Should you invest in solar panels in 2022? It's complicated

Supply chain hold-ups are increasing solar panel costs, but the Investment Tax Credit is still at 26%.

Megan Wollerton Former Senior Writer/Editor
6 min read

Like many industries, residential solar panels have been affected by the pandemic and related supply chain shortages. 

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If you're dreaming of adding solar panels to your home in 2022, there's good news and bad news about pricing. First, the bad news: Manufacturing shortages and subsequent delivery delays are affecting solar service providers during the pandemic. 

Midway through 2021, solar panel prices in the US increased for the first time in seven years due to low supplies of semiconductor chips and other key panel components. Despite these setbacks, many solar providers had enough materials to complete installations last year before the prices went up, according to a report by Wood Mackenzie and the Solar Energy Industries Association. The report added, a 2022 solar system could end up costing more than it would have in 2021 as providers run out of materials and deal with continued delays and higher prices. 

"Having been in residential solar for 15 years, the pricing trend has almost always been down. The past year is different," explained Matt Partymiller, general manager of Solar Energy Solutions, a residential and commercial solar installer in the midwest and southern US. "All major manufacturers are increasing pricing for multiple reasons from cost of input materials to cost of transportation [and] cost of labor."

Now for the good news: So far, residential projects haven't been hit as hard as commercial ones. The solar Investment Tax Credit remains at 26% through this year, but it'll scale down in 2023 and phase out for residential solar projects in 2024. Even with the potential for higher project costs, those who qualify for the ITC might still find it worthwhile to get a solar system this year.

Increasing concerns about climate change and a growing interest in saving on energy costs, along with the ITC incentives, are contributing to higher demand for solar. But it's complicated deciding whether it's the right time to make such a big investment -- and the supply chain issues aren't helping. Here's what all of this means for deciding whether 2022 is the right year for you to invest in solar. 

The state of residential solar panels

Despite delays associated with the pandemic, residential solar projects increased 11% in 2020. In the third quarter of 2021, one out of every 600 households in the US installed a solar system, totaling more than 1 Gigawatt and 130,000 solar systems, according to Wood Mackenzie.

Growing interest in solar panels is due to a variety of factors, including incentives such as the Federal solar Investment Tax Credit and prices for residential solar panels decreasing by an average of 64% over the past decade. Much of that change is due to falling hardware costs, especially solar panel components, which dropped 85% between 2010 and 2020. 

Although there have been notable reductions in solar costs since 2010, the most significant declines took place earlier in the decade. 

"The cost of solar projects has declined considerably in recent years, but the cost reductions have now started to taper off and move closer to a floor, currently defined by the price of input factors such as labor, polysilicon, silver, copper, aluminum and steel," according to a report by Rystad Energy in September 2021. "These input factors have seen a clear rise in prices in 2020 and 2021."

While solar component prices are going up, the solar Investment Tax Credit is only available at 26% through 2022.

"The US solar market has never experienced this many opposing dynamics," said Michelle Davis, Wood Mackenzie's principal analyst in its Q4 2021 Solar Insights report. "On the one hand, supply chain constraints continue to escalate, putting gigawatts of projects at risk. On the other, the Build Back Better Act would be a major market stimulant for this industry, establishing long-term certainty of continued growth."

Let's look at these competing factors a bit more closely. 

  • The supply chain

Important solar panel components, such as steel, semiconductor chips and copper are currently in short supply, according to Wood Mackenzie. While solar prices stayed about the same from the fourth quarter of 2020 through the first quarter of 2021, "compounding cost increases across all materials started at the end of Q1 and are beginning to affect installers now."  

Costs continued to increase in the third quarter of 2021, although residential solar installers have faced smaller jumps in price than commercial solar providers, Wood Mackenzie found. Still, solar panel shortages "may impact future installations" of residential systems. 

"In the residential space, projects have a little bit more shielding from price sensitivity that you might see in utility or industrial solar, but certainly we're seeing residential costs go up," said Partymiller. "That makes finance projects look a little less appealing to those customers. Certainly cash projects become a little bit more expensive for those customers."

In real terms, Partymiller said a residential solar project that cost $20,000 before the prices went up might cost between $22,000 and $24,000 now. He's also seeing "more demand for solar now than ever before." Most of Solar Energy Solutions' projects haven't experienced delays due to the supply chain, but there have been exceptions. Partymiller explained that a couple residential installations have been delayed due to needing a certain component -- or the client preferring a component from a specific manufacturer -- that wasn't readily available. 

  • Solar Investment Tax Credit

Right now, the ITC provides a 26% credit to qualified individuals through 2022. The ITC rate drops to 22% in 2023, before phasing out completely for residential solar installations in 2024. One of the provisions of President Biden's Build Back Better plan includes an extension of the Investment Tax Credit for another ten years, as well as other incentives for renewable energy projects. 

"Before the investment tax credit (ITC) fully phases down under current law, the solar industry will continue to break annual installation records every year for the next three years," said Wood Mackenzie in its third-quarter 2021 report

Learn more about the ITC for residential solar systems, including who qualifies for it. 

The 2022 outlook

2022 is an interesting time for residential solar panels. The 26% ITC is locked in for this year, though the tax credit may be extended beyond its current phased plan depending on what happens with the Build Back Better Act. 

Supply chain delays and cost increases have caught up with solar panel providers, including residential installers, but so far they aren't dealing with the same sharp increases as some commercial solar companies. The current supply chain issues shouldn't hurt long-term demand for solar panels, either, although it could delay projects, according to analysis from Wood Mackenzie. "For 2022 projects, many developers took the wait-and-see approach, aiming to delay non-critical procurement decisions to avoid buying equipment at peak prices," said the report.

Partymiller said he expects prices for solar modules and components, as well as labor costs to continue to go up in 2022. "It's not going to be substantially more expensive, but I'm certainly expecting to continue to see a single digit, maybe low double digit increase in residential project prices into 2022."

These price increases could inhibit solar growth for a few years, according to Rystad Energy

But there's another interesting development in residential solar we'll be watching. New technologies, such as the GAF Energy Timberline Solar Energy Shingles, claim to be much easier to install and much less expensive than today's rooftop solar arrays. If more options like this become available, more potential customers might opt into solar now, despite the current price hikes. 

If you're thinking about adding a solar array to your home, consult a qualified professional who can help you decide how, or if, this is the right time to make such an investment. Weighing these external factors alongside your budget and other considerations will help you make the most informed decision possible. 

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