As everyone has heard by now, the federal solar tax credit may be going away thanks to the US House of Representatives’ new budget reconciliation bill. Losing this credit would impact a large portion of the solar market and undoubtedly make it harder for many to go solar. While there are many states that offer incentives of their own, for a lot of Americans the federal tax credit is the only incentive available to reduce the cost of adopting solar.
What’s changing, and what would the impact of this be on payback periods for someone if they choose to go solar in a post-tax credit market? We ran some numbers to help show the changes.
Table of Contents
What’s Changing?
As of the time of this writing, the proposed changes have passed through the House but have yet to be debated and amended by the Senate, so the bill will likely look different if it does become law. As of now, there’s no timeline for when a final version may be passed.
The House version of the bill includes the removal of the 30 % federal solar tax credit for residential solar installations. There are two versions of this credit, and both are looking to be removed.
- Section 25D – This version of the credit is used by homeowners who purchase their solar via cash or a loan. The bill proposed to end this credit at the end of 2025 with no phase-down, meaning any system installed on or after January 1, 2026, would receive no credit at all.
- Section 48E – This version is used by solar lease and solar PPA companies when they claim the credit for their business. Because those companies own the equipment, they get to claim the credit and “pass on” the savings to the homeowner. The bill implements a 60-day rule, stipulating that any project not beginning construction within 60 days of the bill’s passage will no longer be eligible for the credit. If this amendment stands, the solar lease and PPA market could vanish very quickly since companies may not be able to permit and install projects in time.
The Effect on the Energy Market
Losing this credit could have a major effect on the energy market as a whole because of how large of a share both solar and energy storage have in the energy mix of today and the energy mix of the future.
In their Solar Market Insight Report, SEIA and Wood Mackenzie note that in 2024, solar and battery storage make up nearly 84% of newly added generating capacity in the United States, and that number has been steadily growing over the last decade and a half.
In addition, on a much larger scale solar and energy storage are set to make up 75% of all new US Generators that are under development but won’t officially come online until sometime between 2025-2028.
What Does this Mean For Payback Periods?
Even though the loss of the federal solar tax credit could hit the market hard, it doesn’t mean an overall end to solar. As an investment and form of energy, solar is still an incredibly low-cost form of energy. In the face of continually rising electric prices from the utilities, solar will continue to have its place in the market.
What does the difference in payback period look like though? We ran some numbers so you don’t have to.
Payback Period (ROI) – The time it takes for a solar system to offset enough energy that the system recoups all it’s cost and pays for itself.
To properly simulate the change in payback period, we set up system parameters to ensure all variables are the same. For this example, we looked at:
- 8 kW Array producing 10,000 kWh/year
- We assumed 100% of that energy was consumed by the home, so none was sent back to the grid for net metering
- Electric rate = $0.173/kWh to match the US average electric rate in 2024
- Utility cost escalation set to 2.89%, matching the US average escalation rate over the last 10 years.
- Panel degradation set to 0.25%
Our research ran one simulation without battery storage, for $3/Watt, or $24,000, and one with battery storage at a starting price of $34,000.
In the simulation without battery storage, the system where a homeowner got to take the federal solar tax credit paid for itself in 10 years. The system without the federal solar tax credit paid for itself in 13 years.
In the simulation with battery storage, the increased cost of adding a battery unsurprisingly added a few years to the payback but kept the same trend. The system with the federal solar tax credit paid for itself in 13 years, and the system without the ITC paid for itself in 18 years.
The Overall Effect of No Tax Credit
Clearly, the loss of a federal solar tax credit pushes payback period back by a number of years, but doesn’t make solar unfeasible for homeowners. In both our examples, the systems not only pay for themselves, but go on to produce $40,000-$50,000 in additional value for a home over a 30 year period. That’s value that provides real impact to a home.
Overall, losing the federal solar tax credit will be a major hit to the industry, but solar isn’t going anywhere. Solar installers whose business is diversified and are selling on value in an investment over just a low monthly payment, can weather any coming storm and set themselves up for success.
Be sure to follow and check in on our social media channels for more updates on the solar tax credit.
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