Arizona is one of the strongest solar states in the country on pure sun-hours alone — 6.5 peak sun hours per day is better than all but a handful of U.S. markets. Without the federal Section 25D credit, the state's 25% income tax credit (up to $1,000) and excellent irradiance still make solar ROI among the best in the nation. The main nuance: APS and SRP have both moved away from full retail net metering, which means export strategy matters.
Disclaimer: Cost estimates are based on Lawrence Berkeley National Laboratory's Tracking the Sun 2024 report and NREL PVWatts data. Section 25D residential credits expired December 31, 2025. Electricity rates from EIA Electric Power Monthly. APS and SRP export rates are subject to change — confirm current terms with your utility before sizing your system. Get at least three installer quotes before deciding.
Key Takeaways
- Arizona averages ~$2.60/watt installed (LBNL 2024) — a 9 kW system runs ~$23,400 before any incentives
- 25% Arizona state income tax credit (max $1,000) plus sales tax exemption reduce net cost by ~$2,500 on a typical system
- APS net metering exports at ~$0.07–$0.09/kWh (not full retail); SRP has a separate demand-charge solar rate structure
- At 6.5 peak sun hours, Arizona systems produce significantly more than national average — a 9 kW system generates ~21,400 kWh/year
- Property tax exemption covers 100% of solar added value, permanently
What Does Solar Cost in Arizona in 2026?
Arizona's install costs are below the national average, thanks to lower labor costs, simpler permitting in most jurisdictions, and a large competitive installer market. LBNL's Tracking the Sun 2024 report puts the Arizona median at approximately $2.60/watt — about $0.15/watt below the national median of $2.75/watt.
| System Size | Gross Cost at $2.60/W | Annual Production (est.) | Notes |
|---|---|---|---|
| 6 kW | $15,600 | ~14,200 kWh/year | Smaller home, mild usage |
| 8 kW | $20,800 | ~19,000 kWh/year | Average Arizona home with A/C |
| 9 kW | $23,400 | ~21,400 kWh/year | Higher usage or EV charging |
| 11 kW | $28,600 | ~26,100 kWh/year | High-usage home, pool, multiple EVs |
Production estimates assume 6.5 peak sun hours per day — the Phoenix/Tucson average from NREL's solar resource maps. Flagstaff averages slightly less (~5.5–6.0 peak sun hours) due to elevation and occasional cloud cover; southern Arizona and Yuma average even higher (7.0+).
Arizona Solar Incentives in 2026
Arizona's incentive structure is modest compared to New York or Hawaii, but the combination of the state income tax credit, sales tax exemption, and property tax exemption adds up to real savings.
| Incentive | Type | Value | Notes |
|---|---|---|---|
| 25% AZ State Income Tax Credit | Tax credit (against AZ income tax) | Up to $1,000 max | 25% of installation cost; credit may carry forward |
| Sales Tax Exemption (ARS 42-5061) | Upfront cost reduction | Saves ~8.37% on equipment | Applies to solar panels, inverters, racking |
| Property Tax Exemption (ARS 42-11054) | Ongoing tax savings | Solar added value excluded from assessed value | Permanent; applies to full added home value |
| APS / SRP Net Metering | Ongoing export credit | ~$0.07–$0.09/kWh for APS; SRP demand-based | Not full retail; self-consumption is more valuable |
On a $23,400 system: the $1,000 state tax credit is modest but straightforward. The sales tax exemption at ~8.37% saves approximately $1,959 on equipment — this is one of the more generous sales tax exemptions in the country. Combined, you're looking at roughly $2,959 in upfront incentives on a typical 9 kW system.
According to Arizona Department of Revenue guidance on the solar tax credit, the residential credit can be claimed on Arizona Form 310 and carried forward if it exceeds your tax liability.
How APS and SRP Handle Solar Export
This is the key nuance in Arizona solar in 2026. Both of the state's two largest utilities have reduced solar export compensation below full retail rates, which makes the self-consumption strategy critical.
Arizona Public Service (APS)
APS moved away from full retail net metering in 2017 and continues to offer export credits at avoided cost rates of approximately $0.07–$0.09/kWh. The retail rate in APS territory is approximately $0.134/kWh on standard plans — meaning export earns roughly half what it would cost to buy that electricity back.
APS also offers time-of-use rate plans where peak pricing can reach $0.20–$0.25/kWh in summer afternoon hours. Under TOU plans, the gap between export value ($0.08/kWh) and peak import value ($0.22/kWh) is even larger — making battery storage and self-consumption strategies more financially compelling.
SRP (Salt River Project)
SRP has perhaps the most complex solar rate structure in the state. When you install solar, SRP requires you to switch to their E-27 solar rate, which includes a demand charge based on your peak 30-minute electricity draw during on-peak hours. This means even if you produce more solar than you use, a few high-demand events per month can result in significant demand charges.
According to SRP's Customer Education on Solar, the demand-charge structure can add $20–$50/month to bills for homeowners who don't carefully manage their peak consumption. A battery that smooths out demand peaks can substantially improve the economics for SRP customers.
The Practical Implication for System Sizing
With both APS and SRP offering poor export rates:
- Don't oversize your system beyond ~90% of annual consumption
- Self-consumption strategy matters — shift loads (dishwasher, laundry, EV charging) to solar production hours
- Battery storage has a stronger case in Arizona than in full retail net metering states
Arizona Solar Payback Math
Despite the reduced export rates, Arizona's outstanding sun exposure keeps payback competitive. A 9 kW system in Phoenix:
- Annual production: ~21,400 kWh
- Self-consumption (75%): 16,050 kWh × $0.134/kWh = $2,151 savings
- Export (25%): 5,350 kWh × $0.08/kWh = $428 credit
- Total annual benefit: ~$2,579
- Net system cost (after incentives): ~$20,441
- Estimated payback: ~7.9 years
That's a strong result for a state without state income tax credit above $1,000 — it's primarily driven by the high production from 6.5 peak sun hours. Use the Solar ROI Calculator to model your specific ZIP code, utility, and rate plan.
Tucson vs. Phoenix: Does Location Affect Economics?
Both cities have excellent solar resources, but there are small differences worth noting.
| City | Peak Sun Hours/Day | Primary Utility | 8 kW Annual Production | Payback (est., after incentives) |
|---|---|---|---|---|
| Phoenix | 6.5 | APS or SRP | ~19,000 kWh | 7–9 years |
| Tucson | 6.5–7.0 | TEP (Tucson Electric Power) | ~19,500 kWh | 7–9 years |
| Scottsdale | 6.5 | APS | ~19,000 kWh | 7–9 years |
| Flagstaff | 5.5–6.0 | APS | ~16,000–17,500 kWh | 9–11 years |
| Yuma | 7.0+ | APS | ~20,600+ kWh | 6–8 years |
Tucson Electric Power (TEP) offers a home solar tariff that operates differently from APS and SRP — TEP's export rates are slightly different. Confirm terms directly with TEP if you're in their service territory.
Should You Add Battery Storage in Arizona?
Under APS's reduced export rate structure and SRP's demand-charge model, battery storage has a clearer financial case in Arizona than in most states. A battery allows you to:
- Store midday surplus instead of exporting it at $0.08/kWh
- Use stored energy in the evening when grid rates are higher
- Smooth SRP demand peaks to avoid high demand charges
- Provide backup power during outages (relevant in Arizona summer storm seasons)
A Tesla Powerwall 3 (~$10,000–$13,000 installed) adds roughly 4–6 years to the combined system payback, but reduces net grid consumption and can eliminate demand charges for SRP customers. If you're an SRP customer, the battery economics are particularly worth modeling. Use the Solar ROI Calculator and factor in the demand charge reduction.
Bottom Line
Arizona is one of the clearest solar opportunities in the 2026 market. Excellent sun, below-average install costs, and a meaningful incentive stack (state credit + sales tax exemption + property tax exemption) combine to produce payback periods of 7–9 years in Phoenix and Tucson without any federal credit. The reduced export rates from APS and SRP are the one caveat — right-size your system and consider battery storage if you're on SRP's demand-charge solar rate.
Run your numbers with the Solar ROI Calculator. If you're comparing a cash purchase to a lease or PPA, the Solar Lease vs. Buy vs. PPA Calculator can help you decide which structure makes the most sense for your situation.
Related Guides
- Is Solar Worth It in 2026? — National payback analysis and how Arizona compares to other sunny states.
- Solar Panel Cost by State in 2026 — See how Arizona's cost and incentive structure compares to every other state.
- Net Metering Guide 2026 — Full explanation of APS and SRP export rates and what they mean for sizing decisions.
- Home Battery Storage Cost in 2026 — Whether battery storage makes sense in Arizona under reduced net metering export rates.
