The Case For A Residential Solar Depreciation Benefit

By Mouli Vaidyanathan, PhD, PE, CEM, Founder of Mouli Engineering Inc.

Solar electricity is being promoted as an alternate energy source. Conventional dirty (coal) grid power is being phased out. The promotion appears environmentally cleaner and to favor a new technology.

How much of this promotion is for “being clean & new technology” vs financing vehicles.

What is the motivating factor to an entity to do solar PV? Is it for the environment? Is it the cost savings? Is it fixing the cost of energy? Is it to be at the cutting edge of technology? These are questions that the solar owner asks before going solar on her property.

Financing vehicles (tax subsidies) are favorable to entities with higher tax burden.  

So, what is the cost of financing vehicles? While a financing vehicle like depreciation is well understood, its use in residential solar is not widespread. Depreciation is bundled in by large solar companies along with leasing agreements.

Can a small company that cannot do this financial bundling play a part in solar PV? Yes, it can. It needs to find its secret sauce. The secret sauce has to be better in cost and simultaneously show significant improvement in reliability.

Yet, the tilts of financing can be quite difficult to overcome. And here is why? The table below shows the installed cost versus payback for two different scenarios:

Scenario 1: With federal 30% tax credit + depreciation

Scenario 2: With federal 30% tax credit

Scenario 1: 30% federal tax credit + depreciation

Assuming $0.13/kWh and 2000 kWh/kW per year in California (southern).

From the above table, payback is not affected because of installed price. An increase of $2/W in the installed price from $3.3 to $5.3 has made no significant difference in payback.

Tax equity companies have relied on the lease agreements with residential owners to take the depreciation benefit through a financial vehicle.

Scenario 2: Only 30% federal tax credit

There is no depreciation for a residential owner wishing to go solar. She only has the federal 30% tax credit.

With only the tax credit, the installed price becomes a very important factor. You can see that the payback almost doubled when the price increased by $2/W.

Location: Solar Generation Potential

The location of the solar system is extremely important to the payback. Because we have installations in southern California, Massachusetts, Minnesota, and many other states, we have a very good understanding of net generation of solar based on location.  

The installed cost is nearly the same between MN and CA. However, because there is more solar generation in CA, the payback is almost ½ the time in California.  

Filtering the Details

Depreciation is helping spur large solar projects, especially the utility-scale and large commercial (>300kW) projects. However, it is not helping small businesses that cannot do the lease options.    

Large solar companies are not suited to do residential solar. They have very high cost structure that emphasizes tax benefits over efficiency. They have no interests in technology improvements that will reduce installed costs (see tables above). To them, depreciation and tax benefit represent their motivation to do solar.

Residential solar has no significant increase in electrical infrastructure, has almost zero transmission losses, and has the best utilization of land resource (roofs are better than allocating additional land), unlike large utility-scale projects. Only solar electricity technology can give clean point-of-use power.

In order to decentralize residential solar, a residential solar depreciation benefit should be provided for residential home owners. There is no cost to the government, while it will create multiple small business, decentralized residential solar systems and spur more growth. Besides it will level the playing field between the small and large solar companies. And it will ensure solar will not see the kind of issue seen in Nevada.

This residential solar depreciation must be given nationwide similar to the federal 30% tax credit. This will ensure a situation like what is happening in Nevada will not happen and will promote small business to compete with large ones.

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About the Author: Mouli Vaidyanathan is the inventor of the SolarPod Crown, a breakthrough gable roof solar installation. Simply place the smartly designed panel assembly on the roof without damage to the roof structure. SolarPod Crown is based on a revolutionary new design that is wind tunnel–tested to 130 mph wind loads, UL Listed, and Fire Class A rated. Mouli holds other inventions related to simplifying solar installations along with modularity for off-grid and on-grid solar systems. He holds a PhD from UW–Madison and is a PE in multiple US States.