California Solar Cost: Tax Credits & Rebates Guide 2023

Solar power in California

California produces more solar energy than any other state, generating almost 30 percent of the nation’s solar power. State regulations involving renewable energy goals and efficiency standards for homes have driven higher demand for residential solar panels. A major investment like home solar panels requires extensive research before you make a significant financial decision. Learn everything you need to know about solar panels in California, including the average cost, state incentives and whether solar is the right investment for your home.

Can solar panels save you money?

California solar panel cost

The cost of solar panels has decreased by 43 percent in California in the last decade, according to the Solar Energy Industries Association (SEIA). Cheaper solar prices have encouraged greater solar adoption.

The price of a solar array is measured in dollars per watt. According to the Lawrence Berkeley National Laboratory (an Office of Science lab for the Department of Energy), the average cost of solar panels in the U.S. is $3.67 per watt for an 8.6 kilowatt (kW) system (averages are rounded up). This works out to a total installed cost of $31,558 before factoring in tax credits and incentives.

In California, the average price per watt is $3.47, according to data from Find Energy. That price is slightly lower than the national average. What’s more, the typical California home requires a smaller solar system because of low residential energy usage. For context, the average U.S. household consumes 886 kilowatt-hours (kWh) of energy per month, while most California homes only use 535 kWh per month. Using less electricity means you could invest in a smaller (and probably cheaper) solar panel system to power your entire home. According to Find Energy, the average household in California needs a 5 kW solar system to cover their energy needs, which leads to a total installed cost of $17,350.

However, some households use more electricity than others. Using the national average system size of 8.6 kW and California’s average price per watt ($3.47), the total cost shakes out to $29,842. Understanding how much energy you use in a year can help you estimate the system size you would need for your home. You can find your energy usage listed on your electricity bill.

The following table shows the average cost of solar panels in California for a range of system sizes using the state’s average price per watt of $3.47. The more electricity you use, the larger your system needs to be to cover your energy usage completely.

The cost of a solar system depends on several factors, including the system size and the typical price per watt. You may find a correlation between a lower price per watt for a larger system size. The price per watt includes both hardware costs and soft costs. Hardware costs include the physical materials in the system, like solar panels, inverters and solar batteries, which are becoming more common in California following NEM 3.0, the state’s updated net metering terms. Soft costs include installation costs, permits and administrative fees that are baked into the total cost of the system.

How much do solar panels save?

California residents tend to pay high electricity rates. Based on the most recent data from the Energy Information Administration (EIA) from July 2023, residential energy prices in California (29.58 cents per kWh) were almost 86 percent higher than the national average (15.91 cents per kWh).

Using the state’s average usage of 535 kWh per month and the average California annual energy rate from 2022 (26 cents per kWh), we know that most Californians paid $140 in energy bills each month, or $1,680 for the year. Consumers may pay higher energy bills than the state’s average.

Over time, your solar panels will pay for themselves through savings on your energy bills. If you invest in a system that completely covers your energy usage, you could almost eliminate your energy bills (you’ll still pay some utility fees to remain connected to the power grid). 

Based on the average price and 5 kW system size in California, as well as the typical energy bills in the state, you can expect to break even on your solar system in about seven years. Here’s how we calculated the payback period:

(Total cost – 30% savings from federal tax credit) ÷ average annual electricity bill = Payback period

Lower costs with California solar incentives

The initial cost of solar panels remains a major blocker for residents thinking about going solar. Thankfully, there are a variety of solar incentives available to offset the cost, including:

• Tax credits. Solar tax credits don’t offer upfront cash savings. Instead, you’ll receive the savings as a credit when you file your annual tax return. The credit amount is based on the total price of your solar system.
• Rebates. Unlike tax credits, you will receive solar rebates within a specific time frame after your purchase, normally in the form of cashback or a check in the mail. Some installers will claim the rebate for you, passing the savings on to you. 
• Regulatory incentives. Most states (and some local governments) offer regulatory incentives like sales tax exemption on solar panels. Net metering is another common incentive to encourage homeowners’ investment in solar.

The most lucrative solar incentive to know about is the Residential Clean Energy Credit, which is part of the 2022 Inflation Reduction Act. This incentive offers 30 percent of the total cost of your solar array as a credit on your taxes. Regardless of where you live, you qualify for this tax credit as long as you own your solar panels and they’re installed on your primary or secondary residence. Based on the average cost of a 5 kW solar system in California, this tax credit alone could offset your solar cost by as much as $5,205. If your solar system is more expensive than the state average price, this credit is worth even more.

You can combine the federal tax credit with state solar incentives. The following table includes information about several other California solar incentives.

Solar incentives in San Francisco

San Francisco’s green building code requires new construction homes and businesses to meet set energy efficiency standards. Solar panels are one of the eligible technologies that builders can install to meet these standards. Net metering is also available in San Francisco through the utility company. PG&E is the primary utility in San Francisco and offers a rundown of how net metering terms have been affected by NEM 3.0. 

Solar incentives in Los Angeles

Los Angeles passed its Green Building Retrofit Ordinance in 2009, which requires city-owned buildings be retrofitted with energy-efficient technologies like solar panels. The Los Angeles Department of Water and Power (LADWP) is also one of the main utilities offering net metering. 

Solar incentives in San Diego

San Diego offers a Green Building Incentive Program, which waives the building permit and plan check fees for new or remodeled homes installing solar panels. The solar permitting process can take up to six weeks, so this incentive is valuable since it can dramatically expedite the installation timeline. Net metering is available in San Diego through the utility company. San Diego Gas & Electric is a main utility in the city offering net metering.

Solar financing options

Your financial circumstances will determine which solar financing option is best for you. Some residents are able to purchase solar panels upfront through a single cash purchase. That isn’t feasible for everyone, though. 

Solar loans are a common financing option to purchase solar panels without the high upfront cost. There are a few common types of solar loans, including personal loans, FHA loans or home equity loans. Solar loans include monthly payments and interest fees, but the initial costs are low. 

Solar leases or power purchase agreements (PPAs) may also be available, depending on the installer you choose. With leases and PPAs, the installer retains ownership of the system, but the panels are installed on your roof and power your home. The upfront cost is very low, but you’re charged a monthly fee to lease the system. A benefit is the installer will handle system maintenance and repairs. However, you won’t qualify for tax credits or incentives because you don’t own the system.

Are solar panels a good investment?

Solar panels can be a worthwhile investment in California, but the payback period and long-term savings will depend on your home’s energy usage and yearly electricity bills. Additionally, your financial circumstances and the financing route you take will determine whether you experience immediate savings or if it will take a while to recoup your investment.

Californians tend to pay more for electricity, with rates rising to historic highs over the last year, according to the EIA. If the price of electricity continues to rise, now could be a good time to invest in solar panels. At the same time, NEM 3.0 reduces how much you can receive from net metering credits, which could extend the payback period. If net metering was a motivating factor for you, consider the changes in California before signing a contract with a solar installer.