How to Calculate Solar Panel Payback Period (ROI)

The financial benefits of going solar are now well documented. Solar panel systems actually function as investments with strong rates of return, and homeowners generating solar electricity can avoid paying increased utility rates by eliminating their electricity bills. According to a 2015 report by the Lawrence Berkeley National Laboratory, installing solar panels on your home can even increase your property values. If you’re reviewing multiple quotes, there are plenty of metrics that can help you make a decision about which solar option is best for you, but studies show most solar shoppers rely on one metric in particular: the solar panel payback period or break-even point.

The solar panel payback period is a calculation that estimates how long it will take for you to “break even” on your solar energy investment. Increased utility electricity rates and lower equipment costs are making it easier and less expensive to for homeowners to own, rather than lease, their solar panel systems. Comparing the payback period of various quotes from solar installers is an easy way to comprehend the financial merits of each option, and identify the point in time at which your solar investment will start to earn you money.

What is the average payback period for solar panels in the U.S.?

The typical solar payback period in the U.S. is between 6 and 8 years. If your cost of installing solar is \$20,000 and your system is going to save you \$2,500 a year on foregone energy bills, your solar panel payback or “break-even point” will be 8 years (\$20,000/\$2,500 = 8).

How is the solar panel payback period calculated?

To calculate your solar panel payback period, you need to determine the combined costs and annual benefits of going solar. To understand each component, review the following information:

• Gross cost of solar panel system: The gross cost of installing solar on your home is dependent on the size of the system you select and the equipment that makes up that system.
• Value of up-front financial incentives: Tax breaks and rebates can dramatically reduce the cost of going solar. The federal investment tax credit allows you to deduct 30% of the cost of your system from your taxes, and additional state and local financial incentives may also be available in your area.
• Average monthly electricity use: The amount of electricity that you consume monthly is an indicator of both the size of system you need and the amount of electricity that you can offset each month with solar. The higher your electricity bills are, the shorter your estimated payback period will be, as you can reduce or eliminate this bill as soon as your panels are operational.
• Estimated electricity generation: While solar installers will try to provide you with a system that matches your electricity consumption, practical constraints like the size of your roof and seasonal weather variation may impact the amount of electricity that you can produce on-site.
• Additional financial incentives: In some areas of the country, you may be able to earn additional incentives in the form of solar renewable energy certificates (SRECs) or other utility programs that give you a per kilowatt-hour credit for the electricity that your solar panels generate. Depending on the size of your solar energy system, these can represent a significant monetary benefit.

Take the following steps to calculate your payback period:

1. Determine combined costs. Subtract the value of up-front incentives and rebates from the gross cost of your solar panel system.
1. Determine annual benefits. Sum up your annual financial benefits, including avoided electricity costs and any additional incentives.
1. Divide your combined costs by your annual financial benefits. The result will be the number of years it will take for you to achieve payback. Every month of savings after that point in time should be counted as a financial gain!

3 tips that can improve your solar panel ROI in 2017

1. Homeowners who get multiple quotes save 10% or more

As with any big ticket purchase, shopping for a solar panel installation takes a lot of research and consideration, including a thorough review of the companies in your area. A recent report by the U.S. Department of Energy’s National Renewable Energy Laboratory (NREL) recommended that consumers compare as many solar options as possible to avoid paying inflated prices offered by the large installers in the solar industry.

To find the smaller contractors that typically offer lower prices, you’ll need to use an installer network like EnergySage. You can receive free quotes from vetted installers local to you when you register your property on our Solar Marketplace – homeowners who get 3 or more quotes can expect to save \$5,000 to \$10,000 on their solar panel installation.

2. The biggest installers typically don’t offer the best price

The bigger isn’t always better mantra is one of the main reasons we strongly encourage homeowners to consider all of their solar options, not just the brands large enough to pay for the most advertising. A recent report by the U.S. government found that large installers are \$2,000 to \$5,000 more expensive than small solar companies. If you have offers from some of the big installers in solar, make sure you compare those bids with quotes from local installers to ensure you don’t overpay for solar.

3. Comparing all your equipment options is just as important

National-scale installers don’t just offer higher prices – they also tend to have fewer solar equipment options, which can have a significant impact on your system’s electricity production. By collecting a diverse array of solar bids, you can compare costs and savings based on the different equipment packages available to you.

There are multiple variables to consider when seeking out the best solar panels on the market. While certain panels will have higher efficiency ratings than others, investing in top-of-the-line solar equipment doesn’t always result in higher savings. The only way to find the “sweet spot” for your property is to evaluate quotes with varying equipment and financing offers.

For any homeowner in the early stage of shopping for solar that would just like a ballpark estimate for an installation, try our Solar Calculator that offers up front cost and long term savings estimates based on your location and roof type. For those looking to get quotes from local contractors today, check out our quote comparison platform.

This post originally appeared on Mother Earth News.

10 thoughts on “How to Calculate Solar Panel Payback Period (ROI)”

1. Von Clendenen

I’m waiting until the payback period is 2 years anything else it’s not worth spending the time or the money. Cattle is an 2 year payback and that’s bad enough and they keep having calves for another 10-12 years. That’s the standard anything less than that is an no go. I remember when solar panels payback was 25-30 years just an few years ago! Now down to 7.5 years. Still way too early to invest in this solar stuff. An word from the wise take your money and invest in an cow instead and get fat on steak and enjoy life. You won’t with solar it’ll keep you skinny and poor and wishing you didn’t waste your time or money on it. Regards.

1. SolarGuy

This is completely false and short sighted. Its unfortunate that this type of thinking exists. If all we did was wait for things to get better, you wouldn’t the ability to sit behind that computer of yours and type such misinformed rhetoric. You sir, are a boob.

2. Frank

You want to wait until 25-30 years of electricity costs the equivalent of 2 years? Interesting strategy.

2. Optionality

SolarTroll
The emotion you exhibit betrays your own short sidedness, and your name calling betrays obvious character issues…Comparing Solar tech to general microprocessor/networking technology would not support the idea that solar is a great investment…microprocessors took decades to be adopted as computers in homes…there were some early adaptors, but even these are poor analogs to solar – microprocessors could be used for a varity of tasks that did not have reasonable alternatives. Solar is an alternative to our existing power supply. I’m considering solar primarily to provide redundant power for critical home systems in emergencies. If your post is indicative of those I’ll have to deal with to get information about solar panels- I also have other alternatives…Life is too short to deal with trolls.

3. Bert

The opportunity cost of the money invested must also be taken into account. Its not only the period to “payback” the investment in the solar system but also you must take into account the loss of return that you could have earned on that money from something else for eight years. If you take that into account, it takes in excess of 10 years to be even.

4. lee

What about the roof itself? I’ve heard you should have a new roof before solar. Companies that install over an old roof, or cheap roof are irresponsible installers. You gotta take that into account too.