How is the payback period defined for solar panels?
"Solar panel payback period" is the amount of time it’ll take you to completely pay off your solar power system through savings on your electric bill.
It is calculated by taking the total cost to install the system, then subtracting solar incentives and/or rebates, and monthly electric bill savings until the total cost has been paid off.
For example, if you spend $16,000 on a solar panel system, then get a tax break of $4,000, the cost after incentives is $12,000. Then if the solar energy your panels make reduces your electric bill by $1,500 per year, your payback period would be eight years, assuming electricity rates don’t increase.
Average solar panel payback period for homes in the US in 2021
Most homeowners in the United States can expect their solar panels to pay for themselves in between 9 and 12 years, depending on the state they live in.
Some states, like Hawaii and Massachusetts offer solar payback periods as short as five years, while payback time in states like Louisiana and North Dakota can stretch to 16 years or more.
The reason some states’ payback periods are worse than others isn’t just because they’re less sunny. It mostly has to do mostly with the cost of electricity replaced by solar energy and the incentives available to help homeowners go solar. Other factors include roof composition and age, quality of equipment used, and whether you pay with cash or choose a solar loan.
To get an accurate estimate of solar panel cost, incentives, and payback for your home, use our state-of-the-art solar panel estimator. It shows you how panels will look on your actual roof, and by using solar production data from the National Renewable Energy Laboratory, will give you utility prices from the U.S. Energy Information Administration, as well as live cost information from installers all across the country.
What is considered a good solar payback period?
Photovoltaic solar panels are designed to last at least 25 years, and many modern brands will last much longer than that. When considering that lifetime, any payback period less than about half that time, or 12.5 years, can be considered “decent.”
More important than payback time is a concept called “Internal Rate of Return,” or IRR for short. IRR is expressed as a percentage of return on investment, and answers the question, “Considering the estimated future benefits of this investment, what percentage return would you need to get from another investment to be equal to this one?”
In the solar industry, we use IRR to compare the return on an investment in solar with the returns of other popular ways to invest.
For example, a long-term investment in a broad stock index fund has historically resulted in an IRR of about 8% per year. A home solar system in a state like Virginia, where the payback time of an investment in solar is around 12 years, has an IRR of about 8%.
The good news is, there are many states with better IRR and payback time than Virginia, especially in the northeast and California, where electricity costs are very high. For example, people in Massachusetts, New Jersey, California, and New York can expect IRRs of between 16 and 20 percent—double or more of the average return of a long-term index fund.
What factors need to be considered to calculate an accurate solar payback period?
There are 5 primary factors influencing your solar payback period:
- Average electricity usage for your home, which determines how many solar panels you need
- Total system cost
- Solar incentives, rebates, and the federal tax credit
- Energy production from your solar system
- Cost of electricity and rate of increase in that cost
Below, we covered each of these factors to show an example solar payback estimate for a house in California served by Pacific Gas & Electric.
Step 1. Average electricity usage for your home
The first step toward determining solar payback is figuring out how big your solar panel system should be. To do that, you need to look at your average electricity usage, then design a solar system that makes enough energy to offset that usage over the course of the year.
Let’s say our example home uses about 10,000 kilowatt hours (kWh) of electricity per year. According to PVWatts, one kilowatt (kW) of solar panels in Bakersfield, CA can generate around 1,700 kWh per year. Divide 10,000 by 1,700, and you get a system size of about 6 kW.
Learn more: Guide to watts, kilowatts, and kilowatt-hours
Step 2. Total system cost before incentives
The next step is determining how much your system will cost. This number represents the final price of a solar installation before considering incentives like the federal solar tax credit. It is the number we’ll use to begin subtracting savings from to determine the payback period.
As of June, 2020, the national average cost of a 6 kW home solar system is about $3.20 per watt, or $19,200, before incentives. The homeowner in our example will either need to pay cash or take out a solar loan for around that amount.
Step 3. Solar incentives, rebates, and the federal tax credit
The great thing about installing solar panels is that it earns you a big tax break at the end of the first year. If your solar panels are fully connected and operating before January 1st, 2023, you can claim a tax credit equal to 26% of the total installation costs.
Many states offer additional solar incentives like solar rebates and performance-based incentives, as well.
Subtracting the dollar amount of available incentives from the total system cost gives you your net cost of solar panels.
Our friend in Bakersfield is in a great place for solar. In fact, California is so great that many early incentives that were needed to jumpstart the industry are no longer available.
For example, most rebates for home solar in California ended before 2014, but helped bring solar costs down for everyone by getting the industry going. But have no fear! The 26% solar tax credit still applies.
The 6 kW system in question would earn its owner a tax credit of $4,992 based on our estimated upfront cost of $19,200. That means the net cost of the system is just $14,208. That’s the number we’ll use to start subtracting energy bill savings from.
Step 4. Energy production from your solar system
This step is pretty simple, but very important.
Once you know your system size, multiply the number of kW your solar panels can produce under full sun by the number of kWh that 1 kW can produce over the course of a year. In the next step, multiply that number by the amount you pay for every kWh from your utility.
We mentioned above that each kW of solar panels in Bakersfield can produce about 1,700 kWh of electricity per year, on average. So take that number and multiply it by the 6 kW of our system size, and our friend can expect their panels to make about 10,200 kWh per year.
Step 5. Cost of electricity and rate of increase in that cost
Here’s where the rubber meets the road. In a state with net metering, you can take the number of kWh your system will produce in a year and multiply it by your per-kWh rate from the utility. That number will equal your annual solar savings.
To get a simple solar payback time frame, just divide the net cost from Step 3 by your average annual savings to get the number of years it will take for your solar savings to equal the net cost of the system.
Unfortunately, however, it’s not always that easy. Why? Because electricity rates increase over time, and some states do not offer net metering.
Here’s where our friend in Bakersfield finally learns their solar payback period!
California’s net metering law is a bit complicated, and your average rate depends on time-of-use billing. Click on those links to learn more, but for our purposes we’ll use an average cost per-kWh here.
The solar energy our friend’s panels make earns them an average of 24 cents per kWh. Therefore, those 10,200 kWh will save them an estimated $2,450 in one year. Dividing $14,200 by $1,734 gives a solar payback period of about 5.8 years, even if electric rates don’t go up between now and then.
If their solar panels were fully connected by September 2020, they’d be paid off before the summer of 2026, and will keep making electricity until at least 2045. That’s what we’d call a great deal!
Electricity rates increase over time
The rate of increase in electricity rates is the most difficult thing to predict when it comes to solar payback. Over the past 25 years, rates in the United States have increased by an average of about 3.5% per year, but that rate varies widely based on location.
States like California have seen their rates increase by as much as 10% per year, while others like Minnesota have been increasing at closer to 1-2%. The best predictor of future changes is the history of your own utility company’s rate increase requests. This is one area where it pays to do your research before buying.
Some states don’t offer net metering
In a state without net metering, excess solar energy is usually credited to your bill at what’s called the “avoided cost rate.” That’s basically the utility’s wholesale energy price; usually just a couple of pennies per kWh. Some of the solar electricity your panels make will still save you the retail rate, because you’ll be using it to power your home’s appliances and devices.
If this sounds confusing, don’t worry. It is confusing! Luckily, our solar calculators are built to handle the difference between net metering and alternative compensation. Begin by entering your ZIP code and electricity bill, and we can determine your usage, system size, payback time, and more.
Why does SolarReviews claim to have the only truly accurate solar panel payback calculator?
Our site can claim to have the only truly accurate solar panel payback calculator because we use customized local and home-specific information, whereas other sites simply use generic assumptions for some or all of these things.
Specifically, our calculator:
- Uses the exact solar production from your local weather station
- Adjusts solar production estimates to the direction and tilt angle of your roof
- Applies the exact electric rate structure charged by your utility to calculate accurate savings, instead of just a generic rate for power
- Checks current local solar offers from solar providers near you to calculate a realistic cost to use in your payback calculation
Final word on solar panel payback period
Now that you’ve read through the steps outlined in this article, you can calculate the estimated solar payback period if you’ve gotten a quote for home solar panels. If you haven’t yet received solar panel quotes, you can start the process by using our solar panel calculator and learning about offers from solar providers in your area.
Remember, the method above just results in a simple payback estimate, without accounting for increases in electricity costs over time, solar panel degradation, or any other factors.
In addition to electric bill savings, there are other benefits of solar panels which aren’t as easy to put a value on. The most important of these is an increase in home value, estimated to be about 4% of the pre-solar value of your home.
On top of that, there are environmental benefits of renewable energy and, if you add batteries to your solar installation, the peace of mind that comes with being more resilient if the power goes out.
Adding solar panels to your home truly does add value in many ways.
- Solar panels pay for themselves over time by saving you money on electricity bills, and in some cases, earning you money through ongoing incentive payments.
- Solar panel payback time averages between 5 and 15 years in the United States, depending where you live.
- How quickly your solar panels pay back their cost depends on how much you paid, the price of electricity from your utility, and available upfront and ongoing incentives.