Calculate Your Solar Payback Period
How long will it take to make my money back on my solar investment?
Written by Meghan Woods, Marketing Manager & Content Creator
The sun is an incredibly powerful source of free energy. Unfortunately, to harness all that power we need high-tech and expensive equipment. On the bright side, the cost of solar panels has been driven down over 50% in the last decade. Enabling over 1 million people to power their homes with renewable energy. Solar has become a very smart investment as panel prices fall and utility rates rise. However, many people are still questioning whether or not it makes sense for them to pull the trigger on their solar purchase.
Vivint Solar’s CEO, David Bywater states he, “Expects solar to remain a consultative purchase for now. “If [owners] are putting a $30,000 to $40,000 investment in their home, they want to make sure it’s the right solution for them” (fastcompany.com). Of course educated consumers will put a fair amount of consideration into a purchase of this size. The best place to start is by calculating a “break-even point” or payback period.
The Payback Period
One of the first things you may want to know when researching information about purchasing solar is how long it will take to make back your money. By definition, a payback period is the point in time in which you “break-even” or your initial investment amounts to the total revenue earned (or in this case – savings earned). Like any other investment, the solar payback period may vary depending on a few different factors: the cost of the system, the rate you pay the utility company, and added tax incentives.
The average time it takes for a residential solar system to pay for itself is approximately 6.9 years. This number is based upon 2017’s U.S. average system cost of $9,000 ($15,000.00 with 30% tax credit applied), divided by the estimated annual savings for that system. To determine your annual savings, follow the equation below.
The average household usage per month is around 900 kwh at $0.15 per kwh, equalling a $135 monthly utility bill. This individual is paying around $1,620.00 a year for energy, and hopes to offset their bill by at least 80% by going solar. In this example, we are assuming this is a cash purchase, which means no interest paid on financing. Lastly, you take the total cost of the system after the tax credit is applied ($9,000.00) , and divide it by the amount offset by your solar each year ($1,296.00). Now that you have your payback period calculated, you can determine your total estimated savings. Most solar systems last around 20-25 years, backed by a manufacturer warranty. That is nearly $30,000.00 in savings, and that is assuming utility rates do not increase in the coming years.
Total solar panel system cost -$15,000
After taxes and rebates – $9,000 (30 percent credit)
Price for utility electricity – $0.15/kwh
Monthly usage – 900kwh
Yearly cost for electricity – $1,620
Utility electricity offset by solar – $1,296 (80 percent offset)
Solar payback period is $9,000/$1,296 = 6.9 years.
Cost of Electricity
It may come as no surprise that utility rates are projected to increase in the coming years. According to the EIA (Energy Information Administration), residential electricity rates have increased by 30 percent in just the last decade. This increase has been slow and steady, so it may be hard to catch when you go to pay your energy bill every month. However, these annual increases would amount to over $1,000.00 in just that 10 year period. This is another reason why many residents are considering solar as a way to power their home. Solar is not affected by price increases the way the grid is; you can protect yourself from the rising cost of unpredictable utility rates.
Which area of the country you live in may will determine what you’re paying for energy, but the average cost in the United States is 12 cents per kilowatt-hour. Because residents who live in the NE and SW regions of the country pay more for electricity, they may have a faster payback period.
Homeowners in Hawaii pay approximately 33 cents per kilowatt-hour; this is one of the most expensive places for energy usage. For this very reason, the state of Hawaii has become one of the most prominent places for solar in the U.S. and is on target to become reliant on 100% renewable energy by 2045. The state’s senator Mike Gabbard told Think Progress , “Through the process of transformation we can be the model that other states and nations follow. And we’ll achieve the biggest energy turnaround in the country, going from 90 percent dependence on fossil fuel to 100 percent clean energy.”
Cost of the System
There are a couple of things to consider when first starting the solar purchasing process. Save money by shopping around. Get quotes from multiple companies to ensure you’re getting the best deal possible. This can shave several years off of your payback period, and you will get a higher return on your investment in the long run. It is also key to purchase quality products that are highly efficient and durable. A longer warranty on the equipment may be a better indication that you will continue producing the energy necessary to offset your bill over the lifetime of the system (which can be 25-30 years).
You can find an in depth explanation of solar pricing in our company blog article How Much Does Solar Cost?, “Given that the size of an average residential solar installation is 5.0 kw, it would cost someone $12,500 to $20,000 to have solar installed on their home this year.” Equipment, size of the system, placement, the system’s size and orientation, equipment options, configuration, permitting and labor will factor into the total cost of the system. Estimations will vary greatly across the country, but in the state of California solar companies are pricing anywhere from $2-4 per DC watt. The range from company to company can make all the difference ($2,000-$8,000) in your solar purchase, so it is important to get multiple bids.
Government Programs & Tax Incentives
Because of the positive environmental and economical aspects of solar, “Utilities and other organizations offer solar tax breaks and financial incentives to make solar more accessible for today’s homeowners” (energysage.com). Net Energy Metering (NEM) allows owners of residential and commercial PV solar systems to be reimbursed for the power their solar produces at retail rates. This makes solar viable, and enables homeowners to pay their solar system off in less time as they are compensated regardless if the energy they produce is used in real-time.
Another incentive is the Solar Investment Tax Credit or ITC. “The ITC applies to both residential and commercial systems, and there is no cap on its value. Thanks to the ITC, the average solar shopper saved nearly $9,000 on the cost of going solar in 2015.”(energysage.com). This 30% credit is only applicable if you are able to recover funds from a tax credit; please consult your tax professional for verification. This can have a significant impact on lowering the price of a system for qualified homeowners, and may push many residents to go solar in the next few years before the policy comes to an end in 2022.
Solar is an investment that looks different for every homeowner, and each family should do their own research and ask a lot of questions. However, if you have a power bill over $150 per month and you pay federal taxes, solar could be the best investment decision you ever make. The solar payback period will always be lower than the time it takes for a solar system to stop performing. This means years and years of return on your original investment to choose solar as an energy source.
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