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Solar Renewable Energy Credits (SREC)
Solar Renewable Energy Credits, or SRECs can be the most confusing part of going solar. Nevertheless they are vitally important to understand because they will be worth a significant amount of money over the life of your system.
ENERGY CREDIT VIDEO
HOW MANY ENERGY CREDITS WILL MY SYSTEM PRODUCE?
Once it has been certified and registered, your system will produce one SREC every time it produces a megawatt-hour (1,000 kWh) of electricity. As a rule of thumb, you can estimate the number of SRECs a system will produce by multiplying the size of the system by 1.2. For example, a 5-kilowatt system will produce approximately 6 SRECs each year.
What is a SREC?
Solar Renewable Energy Certificates (SRECs) are a solar incentive that allows homeowners to sell certificates to their utility. A homeowner will earn one SREC for every 1000 kilowatt hours (kWhs) produced by their solar panel system. An SREC can be worth as much as $300 in certain markets.
SRECs exist as a result of a regulation known as the renewable portfolio standard (RPS). Renewable portfolio standards are state laws that require utilities to produce a specific percentage of their electricity from renewable resources. Nearly 30 states and Washington, D.C. have an RPS, and eight states have a renewable portfolio goal.
To meet their RPS requirements, electricity providers must obtain renewable energy certificates (RECs), which serve as proof that they have either produced renewable electricity themselves or paid someone who is producing renewable electricity for the right to “count” that electricity themselves. Many renewable portfolio standards also have a solar carve-out, which requires that a minimum percentage of electricity sales in that state come specifically from solar power. In those cases, SRECs are used to account for solar electricity production.
SRECs are just like RECs, but specific to electricity that comes from solar panels. For every megawatt hour (MWh) of electricity that a solar energy system produces, a corresponding SREC is created. Just as RECs are bought and sold to transfer the right to count renewable electricity, SRECs can be bought and sold to transfer the right to count solar electricity.
What happens to SREC’s when I move?
If you sell your solar home while there is an active SREC market in your state, you retain the rights to sell your system’s SRECs even after moving. That means that, even if you sell your home, you could still receive income from the solar panel system you installed for years after. That being said, you also have the option to transfer the rights to the SRECs to the new home buyer if agreed upon as part of the sale, which is very common. Many homeowners use this as a negotiating tactic when trying to sell their property for more money.
SOLAR AND TAXES: PAYING WHAT YOU OWE AND GETTING PAID WHAT YOU’RE OWED
(NOTE: The information in this article should not be construed as tax advice. We recommend you check with your tax adviser on this credit and tax preparation questions.)
If you are a new solar owner it is important you understand what you can and can’t deduct as part of your new solar system.
The federal government offers a non-refundable 26% credit off your system’s purchased cost. For this tax season, this credit can be recovered for systems placed in service before the end of 2016. This credit is covered under section 25D of the IRS Code. The relevant sections are 25D(d)(2), 25D(e)(2), and 25D(d)8. The Federal Tax Credit for homeowners is scheduled to lower to 22% in 2021. It is set to expire at the end of 2023.
This credit reduces the amount of tax you will pay in the year you take the credit. Assume you paid $10,000 for a solar system and your total tax bill that year was $6,500. You would get a $3,000 tax credit. So, your final tax bill would be $3,500. Assuming that you paid taxes through withholding from your paycheck or made quarterly estimated tax payments, you would probably get money back in a refund.
Under the same scenario, let’s assume your tax bill was only $2,000. You can only take the tax credit up to zeroing out your tax liability for the year. But, you would be able to roll the remaining credit over to account for your taxes the next year, so you aren’t losing out if you can’t take the entire credit in one year.
Solar customers are able to take the tax credit starting the year their system goes into service. So, if your system was installed in December, but it wasn’t approved by the utility company to be switched on until January, the conservative approach would be to wait until the next year to claim the tax credit. Interpretations vary on the exact meaning of “in service” however. An alternate interpretation would be when the system is fully installed and tested by the installer and subsequently inspected and approved for use by your local jurisdiction.
Does that 26% cover covering?
A key solar tax question is does the credit apply to structural improvements you need to make in order to complete the installation. For example, let’s say you had to make improvements to your roof as part of your installation. Is that covered?
Here’s what the IRS says:
Qualified solar electric property costs are costs for property that uses solar energy to generate electricity for use in your home located in the United States. No costs relating to a solar panel or other property installed as a roof (or portion thereof) will fail to qualify solely because the property constitutes a structural component of the structure on which it is installed.
This would seem to indicate that you may be able to include the costs of roofing into the tax credit as long as it is a structural component of the installation. A practical example of this would be if a home needed to have its roof re-enforced (the rafters or trusses for example) to support an installation that may be covered under the tax credit whereas replacement of roofing shingles, since they are not structural in nature, would not be covered.
What you’ll owe
The 26% tax credit only applies if you own your system. If you lease your system, the company you lease from is eligible to take the tax credit. If you own your system (you pay cash or finance your purchase through a loan), you will also own any Solar Renewable Energy Credits (SRECs) generated by the system. The money you earn from selling these SRECs is taxable. Think of this like capital gains taxes you would have to pay upon the sale of a stock.