Going Solar in Arizona
It’s no surprise that Arizona has been a pioneer in the solar industry. Residents enjoy sunshine for 85% of the year, making it the ideal location for going solar.
The state ranks second only to California in total installed solar capacity, which sat at just over 2,300 megawatts in 2015.
Solar energy’s popularity is a good thing for the earth, however, its long history in AZ means that some of the most lucrative rebates and incentives have expired. On the other hand, economies of scale and stiff competition have caused a drop in the average price of systems in the state. All told there are roughly 400 solar companies in Arizona, making it convenient for residents when it comes time to shop for an installer. Due to the unique dynamics of the industry in this state, there are things to take into consideration before jumping into the solar decision. Some of these include:
- Financing and other payment options for your AZ solar system
- Tax credits, exemptions, and other financial incentives
- What happens if you decide to sell your home with solar installed
- Ways to ensure you hire a reliable installer
- Estimated energy bill savings
Payment Options for Solar in Arizona
A photovoltaic power system is a hefty investment – buying an average sized system in AZ will set you back about $17,000, possibly more depending on what you choose. There are some other options, but due to various factors involved in this state in particular, you’ll want to take an extra hard look at the details of each one.
Leasing a system is an option in more than half of the United States, including Arizona. Leasing offers the opportunity for homeowners to avoid a large cash outlay while still being able to get into the solar action. An installer facilitates the installation and essentially sells the homeowner the resulting power through a fixed monthly payment. Lease contracts may run 15-20 years, and the installer retains ownership during this time. Just as with a loan, you must meet qualifying criteria, and in fact, sometimes it’s even more difficult to qualify for a lease than it is for, say, a HELOC (home equity line of credit-see below). FICO score requirements can be as high as 625-700, and you must sign a binding contract. Leasing can be a viable option for those who want to go green, but don’t have the cash to put down for a purchase. Along with looking at the normal pros and cons of any solar lease, you must consider the fact that Arizona comes with an extra con which most states don’t.
The issue is complex – in 2013 the Department of Revenue decided that leased systems should not be exempt from property taxes because they consider the systems to technically be mini-utilities being administered by the installer/owner. This meant that the DOR put the burden of the taxes onto the solar companies, who in turn often choose to pass the responsibility along to the leasing (or PPA) consumer. Two solar companies subsequently sued the DOR, and in an odd ruling in June of 2015 a superior court judge essentially ended up siding with both parties. The results of this ruling are unclear. The task of determining just who should pay the property taxes on leased systems could land on the laps of county assessors, but the true impact is not yet known. If you do choose this route, it’s wise to check with your local municipality to find out whether or not you will be liable for taxes assessed on the added value that solar brings to your property. Pros of solar leasing:
• Homeowners usually have no maintenance or repair responsibilities, although this can vary so be sure to check with installers to see who covers what. • Because there is typically no money required down on the system, there is no payback time – savings on energy bills should be immediate. • There are no installation costs, and the price of your system is broken up over a period of years. • Your system could produce more power than you need, allowing you to benefit from credits to your bill. This comes in especially handy during the hottest months of the year when air conditioning bills are at their highest.
Cons of solar leasing:
• Depending upon the installer’s terms, you may be responsible for some maintenance, or replacement in certain situations such as natural disasters. Be sure to read the fine print so you know exactly what’s covered. • If your home uses more energy than your system produces, your lease payment plus the electricity bill could offset any savings. • Tax credits and any other financial incentives offered by the federal or state government belong to the owner of the system, not the homeowner. • Just as utility companies normally raise their rates each year, solar leases often include an annual escalator. For example, a contract with SolarCity involves agreeing to a 0-2.0% per year increase in payments each year for the length of the lease. • Selling a house before the end of a lease contract can be challenging. Potential buyers must meet credit score criteria – and be willing to assume the payment. Otherwise you’ll be forced to buy out the contract. • The system may not be eligible for property tax exemption. This could cause your overall savings to shrink considerably since solar adds about $20,000 to a home’s value.
One other option offered by some Arizona solar companies is a prepaid lease. This arrangement typically results in the homeowner paying much less per kWh by paying the entire contract upfront – sometimes as little as 50% of the amount per kWh you’d pay over the course of 20 years of monthly payments. If you’re considering this option, weigh the price of the prepaid contract against buying a system outright to be sure it’s financially advantageous, because at the end of the term, the installer will still technically own the panels and may opt to take them back unless you choose to renew your contract or purchase the system (typically at a reduced cost).
Power Purchase Agreements (PPAs)
Power Purchase Agreements are similar to solar leases, with one major difference. Rather than making a “rent” payment on your system, with a PPA the homeowner agrees to pay a certain amount per kWh of energy used. Traditional energy rates in Arizona are very low right now – about 11.1 cents per kWh, so it’s important to consider whether a solar PPA will net you any savings over your regular electric bill. Just as with a lease, you will need to meet credit requirements in order to enter into a PPA. While it’s not the right choice for everyone, a Power Purchase Agreement may be beneficial if you don’t have the money to put down upfront for owning your own system. Pros of PPAs
• As with a lease, the owner of the unit is usually responsible for maintenance and repairs. • There is often little to no money required down at the beginning of the contract. • In the best case scenario, you will see significant savings by way of the locked-in per kWh rate if local utility rates rise.
Cons of PPAs
• Selling your home may pose issues with this third-party ownership arrangement, just as with a lease. • Green energy incentives such as the federal tax credit go to the installer/owner rather than the homeowner. • If you want to buy the system after a number of years, the total of your PPA payments plus the purchase price will likely be more than what you would have paid for a brand-new system in the first place. • As with a lease, this third-party option may end up boosting your property taxes.
Purchasing Your System with Cash
Paying cash up front for solar is almost always the most economically rewarding way to go green with your electricity. Without any interest charges or monthly payments, any power your system generates will truly belong to you, which is particularly advantageous if your system produces all of the power your home needs (in Arizona this may not happen during the hottest months, as kilowatt-hours used will be higher the more you use your air conditioning). With the low-cost of traditional electricity rates in AZ, buying your own system free of monthly payments plus interest makes good financial sense because even a 5% interest rate on a HELOC can shave off a considerable amount of your energy bill savings. Still, looking at both the benefits and drawbacks of this option helps you see the big picture in order to make the best choice for your situation. Pros of a cash solar purchase:
• You’ll own your own equipment, which means that any energy generated will be yours to keep. • Once you recoup your investment through energy bill savings, you’re essentially getting free electricity. • You won’t have to throw money away on interest charges. • Tax credits and other financial incentives will belong to you rather than to the installer. • Should the need to sell your home arise, you’ll be able to reap the benefits of the increased value without worrying about attracting buyers who are willing to take over lease payments.
Cons of a cash solar purchase:
• All maintenance and repairs are solely your responsibility (although most equipment does come with a lengthy warranty and maintenance is typically slim to none). • Payback time in Arizona is on the slower side compared to other states, at approximately 10 years.
Solar Loans in Arizona
If you’re considering going solar in AZ but don’t have the thousands of dollars on-hand to put into paying for your system outright, a solar loan may be an option. Fortunately, there are several avenues to pursue in terms of obtaining financing for a photovoltaic installation. • Personal loan from a bank or credit union – personal loans may have a higher interest rate than other loans, particularly if they’re unsecured, and could require an origination fee. But, they are generally simple and straight-forward to apply for. • HELOC – a Home Equity Line of Credit is available to those with enough equity in their home, and interest rates are fairly competitive, at under five percent. • Installer financing – many solar companies offer their own financing options, often at very competitive rates. For example Arizona Solar Solutions currently offers a 12-year loan at a 2.99% interest rate. Be sure to ask plenty of questions – installers often use third-party lenders rather than financing the system themselves, so you want to be fully aware of all the terms of the loan and from whom you’re borrowing. • Fannie Mae – you may be eligible to borrow up to $15,000 toward your solar installation in Arizona via the federal government’s Residential Energy Efficiency Improvement Loans. At below-market interest rates, this is a worthy option to investigate. Certain restrictions as to the type of roof and system you have may apply. No matter which solar loan option you choose, it’s a good idea to compare several financing sources in order to get the best possible interest rate and loan terms. With such a robust, competitive solar environment in Arizona, it may even be possible to negotiate a loan with no money down.
A loan is a good choice for those who qualify, putting solar power within reach without a huge cash outlay. Like any payment option, solar loans have their benefits and drawbacks. Pros of solar loans:
• As long as your payment amount is below the amount of your energy bill savings, you’ll see the benefits immediately, on the first power bill. • Installation typically requires little to no money down, depending upon which type of loan you choose. • Even if you borrowing the money to buy your system, you still retain ownership and are entitled to all available financial incentives and tax benefits. • Payments on a solar loan are normally lower than those on a lease or Power Purchase Agreement (be sure to make these comparisons side by side before making a final decision, however). • After a period of years, typically between 7 and 15, your system will be completely paid off, allowing you to sell your home without concern for payments or contract transfers.
Cons of solar loans:
• Some loans required collateral, which in most cases means putting your home up as a guarantee in case of default. • Using a loan to purchase your Arizona PV system means you’ll pay more total for the system than you would if paying all in cash up front, due to the addition of interest charges. • PPAs and leases are faster to process than a loan application. • If you choose to sell your home before the loan term is up, you will have to pay the loan off one way or another (this aspect may be nullified by the increase in your home’s value). • As the owner of the system, you are responsible for any maintenance or repairs that arise (it’s notable that PV systems typically require little to no maintenance, and the equipment often comes with lengthy warranties).
Are solar panels worth it in Arizona?
Despite the fact that solar rebate incentives have fizzled out in Arizona, they do have a strong RPS – Renewable Portfolio Standard. This means that the state has a goal to achieve a certain level of alternative energy generation by a specified time, in this state’s case, 15% by 2025. Of this amount, 30% must be distributed energy, such as wind or solar. There is no specified solar carve-out included in this goal as there are is in many other states. Even though the state doesn’t offer SRECs (Solar Renewable Energy Credits – proof of alternative energy generation that can be sold to utility companies in order to meet their solar energy production requirements), consumers can still take advantage of the federal tax incentive, plus other various financial benefits of installing a photovoltaic system.
Interconnection is the process of tying your solar power system into the local utility company’s grid so that you have access to any extra power you might need above and beyond what your system produces. Interconnection also allows for net metering, which is a way to send extra energy generated by your unit back into the grid so that you can get credit for it on future energy bills. Each utility has their own interconnection policy requiring that you apply for tie-in. The company then reviews the system, associated documentation, and approves or denies interconnection. You might wonder why you need the utility company’s permission to connect to a grid that your home already utilizes for traditional electricity. In part, the process is in place because the utility must ensure that your PV system will not compromise the reliability and safety of their equipment. They analyze the system’s type and size, customer load, and how those elements will interact with the grid. Arizona has received a grade of “F” in its interconnection policies from the IREC (Interstate Renewable Energy Council) due to a lack of universal procedure policy. This means there are no limits placed on the length of time utilities can take to review your application and no across-the-board standards for how the process is carried out.
While financial incentives for installing solar power are a bit slim in Arizona, there are still plenty of reasons to take the leap and put a photovoltaic system on your home. As mentioned above, it’s important to note that if you opt for a solar lease of Power Purchase Agreement you will not be eligible for the tax credits and other incentives available in this state, including the property tax exemption.
Federal Tax Credit
The federal Investment Tax Credit (ITC) is one of the major reasons many people choose to go solar. It slashes the cost of your installation by nearly a third, via a 30% tax credit, as long as your system meets the qualification criteria:
• Installation of the PV system must have been between January 1, 2006 and December 31, 2019. • You as the homeowner must be the owner of the system. If you lease or have a PPA, you may not claim the ITC. • Your solar power system must be an original installation – this means if you buy a home which is already equipped with solar panels, you may not claim the ITC on that system.
The Investment Tax Credit was scheduled to expire at the end of 2016, however the government extended the credit and it will continue until 2022, decreasing in steps until the final year, after which residential installations will no longer be eligible. This particular credit is calculated on a basis of the net price of the system. What that means is that once any promotions or discounts are deducted from the retail price, you will be able to receive a tax credit for 30% of that amount – the final total you paid for the system. In addition, if your tax burden is not high enough to eat up your entire ITC amount, you can carry the remaining balance over to your next year’s tax liability. There may additional criteria depending upon your individual tax situation, so be sure to consult your tax preparer when applying for this credit to ensure you’re getting the full amount for which you are eligible.
Arizona Solar Energy Tax Incentives
Arizona, like many other states, also offers some attractive benefits to consumers who install photovoltaic power systems.
State Sales Tax Exemption
The state of Arizona grants solar purchasers exemption from paying sales tax on their systems. This can result in significant savings – the state has a variable sales tax rate due to the fact that there is a base rate of 5.6%, on top of city and county rates. These may total up to 10% in sales tax, which means on a $20,000 system you would save $2,000 in sales tax alone.
Property Tax Exemption
Just like 37 other states, Arizona offers a property tax exemption for those who choose solar as their preferred method of going green. There is no cap on the amount of equipment you can claim on this exemption, but you will have to provide documentation regarding the purchase and installation to your county assessor. This information must be provided within six months of installation in order to be eligible for the exemption. Considering that solar panels can add $20,000 or more in value to your home, this exemption is definitely worth the time and effort to apply.
Why There Is No SREC Market in Arizona
SRECs – Solar Renewable Energy Credits – have played a huge part in the popularity of residential solar energy. These credits allow homeowners to sell their power production certification to utility companies for a pretty hefty profit – a few hundred dollars in some cases. The purpose of such sales is to help utilities to meet state government requirements for alternative energy production. The lack of SRECs in AZ is good and bad – good because it’s largely due to the fact that utility companies in the state are at a point where they are able to meet RPS requirements for green energy generation, eliminating the need to purchase certificates from private solar power system owners. This is bad because it means that consumers can’t capitalize on their own solar energy production in Arizona the way those in many other states are able to. This also means that the payback period is longer in Arizona than is typical.
Net metering goes hand-in-hand with interconnection and provides a way for you as the PV system owner to benefit from any excess power your system generates. This is considered a solar power incentive in Arizona and most other states because it provides you with what is essentially free energy in the form of credits to your bill. You feed in power you aren’t using during certain times of day or year, and then the electric company measures the energy through net metering and credits your bill so that you can use the power during times your system isn’t producing enough energy for your home’s demands. Net metering isn’t directly an income-producing incentive, but it does save you a considerable amount of money on your electric bill aside from the normal savings just by using solar power.
There are a couple things you should know about this process, however. Utility companies operate differently when it comes to net metering. Some will give you a one to one kWh ratio, while others offer a slightly reduced return for each kWh you send them. You do get to carry these credits over indefinitely. Make sure to get the details about your local area’s specific net metering practices so you can take this into account when calculating the payback time of your investment.
Selling Your Arizona Home with Solar Panels
Selling a home with solar panels already installed is a bit like trying to sell house with a swimming pool – buyers tend to either love it or hate it. On the plus side, houses with existing solar energy can sell for more than those that don’t have it. Regardless of any pros and cons of putting your home up for sale when it is equipped with solar panels, in the end buyers are going to buy a home they love – and the vast majority aren’t going to let a PV system be the make or break factor. Interested buyers likely will, however, have plenty of questions for you, so you’ll need to be armed and ready with answers so that you can allay their concerns and set their minds at ease. Common concerns include:
• How much will I really save on my energy bill? • Is there any maintenance required, and if so, who is responsible and how is it accomplished? • What happens with the loan or lease on the solar system? Will that interfere with the buying process? • Is there a warranty on the equipment, and will it be valid if new owners take over the house?
You may need to consult your installer for answers to some of these questions while others can be addressed just by allowing potential buyers to peruse your past energy bills. Because Arizona is a state with a longer solar system payback time than average, it’s important to think about whether you may need to sell your home in the near future, before you even consider installing solar. If there is a possibility that you may have to move within fewer than 7 to 10 years, it’s probably best to wait until you’re in your long-term house before going ahead with the installation.
Selling Your Home with a Solar Lease
Few experts deny that selling a home with a solar lease or PPA can be a bit of a sticky situation. It’s not that you can’t sell your house if you’re in the middle of a contract, it’s that it just might take a bit more time to find just the right buyer. Your interested party will have to meet credit requirements for the solar provider, and they must be willing to take over the payments on the remainder of your lease. The closer you are to the end of your lease term at the time of the sale, the better, because if it becomes necessary you can make the final (hopefully minimal) payments, thereby removing any perceived roadblocks that may be giving buyers pause. Ultimately, an existing solar installation isn’t likely to stop a buyer who adores your home and is happy with all of the other aspects, such as location and size. In addition, you’re able to appeal to a specific demographic – those who are already eco-conscious and reflect that philosophy in their lifestyle choices.
You don’t hire a contractor to remodel your kitchen or bathroom without vetting them thoroughly and making sure they’re qualified to do the job properly and on budget and the same should be true of your solar installer. There are certain questions you can ask in order to ensure the best and smoothest possible experience when it comes time to start the big project: • Can the company provide references for past clients that are willing to be contacted by potential customers? • How long has the installer been in the solar power industry, and specifically residential installations? How many installations have they done? • Is there anyone on staff who possesses North American Board of Certified Energy Practitioners certification? NABCEP certification is the gold standard in the industry, with rigorous criteria for attaining the label. • Does the company have the appropriate licensing, bonding, and insurance – on every team member? • Is there an equipment warranty, and if so, what is covered, and for how long? • What types of financing options does the installer offer, and are they provided by the company itself or by a third-party lender? • What is the anticipated timeline – for the beginning of the project, as well as time to completion? • Is all of the work completed by members of the company or do they employ subcontractors? • Can they provide you with assistance in the interconnection application process, and/or with documentation or other needed help for dealing with tax exemptions and other incentives? • What is the customer service protocol if something should go wrong, or repairs are needed? • Are there any hidden fees involved in the price, or is what you see what you pay?
You should also ensure that the installer is familiar with the net metering policy and can provide guidance on how the process works. There are multiple electricity providers in Arizona and each has their own policy as to how they handle credits, how long the credits are carried over, and what happens at the end of the year if you have remaining credits.
Controversies and Concerns
Arizona has – somewhat unfortunately – taken on the role of epicenter of the battle between solar providers and utility companies, becoming a hotbed of the uncharted territory of a power struggle that continues its ongoing tug-of-war. At the heart of this struggle is the utilities’ claim that solar customers aren’t paying their “fair share” of the fixed costs of maintaining and running the grid, even though these customers are tied into – therefore utilize the services of – this equipment. The past couple of years have brought some issues to a head when it comes to fees and costs charged to solar system owners. One of the most hotly debated elements of this war of the energy sources has been the institution of a per kW surcharge to those installing new PV systems, starting January 1, 2014. The Arizona Public Service Co., commonly known as APS and one of the largest utility companies in the state, originally lobbied for this fee to be set at $3 per kW. The Arizona Corporation Commission rejected this amount, ultimately approving a surcharge of $0.70 per kilowatt, amounting to about $5 extra per month for those with an average sized system. There have been other efforts to hit solar customers as well, such as Tucson Electric Power’s bid to lower net metering credit rates from the retail rate down to the wholesale rate. The utility companies claim that traditional energy customers are subsidizing solar customers by paying all of the maintenance costs for the grid while solar power owners reap the same benefits as everyone else without paying extra fees. The solar industry counters by pointing out that all of these hits to green consumers are an effort to hurt the competition to traditional energy companies, and could ultimately destroy the solar industry in Arizona.
Many of these rate cases are still up in the air as the involved parties bicker back and forth about which fees are fair and what amount they should each be set at. GTM (Greentech Media) does a good job of keeping an eye on the current happenings in the world of solar energy and the politics surrounding the issues.
Despite the infighting among energy providers, solar installations in Arizona are still going strong and will all of the tax credits and incentives available there, consumers can fulfill their desire to protect the earth while saving some money on their power.
As you make the decision on what type of energy to use in your home, and how best to finance that decision, there are some numbers that can help guide your decision-making process:
• Average upfront cost of installing solar in AZ: depending upon the size of system you need and the installer’s promotions, a new solar installation may cost between $17,000 and $40,000. This cost will be offset by the 30% federal tax credit, making the final cost between $11,000 and $27,000. • Average energy bill savings: with an average traditional electric bill of between $100 and $200 per month, generating the majority of a household’s power via solar can result in $30,000 to $40,000 in savings over 20 years. • The IRR (Internal Rate of Return): 12.7% on a 5 kW system • Average payback time for a PV system in Arizona: 10 years
Making the decision to go solar in Arizona is not cut and dried. Between leases, PPAs, paying cash, and taking out a loan, the financial rewards will vary according to each individual situation. In addition, the continuous attempts on the parts of each industry to push back at the other can further complicate the situation. In the end, solar will at the least end up saving you some money, and giving you a sense of satisfaction at the idea of saving 106 trees per year simply by harnessing the sun’s power to operate your home’s electrical components. By closely examining your local energy rates, combined with any payments you will need to make on your system, you can make a solid decision that will serve you well for years to come. Image Credits: via FlickR (1,2,3,4,5,6) under CC license Sources: http://www.solarcity.com/residential/states/arizona-solar http://www.seia.org/research-resources/rps-solar-carve-out-arizona http://www.cleanenergyauthority.com/solar-rebates-and-incentives/arizona/energy-equipment-property-tax-exemption/ http://www.azcentral.com/story/money/business/energy/2016/04/26/solar-net-metering-supporters-rally-capitol/83543316/ http://www.greentechmedia.com/articles/read/Arizona-Study-Claims-Solar-Leasing-Companies-Can-Afford-to-Make-Net-Meterin http://kjzz.org/content/156849/ruling-handed-down-solar-property-tax-case-against-state-revenue-department http://www.phoenixnewtimes.com/news/leased-rooftop-solar-no-longer-a-good-deal-in-arizona-says-tech-site-6628138 http://www.wsj.com/articles/solar-power-fight-hits-home-in-arizona-1438335000 http://www.azenergyfuture.com/grid-access-charge/history-of-solar-issue/ http://www.seia.org/state-solar-policy/arizona https://www.currentresults.com/Weather/Arizona/annual-days-of-sunshine.php