A crucial factor to consider when transitioning to solar is the payback period of your solar panels. Payback periods vary based on several factors, such as your selected financing option and available solar incentives.
It’s natural for individuals to learn about when and how they will recoup the investment made in home solar power.
This article aims to elucidate the various elements contributing to your solar panel payback period calculation and guide you in determining your own return on investment.
What Is a Solar Payback Period?
To determine your solar payback period, divide the installation cost of your system by the annual savings on your electricity bill.
For instance, if the solar installation amounts to $20,000 and yields yearly savings of $2,300 on your electricity bill, the breakeven point is at 8.7 years ($20,000/$2,300 = 8.7).
This implies that post 8.7 years, the savings accrued from your solar panels on your electricity bill will have offset the initial cost of your system.
From the ninth year onward in this scenario, you essentially begin to save money, having recouped your investment.
Analyzing the payback periods from various solar installation quotations is a straightforward method to grasp the financial merits of each option and ascertain the year from which your solar investment will commence saving you money.
What Is a Good Solar Payback Period?
The commonly cited average payback period for solar panels ranges between six to ten years.
This broad range stems from numerous factors affecting the duration needed to recoup the cost of your panels and the prospective monthly savings.
For instance, a more extensive solar setup will entail a higher initial cost but will lead to greater monthly savings.
Additionally, a significant hike in your utility’s electricity rate can substantially impact your long-term savings.
Contemporary photovoltaic (PV) solar panels are designed to endure for at least twenty-five years, maintaining around 80% efficiency towards the end of this timeframe.
Some newer solar panel models boast even longer lifespans.
Therefore, if your payback period is ten years, you stand to enjoy approximately fifteen more years of savings on your electricity expenses.
How to Calculate Your Solar Panel Payback Period?
Here’s a simplified explanation using the steps you provided:
- Find Total Costs:
- Let’s say your solar panel system costs $31,285 before any discounts.
- Apply Discounts:
- You get a 30% federal tax credit, which is $9,385 off the price.
- You also get a local rebate of $1,200.
- Total discounts: $9,385 + $1,200 = $10,585
- Find Your Adjusted Costs:
- $31,285 (original cost) – $10,585 (total discounts) = $20,700 (your cost after discounts)
- Calculate Yearly Savings:
- Your electric bill is $145 per month (assuming your system’s energy production covers 100% of your electricity needs). So, in a year, that’s $1,740 you’d save.
- You also earn $600 a year from selling solar certificates.
- Total yearly savings: $1,740 + $600 = $2,340
- Calculate Payback Time:
- $20,700 (your cost after discounts) ÷ $2,340 (yearly savings) = 8.8 years
So, in this example, it would take you 8.8 years to earn back your solar panel costs. After that, you save money each year.
Factors That Impact Your Solar Power Payback Period
Total Cost of Your Solar Power System
On average, an 8 kW residential solar energy system is priced around $2.99 per watt, totaling approximately $23,920 prior to applying any incentives.
Nonetheless, acquiring incentives like the Residential Clean Energy Credit can notably reduce your cost by several thousand dollars.
Average Monthly Electricity Use and Cost
The size of the solar system you require and the amount of electricity you need to offset each month is dictated by your monthly energy usage.
The cost of energy in your area directly influences the return on investment (ROI) from your solar power system.
Higher monthly electricity bills generally lead to quicker recouping of your investment, thereby shortening the payback period.
Solar installers aim to equip you with a system that covers 100% of your electricity usage, although practical limitations such as roof size and seasonal weather fluctuations may affect the amount of electricity you can generate on your property.
Tax incentives and rebates significantly lower the overall cost of transitioning to solar.
The Investment Tax Credit (ITC) offers a credit equal to 30% of your total system costs on your federal tax bill.
Depending on your location, additional state and local solar incentives may further reduce your expenses.
Extra Financial Incentives
In certain regions, you can gain additional incentives through Solar Renewable Energy Certificates (SRECs) or net metering programs, which provide a per kilowatt-hour credit for the excess electricity your solar panels generate and contribute to the local electric grid.
These credits can offer substantial financial benefits, depending on the size of your solar energy system.