How to calculate an exact solar panel payback period for your home
Written by Andrew Sendy
Updated August 12, 2021
5 minutes read
Do solar panels pay for themselves? Absolutely!
How long will it take for solar panels to pay for themselves on my specific home? Well... that’s a much trickier question, but one for which our site is uniquely set up to give you an exact answer.
You can calculate the payback period for your home now by starting the calculator above or you can go through the basics first (below) if you are unfamiliar with solar panel payback calculations.
How is the payback period defined for solar panels?
The ‘solar panel payback period’ refers to the amount of time it’ll take you to completely pay off your solar power system from the electric bill savings that the system generates. So, for example, if you spend $12,000 on a solar power system and it reduces your electric bill by $1,500 per year then the payback period would be 8 years.
What is the current average solar panel payback period for homes in the US in 2020?
As of March 2020 the average residential solar panel payback period in the US is 7.6 years based on the last 50,000 homes that have used the solar panel estimator on our site to generate a solar cost and savings estimate for their home.
However, there is a significant variance in the average solar power payback period between states with some states having average solar panel payback periods as short as 4-5 years and other states being in the 10-12 year payback period range.
It is even common solar power system payback times to vary quite a lot within one state because of different electric rates and different incentives offered by specific cities and utility companies that are not available statewide.
This is the reason why knowing the average solar panel payback period is useful to academics and policymakers but it is of little use to a homeowner who wants to know how long it will take to pay off a solar system on their specific house. It is this question that our site was designed to answer for homeowners.
Why does our site claim to be the only truly accurate solar panel payback calculator?
Our site can claim to be the only truly accurate solar panel payback calculator because we use customized local and home specific information whereas all other sites just use generic assumptions for some or all of these things. These factors are:
- We use the exact solar production from your local weather station;
- We adjust solar production to the direction and tilt angle of your roof to get accurate production;
- We use the exact electric rates charged by your utility to calculate accurate savings, not just a generic rate for power;
- We use current local solar offers from solar providers near you to calculate a realistic cost to use in the payback calculations.
What factors need to be considered to calculate an accurate solar payback period?
There are 5 primary factors influencing your solar payback period.
1. Total system cost
Total system cost is the first number you need to know. As of March 2020, the typical 6 Kilowatt (kW) solar system costs an average of $18,000. Do note that this is before the federal 26 percent federal 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 the average solar panel cost where you live for professionally installed residential solar power systems or use the calculator to see specific local prices from solar companies near you.
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. Solar Incentives, rebates and federal tax credits
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 26 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 affect solar panel payback period
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 for your specific home. 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. [Note: As of 2020, the solar tax credit is worth 26%].
- 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.