Understanding the solar panel payback period

How to calculate solar panel payback period (ROI)

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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.

Solar payback periods summarized

  • Your “solar payback period” is the time it takes to make back your initial investment in solar
  • For most solar shoppers, you’ll break even in about 8 years
  • Start comparing solar quotes on the EnergySage Marketplace for maximum savings

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

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.

The typical solar payback period in the U.S. is just above 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 26% 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.
  2. Determine annual benefits. Sum up your annual financial benefits, including avoided electricity costs and any additional incentives.
  3. 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

Three Tips for Solar Shoppers

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 upfront 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.

cost/savings content

23 thoughts on “How to calculate solar panel payback period (ROI)

  1. Troy

    What’s misleading about these calculators is that they totally disregard the opportunity cost associated with the upfront capital investment! That $20,000 upfront cost could alternatively be invested and earning a annual compounded return. At a reasonably modest 7% ROI on the capital with a 15% annual tax on the long-term capital gains and assuming a historical average 3% annual increase in electricity costs (and thus annual savings), one’s really looking at a 13 year break-even, given the quoted baseline $2700/month annual benefit. Not even close to 7.4 years.

    1. Steven Scott

      Exactly right, Troy!! Energysage is a good resource for information about solar but it seems to be more of a cheerleader for solar rather than an impartial observer.

    2. Andrew

      Your point is good to consider but your point also makes a similarly false assumption. If you don’t go solar and instead invest that money, you won’t be making nearly the return you claim if you use those funds to pay your monthly electric bills. You’re not investing that 20k untouched for years and years. You’re investment starts at 20k and as soon as one month in, it starts to drop and eventually reaches zero.

    3. Arthur

      Yes, opportunity cost may be missing but so is the property value added by having solar. Homes with solar sell for ~4% more than those without and ~20% faster… A little bit of selection bias there, but this isn’t all sunk cost we’re talking about here.

  2. Michael

    So with current cost for solar – gov rebate what is the aver cost per kWh for Life of the system which would include maintaining system. I figure it’s about .16-.18 which includes possible new inverter half way through life of panels and degradation of panels output, finance rate for 12 yrs cost of the utility meter.

  3. david schechter

    Good points however most panels and inverters all come with 25 and 12 year warranties so I think the differentiation is workmanship warranty . The cost to repair roof structure damage or worse yet total roof replacement for shoddy install can be in the thousands of dollars .

  4. Michael G

    What about maintenance? We clean panels and output goes up around 20+% after cleaning. Most people don’t maintain their panels so their benefit is reduced over time. That’s a loss. Add in regular cleaning to keep panels producing optimally and that’s an ongoing cost. The numbers in this article are a fantasy. Pigeons like to nest under panels. Factor in $1500 to clean and screen. Where are you numbers after that?

  5. David

    Our company charges $150 per hour to take your panels off and put them back on if you are redoing your roof. So maybe around $750 for a small to mediun sized job. not bad really.

  6. Frank

    Most roofs last about 15 to 25 years. If the roof is towards the end of it’s useful lifespan, what is the costs associated with roof replacement with solar panels in place?

  7. 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.


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