One of the most important considerations when going solar is the payback period for your solar panels. People understandably want to know when and how they will make money back on their investment in home solar power. This article will help you understand all the factors that go into calculating your solar panel payback period, and teach you how to calculate your own return on investment.
What Is A Solar Panel Payback Period?
Your solar panel payback period refers to the amount of time it takes for you to save as much on your electric bill as you paid for your solar panel system. Think of it like a calculator that can help you determine how long it will take to break even on your initial solar power investment.
Note: If you finance the solar power system with your solar company, your “payback period”, or solar panel break even point, may be different from the amount of time it takes to pay off your system, since you might decide to use that savings for other things besides paying down your solar loan.
You can calculate your solar panel payback period by starting with the total cost of installing the solar panels, minus any incentives or rebates you receive. Then just divide the remaining cost by your monthly electric bill savings, until you reach the amount you originally spent.
$17,000 (Cost to have a solar panel system installed)
- $5,000 (Rebates you receive)
= $12,000 Investment (Your total cost after incentives)
$1,200 Savings Per Year (Total savings per year if your solar panels reduce your energy bill by $100 each month)
$12,000 Investment / $1,200 Savings Per Year = 10 Year Solar Payback Period
Of course, this calculation assumes that your electricity rates don't go up. If they do, your savings are also going to increase, and your payback period will be shorter.
What is a Good Solar Payback Period?
The most common estimate of the average payback period for solar panels is six to ten years. This is a pretty wide range because there are many factors that will influence the number of years it can take to pay off your panels and the monthly savings you can expect.
For example, a larger solar installation is going to have a higher upfront cost, but higher monthly savings. And if the electricity rate from your utility goes up significantly, that can have a large impact on your long-term savings as well.
Modern photovoltaic (PV) solar panels should last at least twenty-five years, with at least 80% efficiency at the end of that period. Some new models of solar panels can last even longer than that. So, if your payback period is ten years, you are still looking at around fifteen years of additional savings on your electrical costs.
Calculating Your Solar Power Payback Period
While several factors can change your ultimate payback period, this formula will give you a good idea of what to expect:
Combined Costs divided by Annual Benefits
Combined costs are the total cost of your PV system, minus any solar tax credits. You don’t need to include any credits or solar incentives in the total system cost because that’s money you don’t have to pay back.
Annual benefits combine the savings on your electricity bills with other factors like net metering and Solar Renewable Energy Certificates (SRECs). Net metering and SRECs are considered incentives/credits, so they are benefits and don’t need to be included in the combined costs.
Check out this example to see the calculations in action:
- Combined Costs: $20,000 System - $6,000 Solar Tax Credits = $14,000
- Solar tax credits are taken out to get a more accurate starting number.
- Annual Benefits: $120 Monthly Electricity Bill Savings X 12 Months = $1,440
- If you are saving $120 in electrical payments each month because of your solar panels, you multiply that by the twelve months of the year to get a yearly savings of $1,440.
- Formula: $14,000/$1,440 = 9.7 years
- Finally, you take your adjusted combined costs (having taken out any solar tax credits and incentives) and divide them by your annual benefits, aka yearly savings. This gives you the number of years it will take for the amount you paid for your solar panels to equal the savings you’ll see by paying less for electricity.
This example doesn't even include net metering or selling SRECs, which can give you even more total energy bill savings. Some calculations don’t include them in estimates because the incentives can vary from month to month, but they can still help you pay off your solar panels faster if you put the value of those incentives towards your payments, and reach your solar panel payoff point faster.
Factors That Impact Your Solar Power Payback Period
To calculate your solar power payback period, there are several factors you need to consider:
- Total cost of your system (How much did it cost to have your solar panels installed?)
- Solar tax credits and rebates (Did you get rebates or credits for installing solar panels in your home?)
- Additional incentives (Do you get any other incentives you receive for putting in a clean energy source in your home?)
- Electricity usage (How much electricity are you using each month on a normal basis?)
- Energy production (How efficient are your solar panels?)
- Cost of electricity (How much does the electricity from your utility cost?)
Total Cost of Your Solar Power System
Calculating the total cost of your system is simple: It’s how much your solar panel installation costs without any assistance from federal, state, or local governments.
Let's look at some data and examples to show exactly how your total cost can be calculated:
- Calculate How Much Electricity You Use Per Year: The easiest way to determine how much electricity you use is to just gather up a year’s worth of utility bills and add up each month. If you don’t have those bills handy, it’s also possible to use a sample month and extract from that the typical power usage of that home over the course of the year, taking seasonality into account.
- For this example, let’s say that the home uses 1,200 kilowatt-hours (kWh) per month on average, for a total of 14,400 kWh per year.
- Calculate the Size of Your System: If one kilowatt (kW) of solar in your area can produce around 1,600 kilowatt-hours (kWh) of electricity per year, and you use 14,400 kilowatt-hours of electricity every year, you would divide 14,400 by 1,600 to get an expected system size of roughly 9 kW. For more information, check out How Many Solar Panels Do I Need On My Roof?
- Depending on how much electricity you use, you may need a larger or smaller solar power system to offset your energy usage. It's important to figure out exactly what you need, so you don't end up with a system that can't support your house, or one that produces significantly more than you consume.
- Calculate Your Overall Cost: On average, an 8 kW home solar energy system costs around $2.99 per watt, or roughly $23,920 before any incentives are applied. However, it's fairly easy to get incentives that can decrease your cost by several thousand dollars, such as the Solar Investment Tax Credit, or ITC.
Incentives and Tax Credits
If you do get a discount on your solar panel installation, such as a rebate for switching to renewable energy, that would count as an incentive. Any money you receive to help pay for your solar panels is money you don't have to actually pay back to anyone, which can help make your solar power payback period even shorter.
You also need to consider any savings you are getting from net metering, which is when you get credit from your utility for feeding extra electricity back into the grid. Basically, if your solar panels create more electricity than you need to power your house, you can feed that excess energy back to your electric utility, and they’ll give you credit that can offset the cost of energy that you use in the future.
SRECs create a market for clean energy and allow you to make more money from your solar electricity generation. You can sell one SREC for every megawatt-hour (MWh) or 1,000 kilowatt-hours (kWh) of solar electricity your home generates. Some states must produce a certain amount of electricity from renewable resources, so they pay homeowners with residential solar panels for the electricity they create. You are getting paid to help the planet!
Your Home's Energy Consumption
The amount of electricity your home uses has a huge impact on how much you pay each month for electricity, which also means it will impact your potential savings.
The first step in calculating your home’s energy cost is to determine how much electricity you use, and then figure out how much you will save based on the rate you pay your utility company.
For example, if you pay 12 cents per kWh, and you use around 1,200 kWh each month, you would spend around $144 per month on electricity. So you can expect to save around that much each month by going solar, which you can use to pay off your solar panels. Once they’re fully paid off, your savings will be even higher because every dollar saved goes right into your pocket.
However, you also need to consider that the cost of your electricity will likely go up over time. This means you could ultimately save even more money in the long run, and decrease the amount of time it takes to pay off your solar panels.
The Electricity Production of Your Solar Panels
Another aspect you need to consider is the efficiency of your solar panels. Most solar payback period calculations assume that your solar panels offset 100% of your energy usage. However, that isn't always going to be true, as some systems aren’t designed to offset 100% of your energy, and some will actually produce more than you need, so you can get net metering credits.
In addition, your solar panels will slowly become less efficient over time, which means you won't save quite as much money towards the end of their life, because you may still need some electricity from your electrical provider. However, contemporary solar panels retain around 80% generation efficiency for their average 25-year life, which will be more than enough to help you reach your PV payback period and beyond.
Solar Panel Payback Period Overview
It’s important to understand how and when you can see a return on your investment in solar panels. Installing a solar power system can save you money in the long run, but it can take some time for you to see the full extent of those savings. This time period is often called the solar payback period.
Your payback period for solar panels refers to the amount of time it will take for the savings from your solar panels to equal the amount you pay for them. You can estimate your solar payback by understanding the relationship between your electricity usage, total system cost, solar tax credits and rebates, energy production, additional incentives, and the cost of electricity. Unfortunately, because of these interrelated factors, there is no cookie-cutter answer for the average solar panel payback period.
At Palmetto, we’re here to help you analyze your home to determine your energy consumption needs and your solar production expectations. With that, we can help you calculate your expected solar panel payback period. To get started with that process, enter your address in our Solar Savings Estimate Tool, and find out how much you can save today!