What You Need to Know About Commercial Solar Power in Three Easy Lessons — Part 2: Understanding Rebates and Tax Incentives

(Editor’s Note: Part 1 of this series — Under­stand­ing Your Bill can be found here.)

Com­mer­cial solar power sys­tems are eco­nom­i­cal now — and in the first part of our series we explained how under­stand­ing your bill is the key to under­stand­ing what is cur­rently dri­ving your costs and how much you will be able to save.

Now we turn to the next step in prepar­ing to install a com­mer­cial solar power sys­tem — under­stand­ing the applic­a­ble rebates and tax incen­tives.  We have writ­ten at great length before about these top­ics, includ­ing a blog post sum­ma­riz­ing the year-end state of all solar power rebates in the Run on Sun ser­vice area and our solar tax incen­tives page pro­vides great detail into this topic for all types of sys­tem own­ers — com­mer­cial, res­i­den­tial and non-profit.  In this post we will ana­lyze just those rebates and incen­tives that are applic­a­ble to com­mer­cial solar power installations.

PBI vs EPBB Rebates for Com­mer­cial Solar Power Systems

Rebates for com­mer­cial solar power sys­tems come in two fla­vors — Per­for­mance Based Incen­tives (PBI) and Expected Performance-Based Buy­down (EPBB) — but PBI rebates are by far the more com­mon for com­mer­cial sys­tems above 30 kW.  EPBB rebates are lump-sum pay­ments made based on the expected per­for­mance of the sys­tem.  The rebate rate is denoted in dol­lars per Watt based on the cal­cu­lated AC Watts for the sys­tem.  EPBB rebates are nice for the con­sumer as the money is paid as soon as the sys­tem is approved, but for larger sys­tems, they rep­re­sent too much upfront risk for the util­ity.  Since there is usu­ally no require­ment to mon­i­tor the per­for­mance of the sys­tem, the util­ity ends up putting out its money with lit­tle guar­an­tee of reap­ing the expected benefit.

PBI rebates, on the other hand, are paid out over five years based on the actual per­for­mance of the solar power sys­tem as ver­i­fied by mon­i­tor­ing devices attached to the sys­tem inverter(s).  PBI rebates are denoted in cents per kilo­watt hour gen­er­ated.  Since the util­ity only pays for power actu­ally pro­vided, rebate dol­lars are guar­an­teed of pro­vid­ing the bar­gained for ben­e­fit. How­ever, because of the need to pro­vide the util­ity with ver­i­fied per­for­mance data, PBI rebates increase the Oper­a­tions & Main­te­nance expense of a com­mer­cial solar power sys­tem — at least for the five years of the rebate.  On the other hand, if your sys­tem is well main­tained and con­ser­v­a­tively designed, you may actu­ally receive more in rebate pay­ments than orig­i­nally projected.

Each util­ity will have a thresh­old sys­tem size beyond which the sys­tem owner must take a PBI rebate.

Regional Rebate Amounts for Com­mer­cial Solar Power Systems

Of late there has been a great deal of tur­moil among the local munic­i­pal util­i­ties regard­ing their rebates.  This has lead to uncer­tainty and delays.  As of this writ­ing, here is the land­scape for com­mer­cial solar rebates in the Run on Sun ser­vice area:

This means that as of this writ­ing, only SCE and PWP are pay­ing rebates on com­mer­cial solar power sys­tems greater than 30 kW. While LADWP is expected to come back online this sum­mer, in what form remains to be seen.

We believe that these sus­pen­sions have come about because the lobby for com­mer­cial solar rebates is small and too often silent.  Of course, when no pub­lic dis­cus­sion occurs before the deci­sion is made to sus­pend rebates — as hap­pened in both Glen­dale and Bur­bank — it is pretty hard to orga­nize solar sup­port­ers.  Indeed, in Los Ange­les, where the plans to severely limit solar rebates were pub­licly debated, the solar com­mu­nity came out in num­bers to argue for those rebates — which resulted in LADWP only sus­pend­ing their pro­gram for a com­par­a­tively short time.

The con­clu­sion in inescapable — until there is a statewide feed-in tar­iff at a rea­son­able rate that offers pre­dictabil­ity along with eco­nomic via­bil­ity, the mar­ket for com­mer­cial solar in this state will con­tinue to be sub­ject to the caprice of unac­count­able bureaucrats.

Tax Incen­tives for Com­mer­cial Solar Power Systems

While the news regard­ing rebates remains murky, the news on the tax front is — at least for this year — very good.

One caveat before we begin — while we believe this infor­ma­tion to be accu­rate as of the date that it is writ­ten, you must always con­sult with your tax pro­fes­sional as to the applic­a­bil­ity of these incen­tives to your tax sit­u­a­tion.  Accoun­tants shouldn’t design solar power sys­tems and we don’t give tax advice.

Com­mer­cial solar power sys­tems qual­ify for a fed­eral Invest­ment Tax Credit of a full 30% on the direct cost of the sys­tem.  (By “direct cost” we mean those costs directly asso­ci­ated with installing the solar power sys­tem.  The applic­a­bil­ity of the Credit to indi­rect costs — such as decid­ing to re-roof your build­ing before adding solar — must be decided on a case-by-case basis — see why that tax pro gets paid the big bucks?)  That Credit can be taken over two years and is a sub­stan­tial incen­tive if you have the tax lia­bil­ity to off­set.  For­tu­nately for sys­tems that are put in ser­vice in 2011, com­mer­cial solar power sys­tem own­ers can elect to receive a Grant directly from the Trea­sury for the full 30%, regard­less of their tax appetite.  More­over, that Grant is paid out typ­i­cally within 60 days of project com­ple­tion, as opposed to being cred­ited in the next tax pay­ment cycle.  This pro­vi­sion in the tax code is sub­ject to expi­ra­tion at the end of this year, and there is no telling whether a more con­ser­v­a­tive Con­gress will renew it.  (The tax Credit, how­ever, con­tin­ues through 2016.)

Com­mer­cial solar power sys­tems also qual­ify for accel­er­ated depre­ci­a­tion.  For the past sev­eral years, that was a five year period with 50% in Year 1 and the remain­ing 50% divided evenly over the next four years.  (Cal­i­for­nia offers a sim­i­lar depre­ci­a­tion sched­ule.)  How­ever, once again 2011 is spe­cial.  This year alone, that depre­ci­a­tion is 100% in Year 1, mean­ing that sys­tem own­ers may real­ize more of their sav­ings sooner.

Col­lec­tively, rebates and tax incen­tives can reduce the cost of a com­mer­cial solar power sys­tem by 50% or more.  When com­bined with the sav­ings from the energy gen­er­ated, it is easy to see why a com­mer­cial solar power sys­tem is one of the best invest­ments a build­ing or busi­ness owner can make.

Up Next — Part 3 of Our Series: Under­stand­ing Your Bid for a Com­mer­cial Solar Power System