Emily Pickrell, UH Energy Scholar
In the last two decades, the federal government has used tax policy to encouraged solar adoption. Yet it has done so by appealing to the frugality of the wealthy, giving solar investors a chance to lower the amount of taxes they would otherwise owe.
They do so because with the tax credit, they get a huge discount on an investment that will both lower their power bill and raise the value of their house.
It’s an advantage that renewable energy experts say could be largely solved through the creation of a ‘direct pay’ option, which would put the savings directly in the solar user’s pocket upfront rather than as an offset against taxes owed the following year.
And it’s gaining political traction in Congress.
“The essential tax credit is designed to help residential customers install renewable energy systems such as solar, wind and geothermal, but without a direct pay option, the low- and moderate-income households who would benefit most from distributed generation are effectively blocked from accessing this tax credit,” wrote 25 Senators in an Oct. 1, 2021 letter that proposes to modify the tax code.
It’s not the first time tax policy has been tweaked in the name of encouraging solar power.
Solar tax credits already have nearly two decades of history in the U.S. They were first created by the Energy Policy Act of 2005, which offered a tax credit of 30% of the cost for investments in solar energy property.
Currently, the federal government provides a 26% tax credit for systems installed through 2022, and 22% for 2023. These credits are extraordinarily generous – they reduce your overall tax liability, dollar-for-dollar, in the amount you would otherwise owe.
They have worked well at jump starting interest in solar, especially for high earners. Currently, six-figure earning households four times more likely to invest in solar than those earning less than $50,000.
But solar adoption rates are still startlingly low. Solar power now provides 3% of U.S. generation, up from 1% in 2014. In comparison, Germany – a country north of much of the U.S. – uses solar power to meet about 10% of its power consumption.
The tax benefits are potentially lucrative enough to have created a solar tax equity industry. These investors are looking for ways to reduce their tax liability by underwriting solar developments, especially for large projects.
These funds have been important in funding solar projects, creating a $7 to $8 billion pool of tax capacity resources, according to Wood MacKenzie, though most of this goes to large solar projects. The benefits are significant enough to attract investors such as JPMorgan
Yet the way the tax credit works provides benefits that favor higher income candidates. They do so by requiring enough earnings for a sizeable tax bill in order to benefit from the credit. Even modest offsets will eventually be refunded, as any remaining tax credit can be rolled over to future years.
While it may seem like a benign gift, solar equity advocates have argued that this tax incentive indirectly penalizes lower income residents, as they do not receive the subsidy by merit of not having enough income.
“We have a tax policy that essentially states that if you are not wealthy enough to owe the federal government a minimum of thousands for taxes, you have to pay more for solar than everyone else,” said Holmes Hummel, the founder of Clean Energy Works, a Washington D.C.-based non-profit focused on clean energy solutions. “That is what the federal tax credit means.”
And the federal government misses out on the chance to encourage solar investments amongst the low-income earners who could use the help – the lower electricity bill and the higher home value – the most.
Furthermore, because the tax credit comes long after the investment, it does not address one of the biggest barriers for low-income residents – how to pay for the panels in the first place. The policy assumes that in order to be eligible for the tax credit, you will have either self-financed the panels or borrowed the money.
Yet borrowing is a big barrier as well. Lenders – even the tax credit investment groups – rely on tools like credit scores to determine whether to make the loans, cutting out many of those who financially struggle.
“The criteria for borrowing are a product of consumer protection policies that prevent banks and financial institutions from doing business with households that cannot prove their worthiness for credit based on their history,” Hummel said.
Using credit scores and financial profiles as the basis for access to solar means that millions of Americans – 40% of whom say they don’t have even $400 saved for an emergency – are disqualified from participation.
A direct pay option would address these problems. It would allow those who invest in solar power to receive federal cash benefits in lieu of the tax credits, making the direct hit for the investment less painful for low-income residents.
And the savings would reduce the amount of a loan required, making it easier to persuade lower-income homeowners that the remaining 70% of the cost of solar, paid in monthly installments, will still result in savings over a standard utility bill.
“Direct pay will go a long way to make these projects equitable,” said Yesenia Rivera, the director of Energy Equity and Inclusion at Solar United Neighbors, an organization focused on expanding access to solar power. “We’re working with residents around the country so that they can go solar in a way that is cash positive from day one.”
Adding direct pay as a benefit would require adjusting clean energy tax incentives in the tax code, which are currently scheduled to expire in 2023. A proposed bill, The Clean Energy Act for America, includes the direct pay strategy, but is early in the legislative review process with only Democrat support.
Direct pay would not only benefit residents interested in solar, but utilities and the rural electric cooperatives that serve 90% of the persistent poverty counties in the U.S..
It would also complement – rather than replace – the financing that some state and local governments are offering in the form of subsidies or rebates for solar adoption. These programs are scattershot, with some states offering generous incentives while others lag behind. Illinois, for example, currently offers a 25% rebate to help pay the costs of installing solar energy products. Maryland has a resiliency hub program, which provides grants to micro-providers for emergency solar power during power outages in low-income high-density areas.
Washington State has expanded net metering and re-introduced a sales tax exemption for solar.
Other states with plenty of sunshine – Mississippi, Alabama and Georgia, among others – offer little help.
And even where the programs exist, ensuring these programs are generous enough to not create financial strain for low-income families is key to getting the needed participation.
“The savings that a low income family is getting from a rooftop system, the net benefit should be better than the financing costs,” said Nate Hausman, project director at Clean Energy States Alliance. “They need to see meaningful savings on a monthly basis in order for it to work.”
The importance of making sure that all income levels can participate across the country is what makes the federal tax credit so important. It can cut across state lines and give offer the kind of investment stability for the solar market to fully expand beyond wealthy neighborhoods.
And these are the participants that will be needed if the Biden administration’s ambitious aims are ever to be achieved.
Emily Pickrell is a veteran energy reporter, with more than 12 years of experience covering everything from oil fields to industrial water policy to the latest on Mexican climate change laws. Emily has reported on energy issues from around the U.S., Mexico and the United Kingdom. Prior to journalism, Emily worked as a policy analyst for the U.S. Government Accountability Office and as an auditor for the international aid organization, CARE.
UH Energy is the University of Houston’s hub for energy education, research and technology incubation, working to shape the energy future and forge new business approaches in the energy industry.