Direct Cash Incentives

Description

Direct cash incentives for solar energy take a variety of forms, including rebates, buydowns, grants and performance-based incentives. A rebate is an incentive payment issued to the system purchaser after the system has been installed. A buydown is a reduction in the bottom-line cost of a system to a buyer. Grants generally involve a more detailed, competitive application process and tend to support larger projects. In practice, solar program administrators sometimes use these three terms -- rebates, buydowns and grants -- interchangeably. These types of incentives are typically based on system capacity, a percentage of capital costs, or expected system performance (i.e., estimated energy output). Some programs require verification of expected performance at pre-determined intervals. Performance-based incentives, on the other hand, are based on the actual energy output of a solar energy system (to encourage optimal system design and installation) and are disbursed over several years. Feed-in tariffs and renewable energy credit (REC) purchase programs are examples of performance-based incentives. Direct cash incentives may be offered by states, local governments and/or utilities.

Upfront direct incentives -- rebates, buydowns and grants -- encourage solar deployment by reducing the relatively high upfront system costs. Although performance-based incentives do not reduce upfront costs, such incentives provide a revenue stream that can help secure financing and offset financing costs. The rationale for using direct cash incentives is that they can stimulate deployment while prices are high in the earlier stages of solar development, thereby encouraging manufacturers and distributors to accelerate investment. Ideally, this raises production levels, which in turn lowers prices and expands markets to the point where subsidies are no longer necessary.

Direct incentives offer an advantage over tax credits because they may be used by a broad range of participants, as opposed to only those with a tax appetite. In particular, direct cash incentives are available to non-taxpaying entities that cannot always take advantage of tax credits. However, direct incentives are often less politically viable than tax incentives because an explicit funding mechanism is required. Furthermore, once appropriated, such funds may be easy targets to raid in times of state budget shortfalls. In recent years, several states have raided their public benefits funds -- the source of many direct cash incentive programs that support solar -- to fill budget gaps. Finally, applications for state incentives frequently outpace program budgets, leading to unstable start-stop cycles that tend to disrupt local solar markets. [1],[2]

Status & Trends

More than 20 states and 200 utilities offer direct incentives for photovoltaics (PV) and/or solar thermal systems. These incentives, which typically cover 10% to 30% of project costs and range from a few hundred dollars to millions of dollars, have played a significant role in encouraging solar installations in the United States. Although the vast majority of direct cash incentives for solar projects are offered by states and utilities, a few local governments (without municipal utilities), non-profits and private organizations also offer direct cash incentives.

Direct Cash Incentives for Solar Projects

State incentives for PV emerged in the late 1990s; most were supported by new public benefits funds (PBFs) established as part of electric utility restructuring. Currently, state-level direct cash incentives for PV are funded by state PBFs and renewable portfolio standard (RPS) policies.

States' interest in performance-based incentives, including feed-in tariffs, has risen in recent years. A feed-in tariff requires energy suppliers to buy electricity generated by renewable-energy systems at a fixed rate per kilowatt-hour over many years. Feed-in tariffs typically include a payment for both the electricity and the renewable energy credits (RECs) associated with electricity generated by renewable resources. Payment rates can be differentiated by technology, size and application so that a broad array of projects can be developed profitably. Feed-in tariffs have driven rapid renewable energy development in Europe, but they have not been widely adopted in the United States thus far.

California was the only state with a form of feed-in tariff before 2009. Then, in 2009, Oregon and Vermont enacted feed-in tariff legislation, and Hawaii established a feed-in tariff through regulatory action.[6],[7] At the local level, Gainesville Regional Utilities became the first municipal utility to adopt a solar feed-in tariff (see details below). Since Gainesville adopted a feed-in tariff, several other municipalities, including Austin and San Antonio, created feed-in tariff programs. In October 2009, Vermont's feed-in tariff program, the Vermont Standard Offer for Qualifying SPEED Resources, launched and was immediately fully subscribed. Vermont's program has since been modified and expanded in order to accommodate high demand and a growing state market. Oregon's law creating a solar feed-in tariff required the state Public Utilities Commission to develop rules. During rulemaking process, concerns about FERC jurisdiction regarding the ability of the state to set rates for the feed-in tariff yielded a performance-based incentive structured after net metering. Oregon's program differs from a typical "feed-in tariff" in that the program is part of a developing trend to model performance-based incentives after net metering. Vermont created a similar program in June 2011. Most recently, in June 2011, Rhode Island enacted legislation establishing a state feed-in tariff that took effect later the same year.

Initially, direct incentives were awarded in the form of rebates based on a system’s capacity rating (i.e., dollars per watt). Early programs often offered the same incentive rate for all sectors, although the maximum award for commercial projects was typically higher than the maximum award for residential projects. Most state programs have since adopted more complex incentive structures to incorporate and address four primary issues that have emerged as solar markets have evolved:

The different tax treatment of residential, commercial and non-profit sectors. About one-third of state PV programs and several state solar water heating programs provide larger incentives to the government/non-profit sector because these entities can not easily take advantage of state and federal tax credits.

The desire to reward system performance rather than system capacity. Performance-based incentives, which provide project owners with long-term payments based on electricity production on a dollar-per-kilowatt-hour basis, have gained increasing attention. So, too, have hybrid approaches, which sometimes involve upfront rebates based on a system's expected performance. Such incentives are based on system capacity but may be adjusted after taking into consideration certain other factors, including system rating, location, tilt, and orientation and shading. Payments based on performance or expected performance rather than capital investment have gained prominence as a means of incentivizing proper system design and installation.

Other mechanisms to protect consumers and guarantee adequate performance. Ensuring that solar energy systems will perform as expected solidifies consumer confidence and helps guarantee that a state is making prudent investments. Beyond tying incentive payments to actual system performance, states have developed quality-assurance mechanisms that include one or more of the following provisions: equipment and installation standards; warranty requirements; installer requirements, assessments, and voluntary training; design standards and administrative design review; post-installation site inspections and acceptance testing; performance monitoring and assessment; and maintenance requirements and services. The best approach will ultimately depend on the performance issues of greatest concern and will differ depending on each program’s objectives and constraints.[3]

Interest in rewarding high-value or emerging applications. Providing bonus incentives for desirable applications is becoming increasingly common among state programs. Current and past examples include higher incentives for affordable housing; for the use of in-state manufactured components; for the use of building-integrated PV; for the use of certified installers, and installations in certified green buildings; and for solar on Energy Star homes, new construction and public buildings.

Click the links below to see state-by-state comparisons of rebate programs that support PV and solar water heating, and 2012 rebate installation data.

Experience with state-level direct cash incentive programs has revealed the following best practices and recommendations:[4],[5]

Offer a generous initial incentive level based on market conditions, with stable, long-term funding that decreases over time as the market matures.
When a program is set to step-down over time, make the step-down process transparent so that system installers and owners can finance and plan installations based on different scenarios.

Set incentive levels in line with the overall program budget, to help ensure that funding does not run out early. Many program are still plagued with uncertain funding streams and inadequate budgets.
Establish a consistent but cost-effective quality-assurance mechanism to protect consumers and guarantee adequate system performance.
Advance workforce development by supporting installer training and certification programs to meet the demand for trained technicians.
Design an easy and concise application process.
Allow flexibility for program modifications.
Promote commitments by local and state governments to install solar on public buildings.
Track the details of program use, costs, and energy savings and production to enable program evaluation and improvement.
Develop a coordinated package of policies to complement direct incentives, including net metering, low-interest financing, standardized permitting processes and fair permit fees, solar access laws, and tax incentives.
Cultivate utility support and cooperation to ensure a quick and easy interconnection process for PV systems.
Work with other state agencies and relevant stakeholder groups to educate the public about renewable energy technologies and to market the incentive program effectively.

Examples

The California Solar Initiative was launched in 2007 to provide around $3.5 billion in incentives for solar-energy projects with the objective of installing 3,000 megawatts (MW) of solar capacity by 2016. Incentive levels are automatically reduced over the duration of the program in 10 steps based on the aggregate capacity of solar installed. In this way, incentive reductions are linked to levels of solar demand rather than an arbitrary timetable. Incentives for systems greater than 30 kW are structured as performance-based incentives, whereas incentives for smaller systems are provided upfront based on expected performance. (Smaller systems may opt out of the upfront incentive to take a performance-based incentive instead.)
Massachusetts Commonwealth Solar and Massachusetts Commonwealth Solar II offer rebates for PV systems. Commonwealth Solar was a $68 million, four-year program designed to promote the deployment of an estimated 27 MW of PV in Massachusetts. The effort combined $40 million from the Massachusetts Renewable Energy Trust and $28 million from RPS Alternative Compliance Payment funds collected by the Massachusetts Department of Energy Resources. Commonwealth Solar met program goals of incentivizing 27 MW of PV two years ahead of schedule and closed in October 2009. Commonwealth Solar II launched in January 2010, with a budget of $4 million per year. Bonus incentives are awarded to customers who use components from Massachusetts companies, and for residents with moderate home value or moderate incomes.

The City and County of San Francisco provide rebates to residents and businesses that install PV systems. There are four distinct funding levels for residential installations. First, basic installations are eligible for a flat rebate of $2,000. Residential systems installed by a local installer qualify for a bonus incentive of $750. Installations in lower income and racially diverse neighborhoods considered “environmental justice districts” (because of their proximity to industrial sites and major highways) are eligible for a higher rebate of $3,000. Low-income applications are eligible for a rebate of up to $7,000. Commercial, non-profit and industrial applicants may receive a capacity-based rebate of $1,500 per kW, with a maximum award of $10,000 for commercial installations and $120,000 for non-profit installations. Multi-unit residential buildings operated by a non-profit may receive up to $3,500 per kW (depending on the number of units), with a maximum award of $60,000. This program was initially funded with $3 million from a renewable energy fund derived from the sale of power generated by the Hetch Hetchy dam.
Gainesville Regional Utilities (GRU), a municipal utility in Florida, initiated a feed-in tariff (FIT) in March 2009 for PV systems operating at residential or commercial facilities. Modeled after Germany's FIT, GRU purchases energy from qualified PV systems via a standard offer contract at fixed rates for a period of 20 years. The fixed rate for the life of the contract starts at $0.21/kWh for systems 10 kW or less and $0.18/kWh for building- or pavement-mounted systems 10 kW to 300 kW. The incentive rates will decrease over time. The rate for ground-mounted PV systems 10 kW to 25 kW is $0.18/kWh, and the rate for ground-mounted PV systems 25 kW to 1,000 kW is $0.15/kWh.

Resources

Policy Comparison Table: State Rebates for Solar PV Projects. DSIRE, 2012.

Policy Comparison Table: State Rebates for Solar Water Heating Projects. DSIRE, 2012.

Distributed Solar Incentive Programs: Recent Experience and Best Practices for Design and Implementation. Lori Bird, Andrew Reger, and Jenny Heeter. National Renewable Energy Laboratory (NREL), December 2012.

A Policymaker's Guide to Feed-in Tariff Policy Design. Toby Couture, Karlynn Cory, Claire Kreycik, Emily Williams. National Renewable Energy Laboratory (NREL), July 2010.

Renewable Energy Prices in State-Level Feed-in Tariffs: Federal Law Constraints and Possible Solutions. Scott Hempling, Carolyn Elefant, Karlynn Cory and Kevin Porter. National Renewable Energy Laboratory (NREL), January 2010.

Designing PV Incentive Programs to Promote Performance - A Review of Current Practice. Galen Barbose, Ryan Wiser and Mark Bolinger. Lawrence Berkeley National Laboratory (LBNL), October 2006.

Case Studies on the Effectiveness of State Financial Incentives for Renewable Energy. Susan Gouchoe, Valerie Everette, and Rusty Haynes. North Carolina Solar Center, National Renewable Energy Laboratory (NREL), 2002.

Footnotes

[1] Beyond Rebates: State Solar Market Transitions, Seven Lacey, RenewableEnergyWorld.Com, January 27, 2009.
[2] State Solar Incentives – News from DSIRE, Susan Gouchoe, in 2006: IREC Updates & Trends, Interstate Renewable Energy Council, October 2006.
[3] Designing PV Incentive Programs to Promote Performance - A Review of Current Practice, Galen Barbose, Ryan Wiser, and Mark Bolinger. Lawrence Berkeley National Laboratory, October 2006.
[4] Case Studies on the Effectiveness of State Financial Incentives for Renewable Energy, Susan Gouchoe, Valerie Everette, and Rusty Haynes (NC Solar Center). Prepared for the National Renewable Energy Laboratory, NREL/SR-620-32819. 2002.
[5] Clean Energy State Program Guide: Mainstreaming Solar Electricity: Strategies for States to Build Local Markets, Clean Energy Group and Peregrine Energy Group, April 2008.
[6] Feed-in Tariffs: The Good, the Bad and What Utilities Need to Know, Wilson Rickerson, Solar Electric Power Association Webinar, February 12, 2009.

[7] State Clean Energy Policies Analysis (SCEPA) Project: An Analysis of Renewable Energy Feed-in Tariffs in the United States, Toby Couture and Karlynn Cory, National Renewable Energy Lab, June 2009.

Disclaimer: The information presented on the DSIRE web site provides an unofficial overview of financial incentives and other policies. It does not constitute professional tax advice or other professional financial guidance, and it should not be used as the only source of information when making purchasing decisions, investment decisions or tax decisions, or when executing other binding agreements. Please refer to the individual contact provided below each summary to verify that a specific financial incentive or other policy applies to your project.

While the DSIRE staff strives to provide the best information possible, the DSIRE staff, the N.C. Solar Center, N.C. State University and the Interstate Renewable Energy Council, Inc. make no representations or warranties, either express or implied, concerning the accuracy, completeness, reliability or suitability of the information. The DSIRE staff, the N.C. Solar Center, N.C. State University and the Interstate Renewable Energy Council, Inc. disclaim all liability of any kind arising out of your use or misuse of the information contained or referenced on DSIRE Web pages.

Copyright 2012 - 2013 North Carolina State University, under NREL Subcontract No. XEU-0-99515-01. Permission granted only for personal or educational use, or for use by or on behalf of the U.S. government. North Carolina State University prohibits the unauthorized display, reproduction, sale, and/or distribution of all or portions of the content of the Database of State Incentives for Renewables and Efficiency (DSIRE) without prior, written consent.