Report

Federal Tax Credits and Residential Investment in Renewable Energy: A Qualitative Summary

May 11, 2017 | Thor Jensen, Hadi Dowlatabadi

Summary

The impact of residential investment tax credits (2006–2013) for renewable energy varied by type of technology, leading to larger photovoltaic systems and more solar thermal installations, but geothermal systems grew more expensive.

Key Findings

  • Homeowners’ net investment in photovoltaic systems was roughly $10 thousand regardless of the tax credit cap.
  • Suppliers of geothermal systems increased their costs, extracting a rent on the tax credit.
  • Sales of solar thermal systems were boosted by the rise in sales of photovoltaic systems.

Abstract

In this report we explore the impact of investment tax credits (ITC) aimed at renewable technologies at the residential scale. We use aggregate data from IRS filings spanning 2006–2013. During this period, the tax credit evolved both in level of support and range of technologies covered. The response of households to this natural experiment allows points to four conclusions: a) the savings due to tax credits are only passed on to homeowners when the technology is modular and suppliers are in competition (e.g., solar panels); b) net household outlay on modular systems stays the same regardless of the level of the tax incentive; c) in custom made systems (e.g., geothermal heat pumps) the tax credits are captured by the supplies; and d) signaling about the imminent end and then renewal of ITC led to an “early harvest” effect on sales of solar thermal and photovoltaic systems, causing prices to drop and annual adoptions to spike in 2008.