If you are a “numbers” person, or simply someone that likes to conduct a thorough amount of research, calculating the financial return on investment for any purchase can be very exciting.
Within the emission-free world of solar panels, however, calculating and understanding your potential ROI is a little bit different than your average investment property, stock purchase, or marketing campaign for your next garage sale.
In addition to the industry jargon you must learn as a first-time solar investor, attempting to calculate solar ROI can be downright difficult when considering all of the unique factors that are at play.
In this article, we will help you understand how solar return on investment works, before demonstrating exactly how to calculate the ROI for your clean energy home upgrade.
Understanding Solar ROI
For many homeowners in the United States, installing solar panels is a good investment that will increase your property value and reduce your long-term energy costs.
The key value proposition of most residential solar energy systems is that you can replace some of your existing expenses (utility company bills) using an asset that generates electricity with the power of the sun (retail price of the sun’s energy: $0).
So… although you will not be producing any actual income with the power generated by your panels, your solar return on investment can be viewed as how much you can save on electricity bills.
At some point within your solar energy system’s operating lifetime, the dollar amount you invested will equal the total grid-supplied electricity costs that you have avoided with solar power. At this break-even point, your system will have “paid for itself” in what is known as your solar panel payback period.
Here, your initial investment may be completely recouped in grid-power spending avoided. After this point, you can then see the “returns” each month on your energy bills as your solar panels continue to produce electricity and reduce your ongoing electricity expenses.
How To Calculate Your Solar ROI
Around the web, there are many solar return-on-investment calculators that you can use to get a better idea of how much money you can save by going solar. However, with many unique variables to consider and different methods of calculation on the backend, you may notice that your estimated solar ROI can change depending on what tool you use.
To give you a better idea of how solar ROI calculators work, you can follow these steps to generate your own rough estimate:
- Determine the total costs of your investment, including all project expenses, installation costs, finance costs, and any solar incentives or rebates for which you qualify.
- Estimate the approximate annual electricity production of your system.
- Multiply your system’s production by your local electricity rates to see the amount of money you can save each year on avoided utility costs.
- Project those solar savings over 25 years of efficient solar production.
- Compare how much you will save to your original investment.
For example, let’s say you purchase a 6 kW solar energy system in Boulder, Colorado. After the federal tax credit for solar, your total investment costs came out to be $16,000. According to the National Renewable Energy Laboratory’s PVWatts Calculator, this system would produce approximately 9,600 kWh of solar electricity per year in this location.
Let’s then say that you pay an average electricity rate of around $0.15 per kWh for grid-supplied energy. Under a 1-to-1 net metering or net billing structure, this means your solar panels could help you avoid up to $1,440 in utility bill expenses (9,600 kWh x $0.15 per kWh) annually. Over 20 years, this amounts to $36,000 in savings.
Compared to the original investment of $16,000, saving $36,000 in energy bill expenses can certainly make the case that solar is a wise investment in this scenario.
To get technical, you could also use a standard ROI formula (net return on investment / the cost of the original investment x 100%) to put a number on it. Here, the net return on the investment could be considered $20,000 ($36,000 in value, less $16,000), which divided by $16,000 and multiplied by 100% would equal a solar ROI of 125%.
Factors That Influence Solar Panel ROI
Although we have just illustrated how to calculate your solar ROI, this formula should always be taken with a grain of salt. In reality, there are many other factors that will influence your exact solar return on investment.
For instance, when looking at long-term performance, solar panels slowly lose efficiency over time. This means that your system will not always produce the same amount of electricity each year, with smaller outputs generated as your equipment ages.
In addition, it is very likely that at some point over the next 20 or 25 years, the electricity rates in your area will change. (And usually they will change multiple times!) If utility energy prices were to increase on your property, this would then cause your ROI to be even greater than initially projected.
After your solar installation, it is also important to be conscious of your energy use, as some homeowners can become less careful with electricity consumption knowing their panels will help lower monthly bills. As such, a high solar return on investment can be most easily achieved when actively finding other ways to improve your home's energy efficiency.
Solar ROI, Property Value, and Home Sales
With a system that saves money on energy costs right on the roof, solar panels have been proven to increase home value. If you worry this will increase your property tax each year, many states, like Arizona, have a specific exemption for solar panels that prevents their value from being considered during a property tax assessment.
In the event that you decide to move while your renewable energy system is still up in running, selling a house with solar can allow you to increase your asking price and may even lead to a quicker sale. After all, wouldn’t you want to move into a home with near-zero electricity bills?
Conclusion: Is it worth it to invest in solar panels?
To put it simply, yes, there are many instances in which it can be worth it to invest in solar panels. Although your exact solar return on investment can be tough to calculate, the amount of money you can save on grid-supplied power is often well worth it for homeowners, thanks to decades of solar electricity production.
In the right set of circumstances, you can recoup your investment in solar once, twice, or even three times over in long-term energy savings. So, unless you were planning to stop using electricity all together sometime soon, solar can be a wise investment to combat rising utility costs, protect against inflation, and keep more money in your pocket for all sorts of other endeavors.
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