California has long championed renewable energy, but a change in the state’s policies last year has led to a sharp decline in the installation of residential rooftop solar in the state.

Thousands of companies — including installers, manufacturers and distributors — are reeling from the new policy, which took effect in April and greatly reduced incentives that had encouraged homeowners to install solar panels. Since the change, sales of rooftop solar installations in California dropped as much as 85 percent in some months of 2023 from a year earlier, according to a report by Ohm Analytics, a research firm that tracks the solar marketplace. Industry groups project that installations in the state will drop more than 40 percent this year and continue to decline through 2028.

“The solar installations are off a ton,” said Michael Wara, a senior research scholar at Stanford Woods Institute for the Environment. “What’s happening right now is a painful adjustment process.”

Construct Sun, a solar installation company that is based in Reno, Nev., stopped doing business in California after its sales dried up four months after the policy began; executives said the company was now focusing its efforts on Florida, North Carolina and Ohio.

“I had a very dismal pipeline and had to make the decision to shut down in California,” Thomas Devine, executive vice president of operations for Construct Sun, said. He added that the state’s rooftop policies undercut its goal to effectively eliminate greenhouse gas emissions by 2045. “These competing policies are crazy,” he said.

State officials chafe at the idea that California is undercutting renewable energy and have defended the policy change, which lowered the value of the credits homeowners with new installations receive for the power they send to the grid by 75 percent. They have argued that the old rules, which still apply to systems installed before April, offered too generous a subsidy, helping mostly affluent homeowners. As a result, lower-income people who could not afford panels were effectively left bearing more of the cost of maintaining the state’s electricity system.

“California has done more for the solar industry than any other state in the nation by providing billions in rebates and incentives since 2006,” the state’s Public Utilities Commission, which oversees rooftop solar and investor-owned utilities, said in a statement.

States across the country have wrestled with how to compensate consumers for the electricity their rooftop solar systems send to the grid. And officials have often looked to California for guidance.

Many states, including California before it changed its policy, generally allow homeowners to receive credits that are roughly equivalent to the retail electricity rate for the energy their systems send to the grid. This has never sat well with most utility companies, who contend that offering homeowners a one-for-one credit for solar energy overstates the value of that electricity. Utilities say they could buy electricity for a lot less on the wholesale market or by producing it themselves.

On the whole, renewable energy is growing and now provides more than a fifth of the nation’s electricity. In California, renewable sources produce more than a third of electricity.

But growth of carbon-free sources has become bumpy as regulators, utilities, consumers and renewable energy companies fight over its financial benefits. They are also trying to figure out ways to not just add equipment that can generate electricity but also batteries that can store it because solar and wind energy are intermittent.

California officials note that even as they reduced the compensation for rooftop solar energy they have offered residents more incentives to install batteries. Batteries, they say, can help provide energy to the grid when it is most needed, not just in the middle of the day when California typically has a surplus. The devices can also provide power during blackouts.

“Today, California has a tremendous need for more energy storage and our state must transition incentives toward storage technologies to support reliability, enable polluting gas facilities to be retired and relieve pressure on electricity rates,” said David Hochschild, chair of the California Energy Commission, which broadly oversees the energy industry.

Since regulators put in effect the new rooftop solar policy, the percentage of consumers buying solar panels with a battery increased to as much as 50 percent, from as little as 5 percent before the changes.

But batteries are expensive, especially at a time of high interest rates. Without federal tax incentives, a solar and battery system costs $33,700 on average, compared with $22,700 for systems that do not include batteries, according to EnergySage, a shopping site that compares rooftop solar panels.

Installers and homeowners say investing in rooftop solar systems is difficult to justify financially without access to adequate electricity credits. California’s decision to reduce the incentive has increased the amount of time it takes for a solar system to pay for itself to at least eight years, up from about five.

The nation’s largest residential solar company, Sunrun, which is based in San Francisco, cut about 2,000 jobs after California regulators reduced the rooftop incentives.

“It’s very unfortunate from the perspective that it is at a time when the planet’s on fire,” said Mary Powell, Sunrun’s chief executive. But she added that because of her company’s size and nationwide operations, it has been able to absorb much of the impact.

Other businesses face bigger challenges.

About four years ago, Amy Atchley started Amy’s Roofing and Solar. Before California changed its policy, solar power sales drove more than 55 percent of her business, which she runs with her husband, Brian, in Petaluma, north of San Francisco. Since the policy went into effect, solar sales fell to 45 percent. To reduce costs, Ms. Atchley said she typically recommended that her customers install solar panels when they were also replacing their roofs.

“California should be doing everything in our power to become a clean energy state,” Ms. Atchley said. “But the momentum has been halted.”

Offering energy credits to homeowners with rooftop solar was a central component of legislation, approved when Arnold Schwarzenegger was governor, that aimed to add one million solar roofs, reduce electric bills and fight climate change. The state met the roof goal in 2019 and now has panels on 1.8 million rooftops.

Some solar experts claim that the new California policy is flawed because it does not adequately take into account the environmental value rooftop solar panels provide.

“You are valuing the solar power the same as fossil fuel power, so that doesn’t make sense,” said Yogi Goswami, an engineering professor and director of the Clean Energy Research Center at the University of South Florida. “We should have given some value to the environmental factor.”

By cutting the incentive at a time when the world needs more clean energy, “they’re making it that much more difficult,” he added.

Nationally, rooftop solar grew an estimated 13 percent last year, but this year it could decline by 11.5 percent, according to the Solar Energy Industries Association, which attributes the drop primarily to California’s policy change.

Pacific Gas & Electric, California’s largest utility, said that rooftop solar connections to its system reached a record high last year, up 20 percent from 2022. That may have been because many homeowners rushed to install solar panels before the new policy took effect in April.

“At PG&E, we recognize the significant role rooftop solar plays in California’s clean energy future,” Carla Peterman, PG&E’s executive vice president for corporate affairs and a former state utility regulator, said in a statement. “We’re proud to have interconnected over 750,000 private solar customers, more than any other U.S. utility.”

Rooftop solar proponents have asked the courts to intervene, and others have lobbied regulators and state lawmakers to reverse course or risk losing more jobs and companies.

“The question is, who survives this?” said Bernadette Del Chiaro, executive director of the California Solar and Storage Association. “How many businesses make it through this transition?”

Some energy experts said that rooftop solar could regain some of its financial appeal as California raises electricity rates, which are already among the highest in the country. The utilities commission recently approved higher rates for customers of the investor-owned utilities, Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric.

Customers of PG&E will soon pay about 45 cents per kilowatt-hour, up from about 35 cents. That works out to about $250 a month for 571 kilowatt-hours, the average usage for homes in California. By comparison, the national average retail electricity rate was 16.2 cents in October.

More Californians might install solar panels and batteries not to earn credits for the excess power the panels produce but simply to reduce their dependence on utilities. But that option would mostly be an advantage that affluent homeowners are able to take rather than those with limited means, Mr. Wara of Stanford said. He added: “There is a massive affordability challenge for California electricity.”