Are solar panels a good investment for you?

Updated

Are solar panels a good investment for you?
To determine whether or not solar panels are a good investment, you should weigh their installation costs against incentives and electricity rates in your area.

Using solar energy to power your home is one of the best ways to shrink your carbon footprint and reduce your environmental impact. As a bonus, switching to this renewable energy source will also shrink your utility bills, lowering your monthly expenses. However, the high installation costs for solar panels make many homeowners ask if they’re actually a smart investment.

The answer is: it depends. To determine whether or not a photovoltaic solar array is a sound investment for you, you have to weigh the upfront costs against unique factors like electricity rates in your area, the design of your home, local and federal incentives, and the typical weather where you live.

Keep reading, and we’ll teach you how to measure the financial benefits of a solar panel system. We’ll even help you calculate how long it will take your solar panels to pay for themselves and start giving you noticeable savings.

Get a quote from a solar installation company near you

Key takeaways

  • A solar system equipped with enough solar panels can fully cover the energy costs for a home, eliminating the need to buy electricity from a utility company.
  • Various federal, local, and state incentives exist to help you pay for your solar panels, so you don’t have to cover the entire cost of going solar yourself.
  • YSolar is the best investment for homeowners that pay high electricity rates, have access to net metering, live in areas with solar rebates and incentives, and whose roofs are suitable for installing panels.
  • If you have a north-facing roof, don’t have access to net metering or other rebates, don’t pay high electric rates, or your area doesn’t have adequate weather conditions, solar might not be worthwhile for you.
  • Every solar system has a “payback period” which is the length of time it takes for the system to recoup the money it cost you. Payback periods under 12 years typically indicate a good investment.

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    How much do solar panels cost?

    To figure out the return on investment of going solar, you first need to learn how much solar panel installation will cost you. The good news is that the average cost of solar panels has decreased significantly over the past decade. According to the U.S. Department of Energy, residential solar systems are 64% cheaper now than they were in 2010. 

    The bad news is that they still cost thousands of dollars. Getting all the solar panels you need to power a 2,000-square-foot home generally costs somewhere between $18,000 and $20,000. These costs don’t account for any incentives or rebates, though, so you’ll likely pay less in the end.

    Additionally, your solar system’s size—and therefore price—will depend on how many kilowatt-hours (kWh) of electricity your home requires. If your energy consumption is relatively low or you have a smaller home, you’ll need fewer panels to cover your energy usage and you’ll probably pay less than average for your system. 

    Of course, the converse is true as well. If your household requires more electricity than average or your home is larger than 2,000 square feet, you’ll probably pay more than $20,000 for your solar system. 

    A few other factors can also affect your price, so read our solar panel cost guide to get the full scoop or get a quote from a solar power company to learn exactly what you’ll pay.

    Factors that make solar panels good investments

    Now that you know how much solar panels can cost, let’s discuss incentives that can make them more affordable and benefits that make them worth the price.

    Energy bill savings

    Your power bills are where you’ll see actual financial gain from your solar power system. Depending on where you live, solar panels can eliminate most, if not all, of your electricity costs. For the average American, that’s almost $120 a month!

    Every kWh of electricity you get from your solar panels is a kWh you didn’t have to pay a utility company for. And, depending on the cost of electricity in your area, getting your power from your solar panels can result in huge energy savings. Given enough time, these accumulated solar savings will eventually cover how much it costs to install your panels.

    And, if your state requires your utility company to offer net metering, you can actually bring your energy costs down to zero, meaning your panels will pay themselves off much quicker. Net metering allows you to send excess electricity your solar panels produce during the day to the grid for bill credits. The bill credits then cancel out the cost of the energy you use later when your solar panels aren’t generating power, leading to higher utility bill savings! This means your solar panels can help you save on energy costs even when the sun isn’t shining.

    Not all net metering policies are created equal, though, and some states don’t even offer net metering. Check your utility company’s policies before banking on benefiting from a net metering program.

    The federal solar tax credit

    From now until 2033, homeowners in the U.S. can take advantage of the Clean Energy Tax Credit offered by the federal government. The tax credit, sometimes called the Investment Tax Credit (ITC), is equal to 30% of solar installation costs and is available to taxpayers who invest in clean energy by installing new solar systems on their primary or secondary residences.

    This means that if you add an $18,000 solar system to your home before 2033, you’re eligible for a tax credit of $5,400. And while government incentives like this won’t directly make your system cheaper, they will help it pay for itself much quicker.

    Here’s how the incentive works: during tax season, the federal government will credit you however much money you’re eligible for. For example, if you owed $6,000 on your taxes and you purchased a $20,000 solar system, the tax credit would cover your taxes that year. If you owed less than your tax credit is worth, the remainder of the credit would roll over to the following year.

    So although the solar tax credit doesn’t lower the upfront cost of installing a new solar system directly, it lightens the financial burden of going solar by lowering your taxes for at least a year or two. And while you have several years to take advantage of this incentive, don’t delay too long or you’ll miss out. In 2033, the ITC will drop to 26%. In 2034, it will drop down to 22%. Then, in 2035, it will expire completely.

    And don’t worry. You can still take advantage of this incentive if you pay for your system with a solar loan. Just watch out for steep interest rates or you may not actually net any financial benefits from the tax credit.

    Other incentives and rebates

    The federal solar tax credit isn’t the only way to make your new solar system more affordable. There are also many state incentives, and even some utility companies offer rebates. The details of these incentives vary by state and local utility provider, though.

    For example, getting a solar array in states like California and Texas allows you to take advantage of property tax exemptions. These let you exclude the property value your solar panels add to your home from your property taxes. Additionally, various utility companies in these states also offer rebates that range from several hundred to several thousand dollars that can directly lower the upfront cost of installing the system.

    To find all the incentives and rebates available in your city and state, check out our list of solar incentives.

    Home value

    Another indirect way your solar panels can benefit you financially is by increasing the value of your home. Several studies have shown that homes with solar panels sell for more than homes without them, though the exact value of a home with a solar system depends on which study you believe.

    One study estimated that your home value increases by roughly $5,000 for every kilowatt of solar you install. Another study estimated that homebuyers paid 4% more for homes with solar panels.

    No matter which study you go with, though, it’s clear that homes with solar panels sell for considerably more than homes without them. This won’t help you pay the upfront installation costs of your panels, but it does make your panels a smarter investment.

    If you want to learn more about the various studies and findings, read our report on how solar panels can increase the value of your home.

    Factors that can make solar panels bad investments

    Now that you know about all the financial benefits solar panels can offer, let’s discuss the factors that could make a solar system cost more money than it would save you.

    No comprehensive net metering in your area

    Without a good net metering policy from your power company, your solar system probably can’t bring your electricity bills down to zero. This makes net metering an essential part of the financial feasibility of solar panels for most people.

    This isn’t to say that your utility must have full-retail net metering to make installing solar worth it. All net metering programs are different, and you can still see significant savings even if you’re getting less than the retail rate for all of your solar energy. However, the type of solar buyback program available to you could make it so you can’t get rid of your entire bill, or might impact how the system is designed.

    But, if no net metering policy is offered at all, or the utility purchases energy for very low rates, solar probably isn’t the best investment for you. Our solar calculator is a good place to start when trying to figure out if your utility’s net metering program will provide you with the savings you need.

    Will adding a battery save more money? Technically, yes a solar battery can save you more money on your electricity bills if you don't have net metering in place. However, batteries can cost upwards of $10,000, so the additional savings they provide likely won't be enough to cover the upfront cost of installing a battery anytime soon.

    Electricity prices in your area

    If you live in an area with especially low energy prices, solar panels may not be worth the cost to install them, at least not anytime soon. Because electricity costs less, the potential savings are lower, too.

    For example, a system that produced 10,000 kWh of electricity in Hawaii, where electricity costs $0.28 per kWh, would save the owner about $2,800 a year. However, someone who purchased a system that generated the same amount of electricity in Minnesota would only save $1,000 a year because electricity only costs an average of $0.10 per kWh in the state.

    If the upfront costs to install the panels are too high compared to electricity rates in your area, it will take a bit longer to see a return on your investment. In some cases, it could be so long to achieve significant savings that it won’t be worth it to go solar at all.

    The design of your roof

    Rooftops are the most common places to mount residential solar panels, so everything from the shading, shape, and orientation of your roof plays an important role in how much electricity your system can produce.

    The amount of energy a solar panel generates depends on how much sun it gets, so you want to maximize each panel’s sun exposure. If your panels are often shaded because of where you place them or how they’re angled, they won’t generate as much electricity and you’ll end up having to pay more for more power from the grid than you might like.

    The direction of your roof is also a potential setback when going solar. Solar panels generate the most electricity on south-facing roofs, and can operate well on west and east-facing roofs. If you have a north-facing roof, solar panels just won't produce as much electricity, so it might not make sense to install them.

    The angle of your roof can also be a factor here. Solar panels should be mounted at an angle that maximizes their sun exposure, and the ideal angle depends on where you live relative to the equator. A roof whose pitch doesn’t match the perfect angle for your area won’t be as good for mounting solar panels as one that does, though the pitch of most roofs works well enough.

    The location of your home

    Because solar panels need sunlight to produce electricity, they don’t work as well on cloudy and rainy days. As a result, solar panels don’t work particularly well in states that are often overcast like Oregon and Washington. If you live somewhere that sees more cloudy days than sunny days, you could need to install more solar panels to offset your electricity bills. This increases your overall installation costs, and could impact your investment.

    However, this isn’t a hard and fast rule. The sunniness of your state needs to be weighed against its average electricity prices and incentives that may be available. If grid electricity is particularly expensive where you live, you could still benefit financially from getting solar panels, even if they don’t get as much sunlight as they might somewhere else.

    Whether you’re planning to sell your home

    While it’s true that solar panels can greatly increase the value of your home, installing them on a home you’re planning to sell in a year or two isn’t an optimal use of your time and money. The panels could potentially increase your home’s value enough to cover the total cost of installing them, but there’s no guarantee of this.

    Additionally, installing panels onto a home and then promptly turning around and selling it means you won’t reap the financial benefits the solar panels will provide over the years, so you’d be minimizing your return on investment.

    All told, it’s much better to save your money and install solar panels on your new home instead of installing them on a home you plan to leave in the near future.

    How to determine if solar is a good invesment

    Most people determine if going solar is right for them by looking at a system’s payback period. The payback period is the time between when you purchase the solar panels and when the savings they generate pay off the installation costs. Generally, any payback period that’s shorter than 12 years is considered a decent investment.

    Calculate your solar payback period

    To figure out how long the payback period for your solar panels will be, you need to know:

    1. How much electricity your solar panels will generate
    2. How much installing your solar panels will cost
    3. How much electricity costs per kWh in your area

    Then, you’ll have to do a little math. Multiply the amount of energy your panels will produce every year by the price of electricity in your area. This is the amount of money your solar panels will save you every year as long as you have full-retail net metering. Once you’ve figured this out, divide the cost of your system by the amount of money it will help you save every year.

    The resulting number is the number of years it will take for your panels to pay for themselves.

    Here’s an example.

    Let’s say you paid $24,000 out of pocket for a solar energy system in New York that produces 15,000 kWh per year. If you pay the state’s average electricity rate of about $0.22 per kWh, the solar system would save you roughly $3,300 on electricity every year:

    $0.22 x 15,000 kWh = $3,300

    Now that we’ve got the annual savings figured out, we simply divide the price of the system by this number to find the length of your payback period in years:

    $24,000 / $3,300 = 7.3 years

    So, based solely on your energy savings, your payback period would be a little under seven and a half years. And this is before you consider any incentives!

    Of course, your actual payback period will look at least slightly different from this, but you can use this same formula to find it. It won’t be a perfect estimate since energy prices fluctuate and solar production changes over time, but it will give you a pretty good idea of how long it will take your panels to pay for themselves.

    So, is a solar investment a good idea?

    Like most things, the answer to this question is: it depends! If your home can accommodate all the solar panels you need, your electric rates are high, and your utility purchases excess solar energy, then solar will probably be a worthwhile investment.

    Your panels will eventually pay for themselves and start netting you some considerable savings every month. And with incentives like the federal tax credit, your solar array can be decently affordable to boot!

    But we won’t lie, solar isn’t for everyone - at least not yet. If your roof doesn’t face the sun most of the day, or electricity isn’t especially expensive in your area, then solar might not be the best investment you could make right now. This is especially true if your utility company doesn’t offer net metering. Keep an eye on solar technology and installation prices, though. They’re getting better all the time, so solar may eventually become a great investment for you as well.

    Find a solar installer in your area!
     - Author of Solar Reviews

    Joe Roberts

    Content Specialist

    Joe is a content specialist at SolarReviews. He graduated with a Bachelor’s degree in Writing Studies from Utah Valley University in 2016, and he’s worked in content marketing ever since.

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