Public concern about global warming and rising energy costs has led to an increased interest in clean, renewable energy. Solar energy is a particularly attractive alternative to petroleum dependence. Solar energy is a clean, reliable and endlessly renewable energy source, and new technology has made it more affordable than ever to homes and businesses.



Even so, the initial cost of buying and installing a solar energy system can be daunting. A typical solar installation for a single family dwelling could cost $20,000. Though using solar power saves money on utility bills, eventually giving a complete return on your investment, the initial cost can be prohibitive to many consumers.

Fortunately there are numerous financial incentives at the federal, state and local level that can significantly defray the cost of installing a solar energy system.

Incentives are available from federal, state and municipal governments, from local and regional groups including non-profit and private organizations, and from local utility companies.

At the federal level, the Renewable Energy and Energy Conservation Tax Act of 2005 provided funding for tax incentives for residential and commercial applications. This Act seeks to support the development of energy efficiency and energy independence.

The Act provides two federal tax incentives for homeowners. The Residential Solar Fuel Cell Tax Credit is a personal tax credit which applies to solar hot water systems, photovoltaic, or PV systems (solar electricity), fuel cells, or other solar technologies.

Homeowners can receive a credit for 30% of the cost of installing a solar energy system, with a cap of $2,000 for a PV system, and an additional $2,000 for a solar hot water system; and a cap of $500 per .5 kW generated by fuel cells.

Excess credit, that credit which amounts to more than the taxpayer's liability, can be carried forward to the next tax year. Installation must be certified by the Solar Rating and Certification Corporation, or SRCC; or by a comparable rating system endorsed by individual states.

Additionally, at least one-half of the residence's energy needs must be provided by the solar technology.

The federal government also allows a Personal Exemption : the Residential Energy Conservation Subsidy Exclusion. This exemption applies to solar and other efficiency technologies, including solar hot water, solar space heat, and Photovoltaic.

Owners of single and multi-family dwellings can deduct any subsidies provided to them by public utilities for energy conservation. That means that any increase in a homeowner's income due to a subsidy or rebate from a utility company as a result of the installation of an "energy conservation" measure, will not be taxed.

"Energy conservation" has not yet been explicitly defined by the IRS, though in practice it is understood to include solar technologies. It would wise, however, to consult with a tax advisor about this matter.

The federal government also provides federal loans, both residential and commercial. These are Energy Efficiency Mortgages, or EEMs, that home and business owners can use to finance energy efficiency improvements to existing buildings.

EEMs are available through the FHA and the VA. FHA loans allow lenders to add 100% of the costs of energy efficiency improvements to existing mortgages, by insuring loans of up to 5% of the appraised value of a home, or $4,000, whichever is the greater, with a cap of $18,000.

VA loans can be used to purchase an existing home or to refinance a mortgage for energy efficiency improvements.

EEMs are also available through Energy Star, Fannie Mae and Freddie Mac. Energy Star loans are not guaranteed by the federal government, but they currently provide a listing of 49 financial institutions that will provide loans specifically for energy efficient new homes or improvements to existing homes.

Private lenders such as Fannie Mae and Freddie Mac also provide conventional energy efficiency mortgages as well.

Federal grants are also available to commercial and agricultural entities to promote the development of energy efficiency and energy independence. Unfortunately, the Federal Renewable Energy and Energy Conservation Tax Act is due to expire at the end of 2008.

The most recent energy bill, passed in December 2007, did not extend funding for renewable energy. While the matter of funding for renewable energy will no doubt come up again, and be vigorously debated in the next budget, as of now, its future is in doubt at the federal level.

Luckily, federal funding is only one facet of the broad array of financial incentives available. At the state level, there are tax incentives, state loans, grants, and rebates, municipal, regional and local rebates, utility rebates and credits, private funding, and non-profit funding.

State and local incentives vary greatly. Some states have taken the lead in offering financial help to home and business owners who want to develop energy independence. Other states clearly lag behind, though in some cases, private, non-profit and utility incentives pick up the slack from state governments.

Each state has its own tax law, and tax incentives range from tax rebates of thousands of dollars for each system (for example Vermont offers up to $8,750 for a PV system and another $8,750 for a solar hot water system), to tax exemptions.

Two types of tax exemptions found are sales tax exemptions, a one time exemption; and property tax exemptions, which carry into successive years. Property tax exemptions allow any increase in the value of a property due to the installation of renewable energy systems to be exempt from taxation.

In addition to tax incentives at the state level, there are other sources of financial aid such as low interest loans, grants, and rebates from state and municipal governments, utility companies, and various private and non-profit organizations. Eligibility varies as widely as incentives do.

So how can a consumer find what types of financial incentives are available in his state?

The best source of information is the Database of State Incentives for Renewable Energy, or DSIRE. DSIRE is a comprehensive listing of financial incentives for renewable energy. DSIRE offers information about financial aid on the federal and state level.

To find information about your state, simply click your state on the map, and any incentives offered in your state are listed, including tax breaks, loans, grants, local or regional incentives, and rebates offered by public utility systems. Links to further websites and contact information are also provided.

Additionally, there is an easy link to federal tax information from each state page. DSIRE is the go-to site for determining what financial assistance you may be eligible to receive.

Don't overlook consulting with an experienced solar energy installation specialist. He or she should be familiar with any funding that is available in your area.

Also, do consult with a tax advisor to ensure that you correctly claim the right credits and exemptions on your tax return.

With all the financial incentives currently available, installing a solar energy system is more affordable than it has ever been. There's never been a better time than right now to invest in solar energy.