third-party-owned solar PV facilities. When a customer leases a solar PV facility, or purchases its energy output through a long-term contract, the third-party owner (TPO) receives the federal Investment Tax Credit and five-year accelerated depreciation. Both of these tax benefits are further enhanced by basing them on the fair market value of the facility, not on its installed cost. The fair market value is higher than the asset’s installed cost because the TPO charges the customer contract prices that recoup substantially more than the asset’s installed cost.

Existing incentives may change the economics of future investments in solar. Given that the non-incentivized cost of producing a kilowatt-hour (kWh ) of energy with residential solar PV is much higher than the non-incentivized cost of producing a kWh of energy with  utility scale solar PV, the federal, state, and local incentives for residential solar PV may not be the most economically efficient means for a government entity to increase solar penetration. With all solar energy (residential and utility scale) delivering essentially the same societal benefits in terms of carbon and other emissions reductions, CEA expects policy makers to examine whether their solar incentive regimes should favor distributed solar PV over utility-scale solar PV. N

Net energy metering incentives shift costs onto less affluent customers. Net metering programs, which pay residential PV solar customers a higher rate for excess electricity, shift variable energy costs and fixed infrastructure costs completely onto non-solar customers, who a number of reports show are typically less affluent than customers with solar PV.

NEM only will produce equitable outcomes, the report states, if all utility customers (both solar and non-solar) are served through tariffs that closely reflect the costs that each customer imposes on the utility. Such tariffs would, most likely, include demand charges that fairly allocate fixed infrastructure costs and energy prices that dynamically reflect the hourly cost of energy provided to the customer or avoided through self-generation.

Given the cost shift between non-solar PV customers and solar PV customers, CEA expects that policymakers will contemplate reductions in the NEM incentives through retail tariff modifications, which better match each solar customer’s payments with the costs that customer imposes on the utility.

Incentives for residential solar PV vary widely among the states. The report findings reveal a substantial state-by-state variation in the total incentives for customer-owned residential solar PV facilities. Because of contract pricing differences it is likely that the variation is even greater for third party-owned facilities. Four factors create these disparities: (1) different state direct and REC incentives for residential solar energy, (2) different residential retail tariff designs, (3) different avoided utility costs and, (4) (for third-party-owned facilities) different contract pricing strategies. Still, on a dollar per-kW basis, even the smallest of these incentives far exceeds the incentives provided to utility scale solar PV projects.

Pro-Solar, Pro-Grid, Pro-Consumer Policies

“As the technology continues to advance, solar energy is becoming an even more incredibly powerful and cost-competitive technology that has the potential to change the face of American energy both today and in the future,” commented CEA EVP Michael Whatley.

Whatley added: “As solar energy continues to progress as a larger slice of America’s all-of-the-above energy pie, we hope that CEA’s new report will help yield pro-solar, pro-grid and pro-consumer policies to ensure the proliferation of solar technology, the continued efficiency of a robust electric grid, and increased access to clean, renewable, affordable, and reliable energy sources for all American consumers.”

To review the full results of this analysis and a copy of the report, please visit solarenergyfuture.org. To read the executive summary, please click here.

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