Case 11.2. Can Tax Credits Make Solar Panels Profitable?

Consider the cost of a solar panel system that is intended to replace 25 percent of a homes electricity use.^₁₆ A system that would fit on the roof of a typical home and would reduce electricity usage by 25 percent costs $37,496.36 before any government tax incentives. Currently, the U.S. government provides a 30 percent tax credit in the year of the solar panel acquisition, and the system is exempt from state and local property taxes.¹⁷ The average monthly electrical bill is $200 per month.

The cost of borrowing for a solar panel system through the FHAs Energy Efficient Mortgage (EEM) program, available for energy efficient home improvements, is an APR of 3.35%.¹⁸ The amount of the mortgage is the cost of the panel system, less any federal incentive. The interest on the EEM is tax deductible, but electricity costs are not deductible for the individual homeowner.

Assume that the homeowner has a marginal tax rate of 38 percent and that the installation is at the end of the current year, but the panels are not used until the first month of the coming year. Further, assume that the solar panels have a useful life of 30 years and that at the end of the life of the panels the homeowner must pay a $500 for removal and disposal of the panels at the local dump.

Requirements:

A. What is the payback period for a solar panel system?

B. What is the added value of investing in solar panels on a net present value basis?

C. If energy costs were to increase at a rate of 0.25 percent each month, would this affect the attractiveness of the panels? If so, why?

D. What is the minimum percent tax credit necessary to make the solar system attractive to homeowners on a net present value basis, assuming that energy costs do not escalate?

16 Data for the costs and savings are drawn from CoolPlanetBioFuels.com.

17 See Internal Revenue Service Form 5695 Residential Energy Credits for all the current credits.

18 Based on 2011 rates.