If you want to claim the solar tax credit, install now

For the last two decades, homeowners have been able to claim thousands of dollars in federal tax credits to help offset the high upfront costs of going solar. Things were supposed to stay that way through 2034. But, this week, the U.S. House of Representatives proposed abruptly ending the incentives at the end of the year. If this idea survives the House and passes the Senate, it could upend the economic calculus of powering your home with the sun.

“It would put solar out of reach for millions of people,” said Glen Brand, director of policy and advocacy at Solar United Neighbors, a non-profit that encourages adoption of the technology. “What the House has done is to put ordinary Americans in a really hard place. They are basically saying they aren’t going to help people with rising energy costs.”

The country’s first solar tax credits took effect in 1978, but were allowed to lapse in 1985, when President Ronald Regan was in office. In 2005, however, another Republican — President George W. Bush — revived them. Lawmakers have extended and tweaked the incentives ever since, mostly recently with the 2022 Inflation Reduction Act, or IRA, which set the credit at 30% of the cost of a system until 2032, before a two-year phase out.

The average cost of a solar system in the U.S. right now is just north of $28,000, according to Zoë Gaston, a principal analyst for residential solar at the energy consultant Wood MacKenzie. That means a tax credit would be worth around $8,500.

On Tuesday, the House Ways and Means Committee released an initial budget reconciliation proposal that would roll back large swaths of the IRA, including support for residential solar. The so-called 25D tax credit would still apply for systems that are installed this year, and then it would go away completely.

Without the tax credits, solar systems might still make financial sense in places that get a lot of sun or have high electricity prices, or both, but the payback period will likely grow. For other people, the math may no longer work at all.

“We would expect sales and installation to surge this year, followed by a market contraction,” said Gaston. “If a homeowner is thinking about solar and can afford it,” now would be the time.”

The 25D credit isn’t the only relevant tax break under threat. Another credit, 48E, is available to businesses that install solar on homes where the resident then either leases the equipment or enters into a power purchase agreement. This allows companies to reduce what they charge customers. According to Gaston, more than half of residential installations now follow this third-party ownership model.

Instead of eliminating 48E, the House favors applying limits on where the material in photovoltaic panels comes from. While experts are still sorting out exactly what the proposed language means, it generally aims to bar participation of “foreign entities of concern” — including those in China, where the vast majority of solar components are made.

“It puts the obligation on the installer or the developer to trace back the supply chain in a way that’s completely impossible,” said Sean Gallagher, senior vice president of policy at the Solar Energy Industries Association, a trade group. This, he said, could effectively make the 48E credit effectively impossible to access starting in 2026.

The current House language could at least temporarily push folks toward the third-party ownership options, said Gaston. But when Wood MacKenzie did an analysis, before the House draft, that assumed a phase out of credits by 2028, it still projected a 30 percent drop in installed residential capacity by the end of the decade.

“It’s going to be devastating for companies, their employees, and their customers,” said Gallagher. “It’ll kill an industry that supports hundreds of thousands of workers and tens of billions of dollars in investment every year.”

The House move isn’t the only headwind the solar industry is facing. Some states, most notably California, for example, have lowered the amount the homeowners can earn selling power to the grid, making solar less lucrative. Even before Republicans took control of Congress and the White House, companies were starting to let employees go. More layoffs have ensued.

Some Republicans have acknowledged the role that energy tax credits play in the economy, and their districts. Twenty-one House members of the party signed a letter to Ways and Means Chairman Jason Smith expressing concern about “disruptive changes to our nation’s energy tax structure.” Four Republican Senators also wrote to Majority Leader John Thune (R-SD) urging “a targeted, pragmatic approach” to any changes.

“This is going to turn on what the Senate does,” said Brand, about the future of the solar credits. He believes it’s unlikely that the House proposal will become law in its current form and is optimistic that the rollbacks will be rectified. “This is a piece the Senate can get right.”

But the harm to the solar industry is already being done, said Jacquelyn Pless, a professor who researches energy and environmental economics at the MIT Sloan School of Management. The constant back and forth over policy, she said, makes it extremely difficult for companies to plan ahead.

“Policy volatility is really my bigger concern,” Pless said. “Policy uncertainty alone can start to freeze investment, raise costs, and damage market confidence.”

This article originally appeared in Grist at https://grist.org/climate-energy/if-you-want-to-claim-the-solar-tax-credit-install-now/.

Grist is a nonprofit, independent media organization dedicated to telling stories of climate solutions and a just future. Learn more at Grist.org