Is solar worth it, now that the Inflation Reduction Act is here?

“Is solar worth it?” As a specialist with more than 15 years of experience in the renewable energy space, this is a question I’ve often heard from homeowners. Many people were already asking whether solar was worth it before the Inflation Reduction Act (IRA) passed in August 2022, and now they’re asking about whether anything has changed because of it.

The biggest change the IRA made to solar’s cost-effectiveness is that it allows homeowners to subtract 30% of the cost of installing a new solar system via the solar tax credit. This is a step up from the existing 22% incentive. But it’s not just the IRA that affects the financial calculus; it’s also new state and local policies.

In this article, I’ll explain how the IRA solar tax credit and state-level policies influence the question of whether solar is worth the investment. First, I’ll walk through the top three factors that influence the answer to this question. Then, I’ll dive deeper into some specific considerations.

Is solar worth it? It depends mostly on three factors.

The question of whether solar is worth it isn’t black-or-white or yes-no. There are three broad factors that will guide you toward an answer. The first is financial, the second is practical, and the third is values-based. I’ll summarize them here.

For many people, the financial dimension is the biggest of the three, and that’s why this article focuses on the IRA tax credits and other cost considerations. The financial benefits of solar power depend on your location. If you own a large home in a state like California where electricity is expensive, you’re more likely to get a better return on your solar investment. As I’ll get into later, solar systems are generally more affordable in California where solar is in higher demand than other states.

However, if you own a small home in the Pacific Northwest, where your utility bills are lower for several months out of the year because you have access to abundant hydroelectric power, you’re probably not going to see significant savings on your monthly electric bill from solar power. The variable cost of producing electricity via hydroelectric power is minimal because there is no fuel cost. When the water flows, large amounts of hydropower are generated, and wholesale electricity prices drop.

If your small home is in a cloudy area like Seattle that doesn’t get sunshine more than 200 days out of the year, or if your home is surrounded by trees, you are likely to see less financial value from your solar investment.

These are just a couple of examples of how your home’s geographic location can limit your solar system’s financial value. Of course, on the flip side, if you’re still interested in purchasing a solar system, you may not have to spend as much because a smaller home requires fewer solar panels. But even if solar isn’t necessarily going to save you lots of money, there are other benefits beyond dollars and cents.

One of these is the practical dimension — taking back ownership of your energy sourcing. With a solar power system, you have a different option for sourcing energy. In the era of solar-plus-battery storage, solar can keep your home partially or fully powered during a grid outage. It also allows you to choose where you draw energy from — the grid or your solar / battery — in a way that’s advantageous. If you live in areas where grid outages are frequent or last awhile, such as the hurricane-prone Gulf Coast, a solar-plus-storage system is a way to gain power resilience without a noisy, fossil fuel-powered generator. This reliability factor may be enough of a benefit to warrant the cost of a new solar system, or at least a tipping point in your purchasing decision.

The final dimension of this decision is personal. Many people want to reduce their carbon footprints, and that is a good thing regardless of financial considerations. Of course, only you can decide that, so we’ll leave it to you.

Overall, answering the question of whether solar is worth it really boils down to a case-by-case analysis. The answer depends. We’ll get into some of these case-by-case examples later in this article. Let’s now get into the financial conversation, as that’s a big and complex question for many.

When do tax credits and incentives make solar worth it?

For many, solar may be worth the investment, if they’re able to take full advantage of the IRA solar tax credit. The IRA provides homeowners a tax credit up to 30% of the cost of a solar system, including panels, inverters, optional batteries for storage, labor costs, and even some home electrical infrastructure upgrades if required. The credit is a dollar-for-dollar reduction in the amount of income tax you would otherwise owe. There is no maximum amount for claiming your tax credit.

Be aware that you must meet specific criteria to get the tax credit. First, you must have taxable income to receive the credit. You cannot get the tax credit if you lease your solar system. You must own your solar system, either through a cash purchase or with a loan through financing.

Solar systems installed in 2020 and 2021 are eligible for a 26% tax credit. In the IRA, Congress passed an extension of the credit, raising it to 30% for solar installations between 2022 and 2032. Systems installed on or before December 31, 2019, also became eligible for a 30% tax credit. The tax credit will decrease to 26% for systems installed in 2033 and to 22% for systems installed in 2034. It expires starting in 2035, unless Congress renews it. This timeline is a lot better than before the IRA, when the solar tax credit would decline by a few percentage points each year.

Your solar purchase could also qualify for a state tax incentive, which is not likely to reduce your 30% IRA solar tax credit. For example, if your system was installed in 2022 and your costs totaled $18,000, and your state government gave you a one-time rebate of $1,000 for installing the system, your federal tax credit would still be calculated as $18,000 x 0.30 = $5,400.

State tax incentives typically cover a predetermined amount of the net cost of a solar energy system, usually between 10% and 40%, capped at levels ranging from $1,000 to $5,000. Some examples of states that offer tax incentives include:

  • New York
  • Rhode Island
  • Iowa
  • Connecticut
  • Maryland
  • New Mexico
  • Massachusetts
  • New Hampshire
  • New Jersey

EnergySage is a great place to learn more about state-specific rebates and incentives.

Is solar worth it? It depends where you live.

As noted above, solar power may not be worth the investment if you live in a small home where electricity is less expensive. Your payback on your solar investment can vary on several factors, including your geographic location.

Let’s look at an example. I found a home for sale in Colorado Springs that’s about 1,300 square feet, where the average electric bill is about $135 a month, according to the listing on a real estate website.

Next, I ran the home’s address through the EnergySage Solar Calculator, which provides estimates of how much money you can save over a period of time with solar power. The estimate shown below is based on data such as: roof capacity for solar panels, the home’s average electricity bill, and actual solar system offers in the Colorado Springs area. This estimate is based on a solar purchase through cash, but estimates are also available for financed solar systems via loans.

These numbers also take into account the average cost of deploying a solar installation in Colorado Springs, which can range from over $14,000 to around $20,000. As you can see from the above home’s results generated by the EnergySage Calculator, a solar system can eventually pay for itself in electricity bill savings. But getting your full return on your investment in Colorado Springs can take an estimated 10.5 years. Of course, after that, you’re pocketing $17,000 over 20 years. Systems are usually warrantied for 25 years.

In California, where electricity bills can easily run $200 or more a month for a large home, solar is probably worth the investment. In the below example, I ran a house in Indio, California, through the EnergySage Calculator. The home is about 2,300 square feet in Riverside County, where the monthly electric bill averages around $195 or higher.

This estimate takes into account the average cost of a solar installation in Indio, California, which can range from over $11,000 to more than $15,000. As you can see, it would take just under five years — more than twice as fast as the home in Colorado Springs — for this homeowner to see a financial payback on her solar investment. The long-term potential financial savings for this homeowner is significant, as much as $55,000 over a 20-year period when you factor in lower electric bills and the 30% IRA solar tax credit, along with other state and local solar incentives.

Do time of use rates make solar worth it?

Some states provide financial incentives that allow homeowners to use solar power to help them take advantage of Time of Use (TOU) rates. TOU rates are essentially differing rates you would pay for electricity depending on when you consume it. During peak demand on a summer afternoon, electricity costs more than in the middle of the night.

Sending electricity back to the grid during opportune times is called net-energy metering. To better understand how this can benefit homeowners, let me explain how net-energy metering works. When you turn on an oven, you’re taking electricity from the grid, so your utility charges you by the kilowatt-hour for that energy. A kilowatt-hour is a measure of electrical energy that is equal to a power consumption of 1,000 watts for one hour.

If you’re producing energy with solar power and are producing more energy than your home is consuming, then the extra electricity will be sent back to the grid. The beauty of net metering is that you get paid for sending electricity back to your utility! This is why, for the last 20 years, utilities have paid an average of 11.10 cents a kilowatt-hour back to electrical consumers for electricity they’re sending back to the grid, at which point other residents can then use that energy.

Now, not all electricity is created equal. And some states offer more favorable payback rates than others. For example, If you live in Rhode Island, you can take advantage of the Rhode Island Renewable Energy Growth Program, which will pay 27.55 to 31.05 cents per kilowatt-hour for solar generation that your system produces for the first 15 to 20 years.

Also, electricity in the middle of the night is not very valuable. But electricity in the summer afternoons and evenings is extremely valuable because this is when the grid is strained due to air conditioners and people staying indoors after work. This is when utility companies would love to have more power. If you have a solar battery, you can discharge your battery power back into the grid during these peak time periods and the utility will give you more money back for that power. At times when electricity is more valuable, utility companies charge more for electricity usage. That’s called Time of Use rates.

Note that utilities will automatically switch your electrical billing system to TOU rates when you install a solar system in your home. If you don’t have solar, the cost of electricity goes up as you use more energy. With this traditional billing system, you’re billed on a tiered structure where at the beginning of the month, power is cheap. But, at the end of every month, each kilowatt-hour that you get is more expensive.

You can use a new solar system to take advantage of TOU rates by selling your stored electricity back to the utility when its value is at its highest — in summer afternoons and evenings. If your state pays out a good TOU rate, solar is often a better investment because it increases the value of the electricity you are selling back to the utility.

So, is solar worth it?

The answer is: It depends. It depends on what you expect to gain from your solar investment, whether your goals are financial, practical, or values-based.

The size of your home and your home’s location will determine how fast your financial payback will be and how much you’ll save on top of that. We’ve provided a couple of geographic-specific examples where solar is worth it, and that list is growing as more states begin to offer financial incentives for homeowners.

And there are practical considerations that go beyond financial. From a resilience standpoint, solar combined with battery storage can keep your home powered longer than a battery alone during power outages. If you live in Texas, where millions of people lost power during a winter storm in 2021, you have a true understanding of how valuable power resiliency is when you can’t rely on the power grid to keep you warm. When Hurricane Ian hit Florida in October 2022, an entire neighborhood in Fort Myers, the Babcock Ranch community, never lost power because the community was powered by a nearby solar array made up of 700,000 individual panels, along with the battery storage they needed to keep the power when the sun wasn’t producing enough energy.

Your personal values also come into play when determining if solar is worth the investment. Your personal goal may be to reduce your home’s carbon footprint. In the U.S., electricity usage accounts for 25% of our country’s greenhouse gas emissions. Coal-powered power plants in states like Kentucky and West Virginia create carbon emissions and contribute to local air pollution in areas close to the plants.

When you invest in a solar system for your home, you can reduce the amount of carbon-emitting electricity from your utility grid, pulling directly from your solar panels instead. Even when you are not pulling electricity from your solar system, you’re helping offset the need for carbon-emitting power generation by sending more solar energy back to the grid. What’s more, a typical residential solar system can eliminate 3 – 4 tons of carbon emissions each year, which is the equivalent of planting 66 trees annually.

Given the reasons I’ve outlined above, there are several factors to consider before investing in solar power for your home. There are limitations to how much return you can get on your solar investment, and not every home is an ideal candidate for solar power. This is why Schneider Electric has partnered with EnergySage, an online solar marketplace that has collected a vast amount of data on solar energy from both solar providers and homeowners.

You can use the EnergySage Marketplace to help you decide if solar is worth the investment for your home. Just a few of these resources include:

  • Descriptions of the types of solar energy systems and how they work
  • Breakdowns of the costs and potential savings of going solar in your area
  • The steps you’ll need to take to assess your home’s solar readiness
  • Answers to frequently asked questions about energy storage and solar batteries

Visit energysage.com/solar to learn more.

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