How to Calculate Solar Panel Payback Period (ROI)

Understanding the solar panel payback period

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.


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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. 





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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!

 Solar Panel Payback Period

 

How comparison-shopping can improve your solar panel ROI in 2017

Comparing quotes from multiple solar installers can actually help you go solar with a shorter payback period than the national average. Data from the EnergySage Solar Marketplace shows that, in the first half of 2015, solar shoppers who compared their options in the Marketplace achieved payback on their solar investment in just 7.5 years – more than 6 months faster than the national average! Those solar shoppers will continue to enjoy free electricity for the life of their solar panel systems, which can last between 25 to 30 years.

By comparing multiple quotes and evaluating their respective payback periods, you can more easily understand the value of your solar investment and make the right choice for your home. Get an instant estimate or register your property to see how quickly it pays off to invest in solar.


This post originally appeared on Mother Earth News.

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

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  4. 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.

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