While solar panels can make your home cleaner, greener, and more independent, people choose to go solar to save money. Will this decision make financial sense? Will I save money? Will this be a better return on my investment in the long run?
Calculating home solar panels’ return on investment can be tricky. This guide will help you understand how to calculate and maximize it.
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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.
How do solar panels save you money?
The key value proposition of most residential solar energy systems is replacing some of your utility electricity with free electricity from the power of the sun.
So, although you will not be producing any actual income, your solar return on investment comes from how much you can save on electricity bills.
Solar panels also increase property values in many places, making your home more valuable.
What is a solar payback period?
At some point during your solar energy system’s operating lifetime, the dollar amount you invested will equal the total grid-supplied electricity costs 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. (Overpriced systems and those in unfavorable markets may have payback periods that are too long to make solar panels worth it on a financial basis.)
After this point, you can then see the returns each month in reduced energy bills. You could have years of returns after the solar payback period as home solar panels have an expected lifespan of 25 years or longer.
How to Calculate Your Solar ROI
There are solar return-on-investment calculators online you can use to get an idea how much you can save going solar. However, with many unique variables to consider, you may notice your estimated 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, and finance costs, minus 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 you pay an average electricity rate of around $0.15 per kWh for grid-supplied energy. Under a 1-to-1 net metering 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. (Under a net billing structure, it gets more complicated.) 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%.
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Factors That Influence Solar Panel ROI
Any estimated ROI number should be taken with a grain of salt. More factors will go into the exact return on investment and your solar system is designed to last two or three or more decades.
For instance, when looking at long-term performance, solar panels slowly lose efficiency over time. This means 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 at some point over the next 20 or 25 years, the electricity rates in your area will change. If utility energy prices were to increase on your property, this would cause your ROI to be greater than initially projected.
After your solar installation, it is also important to be conscious of your energy use. A higher return on investment can be achieved easier when actively finding other ways to improve your home's energy efficiency and move more of your systems and appliances to using your renewable energy, or home electrification.
How to Maximize Your Solar ROI
The primary way a home solar system lets you save money is by decreasing your electric utility bills. Depending where you live, you can maximize your solar return on investment by taking advantage of incentives and using more of the power you produce.
- Home electrification: The more of your home appliances and systems that can be run on electricity from your solar panels, the less you’ll pay on gas, propane, and electric utility bills. It’s possible to electrify most or all of your home with heat pumps for heating and cooling, a heat pump water heater, electric laundry machines, an induction stove, and more around your home.
- Net metering or net billing: If you have a net metering or net billing plan, it means you earn bill credits for solar electricity you send to the utility grid. This effectively pays for some or all of the grid electricity you use at night, for example.
- SRECs: In some states, solar owners can sell solar renewable energy certificates to utilities that must meet renewable energy requirements.
- Incentives: Knowing and taking advantage of every tax credit and rebate you are eligible for can cut the upfront cost of a home solar system, including optional battery storage, and shorten the solar payback period.
- Tracking and maintenance: Home solar panels typically are fairly low maintenance. However, regular maintenance checks by a professional solar company and keeping trees trimmed to avoid shading your solar panels will help you get the most out of your system for 25 or more years.
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. Many states, like Arizona, Colorado, Massachusetts, and North Carolina, have a specific property tax exemption for solar panels so they won’t increase your tax bill.
In the event you decide to move while your renewable energy system is still up and 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 lower than average electricity bills?
Conclusion: Is Investing in Solar Panels Worth it?
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.
Ready to calculate your solar ROI? See how much you can save with a Palmetto solar energy system.
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Frequently Asked Questions
What is considered a good solar payback period?
Solar payback periods for a new residential system can vary widely, but a common estimated range is 6-10 years. Your energy usage, local electricity rates, available incentives, system size, and choice to add energy storage to your system are some factors.
What factors affect solar return on investment?
Your energy usage, utility rate, and system size and efficiency all affect your solar payback period and return on investment. So do the incentives you can claim, your area’s climate, whether you add energy storage, and how much of your home uses electricity.
How much money do solar panels save you each month?
The savings you’ll see will likely vary month to month. Seasonal energy usage patterns, net metering credits, and sunlight exposure are some reasons savings can vary month to month even with the same system.
Do solar panels add value to your house?
Yes, solar panels have been shown to increase property value and increase resale value. Homes with solar panels sold for 4.1% more on average than comparable homes without solar according to a Zillow study in 2019.
Disclaimer: This content is for educational purposes only. Palmetto does not provide tax, legal, or accounting advice. Please consult your own tax, legal, and accounting advisors.
Andrew GiermakWriter and EditorAndrew joined Palmetto in Charlotte in August 2024. He’s been a writer in journalism, then in business, going back to almost the 20th century. He’s lived in Indiana, Virginia, Pennsylvania, Virginia again, and now North Carolina for the last 12 years. He likes golf. Is he good at it? Not so much.
