The financial benefits of going solar are now well documented. Solar panel systems actually function as investments with strong rates of return, and homeowners generating solar electricity can avoid paying increased utility rates by eliminating their electricity bills. Multiple studies show that installing solar panels on your home can even increase your property’s value! If you’re reviewing multiple quotes, there are plenty of metrics that can help you make a decision about which solar option is best for you, but most solar shoppers rely on one metric in particular: the solar panel payback period or break-even point.
Key takeaways: solar payback periods
- Your “solar payback period” is the time it takes to make back your initial solar investment.
- For most solar shoppers on EnergySage, you’ll break even in about 8.7 years.
- You calculate your solar payback period by dividing the combined costs for your system by your annual benefits.
- Start comparing solar quotes on the EnergySage Marketplace for maximum savings.
What you’ll learn in this article
- The average payback period of solar panels
- Factors impacting your payback period
- How to calculate solar payback periods
- A step-by-step guide for calculating your solar payback period
- Frequently asked questions about solar payback periods
What’s the average payback period for solar panels?
The solar panel payback period is a calculation that estimates how long it will take for you to “break even” on your solar energy investment. Increased utility electricity rates and lower equipment costs are making it easier and less expensive to for homeowners to own, rather than lease, their solar panel systems. Comparing the payback period of various quotes from solar installers is an easy way to comprehend the financial merits of each option, and identify the point in time at which your solar investment will start to earn you money.
The average solar payback period on EnergySage is just about 8.7 years. If your cost of installing solar is $20,000 and your system is going to save you $2,300 a year on foregone energy bills, your solar panel payback or “break-even point” will be 8.7 years ($20,000/$2,300 = 8.7).
Factors impacting your payback period
Both the combined costs and annual benefits of going solar will impact your solar payback period. These include:
Gross cost of solar panel system
The gross cost of installing solar on your home is dependent on the size of the system you select and the equipment that makes up that system.
Value of up-front financial incentives
Tax breaks and rebates can dramatically reduce the cost of going solar. The federal investment tax credit (ITC) allows you to deduct 26 percent of the cost of your system from your taxes, and additional state and local financial incentives may also be available in your area.
Average monthly electricity use
The amount of electricity that you consume monthly is an indicator of both the size of system you need and the amount of electricity that you can offset each month with solar. The higher your electricity bills are, the shorter your estimated payback period will be, as you can reduce or eliminate this bill as soon as your panels are operational.
Estimated electricity generation
While solar installers will try to provide you with a system that matches your electricity consumption, practical constraints like the size of your roof and seasonal weather variation may impact the amount of electricity that you can produce on-site.
Additional financial incentives
In some areas of the country, you may be able to earn additional incentives in the form of solar renewable energy certificates (SRECs) or other utility programs that give you a per kilowatt-hour credit for the electricity that your solar panels generate. Depending on the size of your solar energy system, these can represent a significant monetary benefit.
How is the solar panel payback period calculated?
To calculate your solar payback period, you’ll need to take the following steps:
- Determine combined costs. Subtract the value of up-front incentives and rebates from the gross cost of your solar panel system.
- Determine annual benefits. Sum up your annual financial benefits, including avoided electricity costs and any additional incentives.
- Divide your combined costs by your annual financial benefits. The result will be the number of years it will take for you to achieve payback. Every month of savings after that point in time should be counted as a financial gain!
Calculating your solar payback period: a step-by-step guide
Let’s walk through an example to help you calculate your solar payback period:
Combined costs
First, we’ll determine your combined costs. you’ll need to know the gross cost of your solar panel system. Let’s assume the gross cost of your solar system is $20,000. Now, we need to understand the upfront incentives available to you, including the solar tax credit and local rebates or incentives. Given that the ITC is currently set at 26 percent, with a $20,000 solar system, you’ll be eligible for $5,200. Now, let’s also assume you can take advantage of an additional $1,000 in local rebates – this brings your upfront incentives to $6,200 and your combined costs to just $13,800.
Gross cost ($20,000) – upfront incentives ($6,200) = combined costs ($13,800)
Annual benefits
To calculate your annual benefits, you’ll need to know how much you’re saving each year on electricity costs. Let’s assume your monthly electricity bill is about $100 – annually, that amounts to $1,200 in avoided electricity costs assuming your system covers 100% of your electricity needs. You’ll also need to know how much you’ll receive from other incentives each year, like SRECs. In our example, we’ll assume you’re earning $500 annually from selling SRECs – this means you’ll receive $1,700 in annual benefits.
Avoided annual electricity costs ($1,200) – annual incentives ($500) = annual benefits ($1,700)
Final calculation
Now, to calculate your solar payback period, you just need to divide your combined costs by your annual benefits!
Combined costs ($13,800) / annual benefits ($1,700) = solar payback period (8.1 years)
In our example, your payback period would be 8.1 years – pretty close to the 8.7 year average on EnergySage!
Frequently asked questions about solar payback periods
Yes, solar really does pay off! The average EnergySage shopper sees a solar payback period of 8.7 years – so given that most solar systems will last at least 25-30 years, you can definitely expect your solar system to be worth the investment.
While you may not owe anything on your electricity bill, you’ll still receive an electricity bill from your utility company as long as you’re still connected to the grid.
According to the U.S. Energy Information Administration (EIA), the average electricity consumption of a U.S. household is 893 kWh. Data from the EIA show that the average cost of electricity in November 2021 was 14.12 cents in the U.S. Thus, assuming that your system covers 100% of your electricity needs, you’ll save $126 each month on avoided electricity costs, on average.
Compare solar quotes on EnergySage
For any homeowner in the early stage of shopping for solar that would just like a ballpark estimate for an installation, try our Solar Calculator that offers upfront cost and long-term savings estimates based on your location and roof type. For those looking to get quotes from local contractors today, check out our quote comparison platform.
This post originally appeared on Mother Earth News.
