Calculate the payback period of your solar energy: when will you break even?
Solar panels are an expensive investment. When you decide to go solar, you are either making a significant initial investment of tens of thousands of dollars or a long-term plan of several years with monthly payments. The breakeven point, or payback period, is the time it takes to recoup the cost of the initial investment. Once that time is up, the real savings begin.
There are many reasons to consider purchasing solar panels. You could, like many americansDo you want to help the environment by avoiding fossil fuels? Perhaps you want to protect your home from blackouts, a common problem during the summer months? Or maybe you just want to stop worrying about paying for electricity.
Before you invite a team of solar panel installers, you need to know when and if the panels will pay for themselves.
Below you can read how long it takes before you start saving money with solar panels.
What is the payback period of a solar panel?
The ‘solar payback period’ is a nice way of indicating how long it takes for the money you spend to be recouped by the money you save (or make) on your electricity bill.
It’s an important number — usually a matter of years — that tells you how long it will take before you see a real return on your investment. The payback period for solar can vary widely and also depends on how you pay for the system in the first place.
“There are many factors that play a role in a particular home or household,” he said. Becca Jones-Albertusdirector of the Solar Energy Technologies Office of the U.S. Department of Energy.
Jamie HaenggiADT Solar, president, told CNET that the average payback period in the U.S. is six to 12 years, with most households leaning toward the latter. Like Jones-Albertus, she stressed that it’s a moving target.
“People are reluctant to say, ‘Well, this is the payback period,’ because the energy market is so volatile,” Haenggi said.
How do you calculate the payback period of your solar energy?
If you want to get a rough idea of your potential solar payback period, here’s one way to do it. Keep in mind that you’ll want to consult the experts (read: solar installers) to make sure you have accurate numbers here. This can help you get an idea:
- Start with the total cost of installing solar panels on your home. (Also consider interest and fees if you take out a loan.)
- Then subtract the value of any discounts, premiums or tax benefits.
- You now see the net costs of your solar system, after deduction of discounts.
- Calculate how much you save annually on your electricity bill with solar panels. (Your solar panel installer or energy supplier may be able to help you with this.)
- Divide the net cost of the system by the annual savings.
- The number you ultimately get is the number of years it will take for your panels to pay for themselves.
Here’s another look at the formula: (Total cost of solar system – discounts) / Savings on electricity bill per year = Payback period in years
In practice, that might look like this: Let’s say the total system cost for your home is $25,000. You know you qualify for $10,000 in incentives, so your net cost is now $15,000. You also know that the panels will save you about $1,500 per year on your electric bill. So $15,000 divided by $1,500 is 10. That means your payback period on solar is 10 years.
Factors that influence the payback period of your solar energy
No two solar systems are the same, and that means no two solar payback periods are the same. “It seems like a simple answer, but it’s more complicated,” Haenggi said.
Calculating your potential payback period depends on many variables.
Total cost of the solar system
The more you pay for your system, the longer it will take to recoup your costs. Solar systems can range in price from a few thousand dollars to tens of thousands, depending on where you live, your electrical needs, and the type of system you choose to install. A solar battery can easily add $10,000 or more to the cost of your system. It goes without saying that the higher the price, the longer the payback period.
Below is an average cost of solar panel systems in most states, according to data from FindEnergy.com.
Incentives and tax benefits
Once you know the total cost of your solar system, you should also consider any state or federal rebates you qualify for. For example, the federal Residential Clean Energy Credit gives you up to 30% back. Your state may also have additional incentives. These credits can take a significant chunk out of the money you pay for solar panels, shortening your payback period.
The energy consumption of your home
Sometimes a rooftop solar panel can cover all of your electricity needs, reducing your utility bill to $0, and sometimes it can only cover a portion of it. If you use a lot of electricity, solar may only provide a small reduction in your electricity bill, meaning it may take longer for you to see a return on your investment. That’s why it’s important to consider the energy efficiency of your home before considering solar panels. You can save money on energy and get a smaller solar panel system.
Electricity production from your solar system
You’ve probably never given much thought to your roof, but it makes a big difference in how your solar investment works out. If your roof has room for lots of panels that are in the sun all day, you’ll produce a lot of electricity and see a faster payback. If you live on a shady lot and your panels produce more erratically, you’ll see a slower payback.
Electricity costs and percentage increase
This is a huge, but sometimes overlooked, factor in the payback period of solar. Basically, the higher your electricity rates where you live, the more profitable solar can be for you. As utility rates rise, you’ll save more money by relying on your solar panels instead of pulling power from the grid.
Solar panels and electric vehicle charging can be a useful combination.
Why it’s important to know your payback period
Now you have your payback period for solar. How does that play into your decision?
“It depends on what motivates the household to make the decision to [install] solar energy,” Jones-Albertus said. Maybe you just want to help the environment and aren’t worried about the cost, but “people are also interested in the resiliency aspect and the economic aspect,” she said.
If you’re interested in the financial aspect, payback period is an important number for your decision-making. A payback period of around 10 years is pretty average and can prove to be a solid investment, Haenggi said.
Again, it depends on your goals and your comfort level. For example, if you plan on moving or selling your home soon, that changes the math. You might not be in the house to see the payback in the form of electricity savings, but you could see a payoff in a higher sales price for your home.
“That system on your roof increases the value of your home,” Jones-Albertus said.
Jones-Albertus and Haenggi agree that there are a few scenarios where installing solar panels probably doesn’t make sense, regardless of the payback period. If you know your roof will need to be replaced soon, you’ll definitely want to wait until that’s done before installing solar panels. If you have a lot of trees above your house, it’s unlikely that a solar system will ever provide a significant return; in that case, Jones-Albertus recommends considering community solar.
How do you pay for solar panels?
There are many different ways to pay for solar panels, all of which affect the payback period.
- Cash: If you simply save up for the purchase (for example, using a high-yield savings account), you avoid paying interest on loans and lower the overall cost of solar panels. “Over the long term, the best return typically comes from paying cash for a system,” Jones-Albertus said.
- Solar energy loan: Some banks offer loans specifically designed to finance solar installations. Check with your installer or lenders to see what your options are.
- Home loan or line of credit, also called HELOC: In general, it can be a good idea to use the value of your home to finance home improvements, especially since solar panels increase the value of your home.
- Lease or power purchase agreement: If you want to minimize the initial investment in solar energy, you can actually lease the system from the installer. developer would own the panels and you would sell the electricity generated at a reduced rate, effectively negating the idea of a ‘payback period’ altogether.
