How to calculate your solar payback period
Published on February 25, 2019 by Andrew Sendy
Last updated on August 01, 2019
5 minutes read
Do solar panels pay for themselves? Absolutely!
How long will it take for solar panels to pay for themselves? That’s a trickier question...
But it is an important one to figure out. While most of us know that a solar power system is a worthwhile investment for the home, many potential buyers justifiably worry about the exact cost and savings. Before they make such a big purchase, they want to know:
- How much will solar panels cost to install?
- How much money will I save each month?
- And how long will it take before I reach the break-even point — and start getting a return on my investment?
This article looks at all the factors that are used to work out the payback period, and how you can calculate this figure for your own home. We’ll also look at a case from San Francisco, California to see how payback times work in real life.
What is the payback period for solar panels?
The ‘solar payback period’ refers to the amount of time it’ll take you to completely pay off your solar power system. It’s commonly said that the average payback period for installing solar panels is between 6 to 9 years. But this range is too broad to be meaningful — and it’s not even true for all cases.
To really understand how long it’ll take you to pay off your panels, you need to get specific. Let’s take a closer look.
What factors affect my solar payback period?
There are 5 primary factors influencing your payback period.
1. Total system cost
Total system cost is the first number you need to know. As of 2019, the typical 6 Kilowatt (kW) solar system costs an average of $23,916. Do note that this is before the federal 30 percent tax credit and other local incentives, which will substantially reduce the overall cost (more on that later).
However, if you’re interested in offsetting all of your energy bills you may need a bigger system. Sure, it means higher upfront costs, but bigger systems produce more solar electricity over time and feature lower costs per watt than smaller setups.
See how much solar panels cost where you live.
2. Average electricity usage
Next, you’ll need to look at how much energy you use each month.
The higher your consumption, the better your payback period is likely to be. That is because you have greater scope to replace expensive energy from your utility with the output from your solar panels — and pay off your solar investment quicker.
The U.S. Energy Administration reports that the average American household uses 10,399 kilowatt-hours (kWh) per month or an average of 28 kWh per day. This figure reflects usage for both single-family homes as well as multi-tenant buildings, which generally use less power. If you own your own home, there’s a good chance you consume more than the average.
You can easily calculate your own monthly usage by simply entering your monthly power spend into Solar-Estimate’s online solar production calculator. The tool has data for utilities across the U.S.
Another option is to check your previous energy bills. If possible, look at a full year’s worth of bills and calculate the monthly average — this will help you account for seasonal fluctuations in your usage. Jot down this number, as it will be important later on.
3. Cost of energy
Every region has a different rate for residential energy, which is charged per kWh used. This number can be relatively affordable — just 9.1 cents/kWh in Louisiana — to very expensive: it’s 33.8 cents/kWh in Hawaii. You can check out average figures for your state thanks to statistics released by the Department of Energy.
Of course, the exact rate you pay can vary depending on your utility and rate plan. Again, check your energy bills to find the average rate you pay for electricity.
When calculating You will also take into account rising electricity prices over the life of the solar panels. Residential electricity prices in the U.S. have consistently increased over the years.
Growth in U.S. residential electricity prices from 2000 through 2019
If your utility charges high rates for electricity it will mean a shorter payback period for your panels. [On a related note, it’s important to check that you’re getting the best rate available from your utility. You can check this using the CutMyBill calculator].
4. Discounts and rebates claimed
Another factor affecting your solar payback period is how many incentives and rebates you claim for your solar investment. Every solar panel purchase is eligible for the federal ITC tax credit, which allows you to write off 30 percent of the solar system cost on your taxes.
Another valuable incentive is net metering, available in most states. It pays you the full retail value for each kWh you export to the grid and is the key to offsetting your power bills. You may also be eligible for local incentives such as Solar Renewable Energy Credits (SRECs) that can help you bring down the costs further.
For more information, check out this state-by-state breakdown of local residential solar incentives.
5. Solar panel production at your location
Solar panel output can vary based a wide variety of factors. This can include geography and latitude, seasonal variances, roof tilt and orientation, number of cloudy days, shade on the solar panels and more.
However, it’s possible to see average solar production figures for your state. You can also get a more exact figure by using the solar estimate online calculator, which uses your home’s location to take into account all of the factors mentioned above. Solar panels have the highest output in the Southwestern United States; 1 kW of installed solar energy capacity produces an average of 4.8 kWh/day in Arizona, 4.7 kWh/day in New Mexico and 4.5 kWh/day in California.
Solar panel payback calculator
With the above points in mind, we can get down to calculating your solar payback period. Let’s look at a system for a homeowner in San Francisco connected to PG&E with an average electricity bill of $200/month.
- Total system cost: S/he would require a 7.06 kW solar system for their home. The gross cost of this system would be $24,781 - before applying the federal tax credit & all other applicable rebates and incentives
- Average electricity usage: Household energy usage is 10,084 kWh, or 27.6 kWh per day - just under the national average.
- Cost of energy: The consumer pays $200 month for electricity or an average of 23.8 c/KWh. This rate is slightly higher than average for the SF-Oakland-Hayward region, but by no means unusual. We will also need to take into account electricity prices rising as has been the long term trend.
- Discounts and rebates claimed: San Francisco has incentive programs that offer money back per kilowatt of energy. The amount offered varies but assuming a mid-point rate the incentive would be worth $1200. This brings the system cost down to $23,581. We then apply the 30 percent federal tax credit to bring the total cost down to $16,506.
- Solar production at your location: Based on the solar irradiation in San Francisco, 1 kW of installed capacity will produce an average of 3.9 kWh each day Thus the 7.06 kW system would produce an average of 27.6 kWh a day - offsetting 100% of the home’s usage.
Armed with this data, we can calculate your payback period using the Solar-Estimate solar panel calculator. Here are the results:
What the payback period results tell us
For this homeowner in San Francisco, their net investment of $16,506 for a 7.06 kWh system will be paid off in 6 years and 1 month. This is pretty typical for California as a whole, where most solar panel systems are paid off in 6 or 7 years. And remember, your solar panel warranty is good for 25 years, and most solar panels continue working well beyond that. That means after the panels are paid off, you’ll enjoy at least 19 years of free renewable energy.
The total amount of savings expected after the panels are paid off is $82,971. And those are just the savings from avoided power bills. It doesn’t reflect the additional benefit of seeing your property value increase thanks to the solar panels. These figures show us that solar panels can make a great financial investment. The best part is that you’re saving money and simultaneously producing clean energy and helping the environment. That’s a win-win.
What else do I need to know about payback calculations?
Overall, your exact payback period will depend heavily on your situation. Use Solar-Estimate’s advanced but easy-to-use solar calculator to get an accurate estimate of what the solar payback period and total savings for your own home. You can start by entering your zipcode below.