What Is a Solar Panel Payback Period? How to Calculate

A major motivation for homeowners to switch to solar power is the potential for saving money. When you buy home solar panels, it takes a few years to recoup the upfront cost of solar panels though electricity bill savings. One common question is: what is the solar panel payback period, or how long will it take for the panels to pay for themselves?

That answer depends on how much you pay for electricity, how much you save by switching to solar, and how much your solar panels cost. Those answers differ for everyone. If you lease solar panels, you’ll skip the upfront cost, making the concept of a payback period irrelevant.

What is a solar panel payback period?

Your solar panel payback period is how long it takes for you to save as much on your electric bill as you paid for your solar panel system. With a simple formula you can estimate how long it will take to break even on your initial solar power investment.

Note: If you finance the solar power system with a solar loan, your payback period, or solar panel break even point, may be different from the 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.

To calculate your payback period for solar panels, start with the total cost of installing the solar panels, minus any incentives or rebates you receive. Then divide the remaining cost by your monthly electric bill savings, until you reach the amount you originally spent.

For example:

$19,500 purchase and installation cost

$240 monthly savings

$2,880 annual savings

$19,500 Investment / $2,880 = payback period of 6.7 years

This calculation, using hypothetical values for a home solar panel system in California, is relatively short, thanks to the high cost of electricity there (and the high potential for savings). 

What is a good solar payback period?

The most common estimate of the average payback period for solar panels is 6-10 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 potentially higher monthly savings. And if the electricity rate from your utility goes up significantly, that increases your savings, since you’ll be avoiding more expensive electricity..

Modern photovoltaic (PV) solar panels typically last at least 25 years and come with warranties that guarantee 80-90% efficiency at the 25-year mark. So, if your payback period is 10 years, you are still looking at about 15 years of savings after recouping your 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.

Payback period equals combined costs divided by annual benefits.

Combined costs are the total cost of your PV system, minus any solar tax credits and other incentives. 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, including net metering or net billing credits, and solar renewable energy certificates (SRECs), if they’re available to you.

Here’s another example, using hypothetical numbers from a system in Arizona.

Solar costs: $24,173

State tax credit: $1,000 

Final cost (solar cost - incentives): $23,173

Monthly savings: $149

Annual savings: $1,788

Payback period: 12.96 years

You can see that, with a larger solar system that costs more, and Arizona’s lower cost electricity, payback periods can be longer. Even with a payback period over 12 years, you’ll still have more than a decade of savings after recouping your cost.

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? Adding battery storage changes the cost (and long-term savings) as well.
• Solar tax credits, rebates, or other incentives: Did you get rebates or credits for installing solar panels in your home?
• Energy production: How much electricity do your solar panels produce?
• Electricity usage: How much electricity are you using each month on a normal basis?
• 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.

To estimate the total cost of a solar panel system that meets your home’s needs, you need to do a little math. If you’re getting quotes from solar installers, they’ll do this work for you.

To get an idea of how many solar panels you need, start by finding how much electricity your home uses over the year (check your electric bills). Let’s assume you use 10,260 kilowatt-hours a year, how much electricity an average household uses in America. That’s how much electricity you want your system to generate.

(Shooting to produce as much electricity as you consume isn’t always the best strategy, as utility policies shift. It’s another reason to work with a reputable solar installer that’s knowledgeable about your area’s policy landscape.)

Then, calculate how many solar panels you’ll need to actually generate that much electricity. One simple way to do that is to use the production ratio for your region (the median for the United States is around 1.3).

Divide your annual electricity use by your production ratio to get a capacity for your system.

10,260 kilowatt-hours / 1.3 production ratio = 7.89 kW system

According to Palmetto’s estimates, the average cost of solar panels ranges by region from $2.36 per watt to $3.24 per watt. At that cost, a 7.89 kW system would cost between $18,620 and $25,563.

These estimates paint with fairly broad strokes, and a dozen factors would make them different for you. To get an estimate specific to your home, get a solar quote today.

Incentives and tax credits

Any money you receive to help pay for your solar panels that you don't have to pay back to anyone can make your solar power payback period even shorter.

While the federal tax credit for purchased solar panels sunset at the end of 2025, state tax credits for purchased systems still exist. Likewise, your utility’s net metering or net billing system will have an impact on your savings.

In some states, solar renewable energy certificates (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, or 1,000 kilowatt-hours, 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. Not every state has an SREC market, and the value of SRECs vary by location.

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.

You can get an idea of your electricity costs by simply looking at your electricity bills from past months.

However, the cost of your electricity may go up over time. This means you could save even more money in the long run, and shorten your solar payback period.

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. But not all systems are designed to offset 100% of your energy, and some will actually produce more than you need.

In addition, your solar panels will slowly become less efficient over time, which means you won’t produce as much electricity towards the end of their life. However, contemporary solar panels retain around 80% generation efficiency for their average 25-year life.

Solar leases and the payback period

Solar leases and power purchase agreements vary from cash and loan purchases in that they typically have no upfront costs. Since you don’t own the panels on your roof, you don’t pay for them. Instead, you pay a monthly fee for those panels. When the panels save you more money than you pay for them, you save overall. When you get a LightReach Energy Plan from Palmetto, it is designed to save you money in the first year.

Payback period doesn’t really apply for leases, since there’s no initial payment on your part, but several factors affect whether you save and how much. Leases typically include an annual escalator, which determines how much your lease increases in cost each year. If your lease increases in cost less than your electricity rate does, you’ll save more at the end of your lease than the beginning. In rarer cases, the opposite can also be true: Your lease costs increase faster than electricity rates. In this case you’ll save less. According to the US Energy Information Administration, the national average retail electricity price has increased in all but three years since 2000.

Solar panel payback period overview

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 when you buy solar panels. That’s the solar payback period.

Your payback period for solar panels refers to how long it takes for solar panels to pay for themselves. You can estimate your solar payback period 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. Because of these interrelated factors, there is no cookie-cutter answer for the average solar panel payback period.

To get started with recommendations tailored to your home, download the new Palmetto app and get energy and savings ideas specific to your property. Or, check out our solar savings tool and find out how much you can save today.

Frequently asked questions

What is the solar payback period?

A solar payback period is the time it takes for your savings from going solar to match your costs. Installing solar panels can cost you thousands of dollars, but can save you more over their lifespan.

How do I calculate my solar payback period?

The simplest version of the payback period calculation is total costs divided by annual savings, which will give you the approximate time in years.

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.