Effective direct incentives can take a variety of forms depending on the particular situation and administrative abilities of a given state. Some states have chosen to offer tax credits, others to offer up-front rebates administered by state agencies or utilities, and still others offer performance-based incentives that are paid by an agency or utility over time based on kWh production.

Regardless of the mechanism, certain principles underlie the most successful programs.

• Unlike in an RPS, direct incentive levels must be set by policy. The incentive level should be set so that the combination of federal and state incentives along with financial savings (through reduced consumption and net metering) yield approximately a five-year payback on the system for commercial customers and a ten-year payback for residential customers. With markedly lower installed costs, easier financing, and greater federal tax benefits, commercial systems can be offered lower incentives than residential systems (or incentives can be "tiered" by system size). States with very low energy rates or limited sunshine have to provide greater incentives than states with high electricity costs and/or plentiful sunshine.
• Where possible, incentives should reward high-performing systems. Upfront incentives can be adjusted to encourage systems that maximize peak energy production. Of course, performance-based incentives, paid on actual energy production, inherently incentivize optimal system design and encourage active, ongoing maintenance efforts.
• Phase incentives out over time. One of the main reasons for enacting solar programs is to jump-start a local solar industry. Once the industry has gotten off the ground in a big way, costs will naturally decline through increased volumes as well as competition. It's not enough just to wait around until California or Germany installs enough solar to drive down prices. The cost of solar panels is only part of the picture. Local installers need to establish themselves and gain the experience necessary to become more efficient, leading to lower overall prices to consumers. As those prices drop, incentives can drop and still maintain the payback targets described above until the point that incentives are no longer necessary to maintain a thriving solar industry.
• Keep it simple. While the state or its ratepayers have every right to get the most bang for their incentive buck, attempting to be overly specific about exactly how and where a system is sited to qualify for an incentive, with all of the attendant engineering, paperwork and inspections, often costs more than it's worth. Particularly for residential and small commercial systems, experience shows that excessive paperwork and similar bureaucratic hurdles hamper and can even halt an otherwise good program.

Solar-friendly Renewable Portfolio Standards