The U.S. now has enough solar energy capacity to power 6.2 million homes, according to a recent report by the Solar Energy Industry Association. Solar power is growing at an unprecedented rate of 43 percent, year over year. The plummeting cost of solar energy is fueling a boom in popularity.

The mission of the SunShot Initiative by the Department of Energy is “to make solar energy fully cost-competitive with traditional energy sources before the end of this decade, making this clean renewable energy resource more affordable and accessible to Americans.” The goal is to reduce the cost of solar energy to $.06 per kilowatt hour by 2020, and this appears to be very attainable at this point.

In fact, it is easier than ever to receive competitive bids for installing a solar system and solar has already achieved price parity in 20 states. How’d that happen? Let’s look behind the scenes to gain a deeper understanding of price trends and how they impact the solar energy market.

1. Manufacturing Costs Taper Down

Solar panels, inverter costs and panel racking costs have come down at a steady pace each year, resulting in large declines over time. There are a variety of causes, including manufacturing efficiencies, a steep decline in polysilicone prices from their high levels a decade ago (a material used by the photovoltaic solar industry) and fierce competition among manufacturers.

This downward price trend is very common with new technologies. Remember how expensive new DVD players and cell phones were when they were first introduced? The cost per unit declines sharply once manufacturing kicks into high gear.

2. Solar Technology Advances

The greater the efficiency of the solar panels (and other equipment), the greater the overall energy production of the system. Although the most efficient solar panels available on the market have an efficiency of 22.5 percent, most panels are in the 14 to 16 percent range. This difference in efficiency means that one system can have a solar energy output that is 50 percent greater than a less efficient system. Some other associated costs are reduced by greater efficiency, such as racking system equipment, installation and transportation costs. Efficiency in turn fuels greater opportunities to sell more solar generation capacity, as many residential systems are limited by the space available for mounting panels.

3. Solar Investment Tax Credit

Since its passage in 2006, the Solar Investment Tax Credit has offered greater stability and a significant incentive for installing solar energy systems, for both the residential and commercial markets. The tax credit was created to support the rapid deployment of solar energy until it is cost competitive without it. The incentive offers a 30 percent tax credit for both residential and commercial solar energy systems. The credit was extended in 2015 and will be in effect until 2023, tapering off over time.

For residential solar systems, the tax credit is a dollar-for-dollar reduction in the federal income taxes owed by the homeowners by 30 percent of the installed cost of the solar system. A $10,000 solar system can qualify for a $3,000 tax credit. This is different from a tax write-off and is more valuable to the taxpayer.

Homeowners who lease solar systems cannot take advantage of the tax credit directly, but the solar leasor can. In theory, some or all of the savings generated from the tax credit are passed onto the homeowners through solar leases with more-affordable terms.

GTM Research predicts the tax credit extension will boost U.S. solar energy installations by 54 percent through 2020 and add enough solar energy generation capacity to power 4 million homes. Although the tax credit doesn’t directly reduce the cost of solar energy, it does help create the economy of scale needed for solar panels to be cost effective and helps create stability in the market for companies wanting to invest in research, infrastructure and other investments with a longer return. It’s worth noting that some, however, argue that the tax credit stifles innovation by artificially lowering prices.

4. Synergy Allows for Greater Solar Energy Growth

The trends that have surrounded the growth of the solar energy industry continue, making future growth likely. Today’s solar systems are generating more electricity and  a larger percentage of total household energy use. EnergySage, the so-called “Expedia of solar,” gathers data on quoted solar systems, offering insights into the months ahead. EnergySage recently released the third semiannual Solar Marketplace Intel Report, which indicates that recent solar energy trends will continue. For example, the quoted H1 2016 solar systems have a payback period of 7.5 years on average, compared with 8.2 years in H1 2015. EnergySage reports that the average quoted solar system size is 7.9 kW, compared with the average installed solar system size of just 5 kW.

The lower the price of a solar system and the shorter the payback period, the more people will go solar. People also tend to install solar energy systems when their neighbors do, thus solar installations encourage greater growth.

Featured image courtesy of Shutterstock.com

By Sarah Lozanova

Sarah Lozanova is an environmental journalist and copywriter and has worked as a consultant to help large corporations become more sustainable. She is the author of Humane Home: Easy Steps for Sustainable & Green Living, and her renewable energy experience includes residential and commercial solar energy installations. She teaches green business classes to graduate students at Unity College and holds an MBA in sustainable management from the Presidio Graduate School.