Burned by the sun: How tax incentives distort the residential solar market

As the clock struck midnight on New Year’s Eve, a much-hyped tax credit boosting the installation of solar panels on residential rooftops came to a halt. The One Big Beautiful Bill Act signed by President Trump in July eliminated the Residential Clean Energy Credit (RCEC) as of December 31, 2025.

The credit, as expanded through President Biden’s Inflation Reduction Act enacted in 2022, covers 30 percent of the cost of installing solar panels and other qualifying “green energy” systems, although most tax claims are for solar energy systems. Some “green energy” advocates and industry analysts warned that eliminating the RCEC could sharply reduce solar installations, raise costs for homeowners, and disrupt jobs as well as market confidence, with demand projections and industry surveys signaling significant headwinds for the residential solar market.

But to many observers, it had long been clear that there was a dark cloud growing ever more visible behind the shine of the residential solar market. Over the past few years, multiple residential solar firms have gone bankrupt. During this time, consumer complaints mounted, with homeowners accusing solar roof installers of greatly understating the costs.

This underlying weakness in the residential solar market was recently exposed through allegations against Sunnova, a prominent market player. As Alana Goodman reported in the Washington Free Beacon in October, a whistleblower met with the Biden administration’s Securities and Exchange Commission to present evidence alleging that Sunnova was misleading investors in the performance of its customer contracts, only to have this complaint fall on deaf ears.

While this whistleblower held discussions with the SEC, the Department of Energy approved a $3 billion federal loan guarantee for Sunnova. Yet even with this government largesse, Sunnova still filed for bankruptcy in June 2025.

Sunnova is not an isolated case of the residential solar industry’s increasing financial instability. Other residential solar firms declared bankruptcy in the past couple of years, including Mosaic, SunPower, and PosiGen. The common denominator is an unsustainable financing model encouraged by government favoritism embedded in the RCEC.

How the RCEC’s design and valuation method interact

The RCEC is calculated as a percentage of a solar system’s fair market value (FMV), which is the amount reported for tax purposes and used to calculate the credit, rather than the installer’s out-of-pocket cost. Because the credit is based on FMV, and the FMV itself reflects the value of the credit, the calculation becomes recursive. Each adjustment to the credit increases the FMV, which in turn changes the size of the credit, much like adding frosting to a cake when the frosting must equal 30 percent of the final weight. This feedback loop continues until it settles at an equilibrium, resulting in a final FMV of roughly 1.43 times the pre-RCEC value.

Because solar companies — rather than homeowners — receive the RCEC, they are incentivized to maximize reported FMV. In doing so, they may understate operations, maintenance, or removal costs, which are ultimately passed on to homeowners. As a result, projects appear more profitable on paper than they really are, while homeowners face higher long-term costs than initially expected.

Taxpayer cost and the scale of the RCEC

The RCEC is more than a technical calculation; it has real financial implications. In 2023, taxpayers claimed roughly $6.3 billion in residential clean energy credits, with solar accounting for over 60 percent of the claims. Combined with state incentives, this means taxpayers fund a significant portion of the cost of each residential solar system. This large public contribution shapes how residential solar companies price and market installations, creating incentives to inflate reported values and minimize anticipated costs.

Consumer financing models and risk amplification

In the residential solar market, the incentives created by the RCEC are expressed through two main consumer-facing financing models: power purchase agreements (PPAs) and zero-down installations. Under a PPA, a third-party solar company installs and retains ownership of a rooftop system while selling the electricity it produces to the homeowner at a predetermined rate over a long-term contract. Zero-down installations allow homeowners to avoid upfront costs by entering into leases or long-term financing arrangements in which payments are spread over time.

By emphasizing immediate affordability and deferring costs into the future, these arrangements accelerated customer acquisition and reshaped how residential solar was brought to market. They did so by tying the economics of residential solar to long-term contractual cash flows.

It is important to note that these financing models are not inherently destabilizing. Comparable arrangements are common in commercial real estate, industrial equipment leasing, and energy services contracting, where the customer pays for output rather than owning the asset. In those markets, asset valuations and contract pricing are guided by competitive pressures and expected cash flows. In the case of residential solar, the RCEC rewards higher reported system values upfront. This weakens price discipline and allows otherwise conventional financing tools to amplify the policy-driven overvaluation instead of reflecting economic fundamentals.

Although residential solar is far smaller in scale than the US housing market, there are structural parallels to the subprime mortgage bubble. In both cases, markets relied on third-party financing to accelerate adoption. Both examples had policy incentives that encouraged overstatement of asset values. Thankfully, the residential solar market remains relatively niche. Any downfall or decline would primarily affect investors, lenders, and firms in the residential solar sector, as opposed to the broader financial system.

From panels to problems: The hidden cost of scarce service

Even though there may not be systemic risk from a possible residential solar industry implosion, there could still be harms from the policy distortion to millions of American homeowners with solar panel systems on their homes. Federal and state incentives like the solar tax credit play a central role in the economics of residential solar. While these incentives influence adoption, survey data suggests that a many homeowners either do not know about them or misunderstand their value. Despite this, solar systems have become increasingly common. According to the US Energy Information Administration, 3.7 percent of US homes have solar systems on their roofs.   

As residential solar firms have entered bankruptcy or exited the market in recent years, homeowners have been struggling to find maintenance services for their solar panels. According to a 2025 industry survey, 81 percent of installers reported the closure of at least one large competitor in their service area, and over 57 percent said those closures led to negative outcomes and increased service calls from customers left without a provider. Routine inspections or cleaning range from $150 to $500, whereas the average panel repair ranges from $400 to $1,000.

These challenges are not simply anecdotal. They reflect distortions created by subsidies like the RCEC, which shape pricing, warranties, and market structure. While it is unclear whether eliminating the RCEC alone will trigger broad industry exits, particularly given ongoing state incentives and regulatory frameworks, the existing subsidy-driven dynamics can meaningfully raise costs for homeowners and complicate the market for maintenance and repairs.

Lessons behind the shine of residential solar

The moral of this story is that the RCEC illustrates how policy-driven incentives distort valuation and risk perception, which creates additional vulnerabilities for investors and companies when market conditions shift. By inflating reported system values and reshaping financing incentives, the RCEC has altered how capital flowed into residential solar and how risk was priced. With that distortion now removed, markets must now reassess the sector’s true economic efficiency and long-term viability.