T

he upfront cost of solar panels is still something that prevents budget-oriented customers from installing a home solar system. But if the original investment eventually recoups and secures consistent yield, it is at least worth serious consideration.  

So do solar panels pay for themselves over time? Keep on reading to find out.

The upfront costs: how much will you spend on solar?

In 2021, the American average cost of a residential solar system was $2.94 per watt i. This translates to $14,700 (before incentives) for a 5 kW system, the national average size of a standard residential solar system. In general, the price of solar panels varies between $3,500 to $35,000 depending on the type and the brand.

Does federal and state support for solar make a difference?

While the cost of solar energy equipment has declined over the last decade, it is still a significant investment for many householders. Advantageously, the federal government, state and local governments, and even utility companies offer incentives designed to make going solar more affordable. The main solar incentive is the Federal Investment Tax Credit (ITC) which gives back 30 percent of what you paid for your solar project on your taxes.

Definition of solar panel payback period

First, let’s clarify the term "solar panel payback period". It is the time it takes a homeowner to completely compensate the upfront costs for their home solar array through savings on their electricity bills. In other words, the solar panel payback period estimates how long it will take for you to break even on your home solar system investment.

Are solar savings sufficient to recoup the solar cost?

Long story short - yes, solar power does save you money by reducing your electricity bills. It is as simple as that: your house can use less energy from the electricity grid by consuming the energy your PV modules generate. You can even start to live completely independently of the grid by installing a stand-alone energy system and stop worrying about paying your electricity bills every month because your home solar array will fully handle your energy consumption.

Calculate solar savings on your energy bills

To calculate your payback on solar panels, you will need to figure out how much money you currently spend on electricity.

The simplest way to get this figure is from your electricity bill. Look for something that says cents per kilowatt-hour (kWh). For example, let’s take the average cost of electricity for residential customers in the United States in 2021, which was $13.72 per kilowatt-hour ii.

As a next step to define your ROI, you need to calculate how much electricity you consume each month. The best thing is to figure out an average rather than just using your current monthly total. This is because the amount of money you spend on electricity will vary based on various factors, such as the season, if you are away or have guests, etc. For our example, we will use the average American household’s monthly electricity consumption, which amounted to 886 kWh in 2021 iii.

So, our average household’s monthly electricity bill would be:

886 kWh x $0.1372 = $121.56 per month
Then, an average annual electricity bill would be:
$121.56 x 12 =$1458.72 per year (around $1,500)

Most solar installers recommend aiming for at least 80% of your current energy usage, meaning that you could cut your electricity bills to almost nothing and save hundreds of dollars (for instance, at least $1200 in case we consider an American average electricity bill).

Calculate the period needed for your solar system to pay for itself

Now we are coming to the main point. How can you calculate your solar panel payback time? If you know the price of solar energy equipment and your electricity consumption, it is easier than you might think. You can use a solar panel payback period calculator (there are many of them available online), or you can do the math yourself.

For example, you paid $16,000 for your solar energy equipment and installation, then got a tax break of $4,800 (30% of the Federal Solar Tax Credit), so the cost after incentives was $11,200. If the solar energy your panels generate reduces your electricity bill by $1,500 per year, the payback period for solar panels would be about 7.5 years, naturally, if your electricity rates don’t increase.

Solar panel output refers to the amount of electricity generated by a solar panel system. It varies depending on factors like panel efficiency, sunlight intensity, shading, and tilt angle. Typical outputs range from 250 to 400 watts per panel.

Average payback period for solar panels in the U.S.

In most American households, solar panels pay for themselves within 9 to 12 years after their installation, however, in some locations, it may take as little as five years. Overall, the solar payback period can differ as it’s influenced by several factors, mainly by electricity costs in those states, as well as the tax break a homeowner can get for going solar.

Solar panel payback by state

Solar panels pay for themselves, but the average payback periods in various states are slightly different. The poorer the solar incentives are, the longer the payback period is. In Massachusetts, for example, it can take just about 5.5 years for your solar panels to pay off. On the contrary, if you live in a state like Pennsylvania, this can be as many as 12 years. Let’s dive into some statistics iiii:

U.S State Avg. Payback Period U.S State Avg. Payback Period
Arizona 10 years New Jersey 5 years
California 6.4 years New Mexico 10 years
Colorado 9 years New York 6 years
Connecticut 7 years Oregon 7 years
Delaware 10 years Pennsylvania 12 years
Florida 9 years Rhode Island 6 years
Hawaii 6 years South Carolina 5.8 years
Illinois 13 years Texas 10 years
Maryland 7 years Utah 5.6 years
Massachusetts 5.6 years Vermont 10 years
Nevada 11 years Washington, DC 6 years
New Hampshire 6 years Wisconsin 12 years

How do I know my solar panel payback term is reasonable?

Solar panels are usually designed and manufactured to last at least 25 years. So if solar panels payback time is less than half as long (around 12.5 years), this can be considered a reasonable investment. Still, there is a concept even more critical than solar panel payback duration - “Internal Rate of Return” (IRR), which shows how profitable a potential investment will be.

The Internal Rate of Return defines the profit from investing in a solar energy system as a percentage. For example, an IRR of 12% means that a solar system owner makes a profit of 12% per year on any funds invested in the project.

Bottom line: initial solar expenses are compensated handsomely over the years

One more thing to keep in mind when installing your solar equipment is that the period of your solar panel payback can be determined with perfect accuracy. This payback period depends on several factors, primarily the electricity price, which can be pretty volatile. But no matter how many years you have to wait for your complete solar panel payback, it is always a good financial decision to opt for solar – even if you decide to sell your house, a solar system will add value to your home.

Sources:

https://www.seia.org/research-resources/solar-market-insight-report-2021-q2

https://www.eia.gov/todayinenergy/detail.php?id=51438#:~:text=In%202021%2C%20the%20average%20nominal,our%20latest%20Electric%20Power%20Monthly

https://www.eia.gov/tools/faqs/faq.php?id=97&t=3#:~:text=In%202021%2C%20the%20average%20annual,about%20886%20kWh%20per%20month

https://www.sunrun.com/solar-lease/cost-of-solar/solar-energy-economics

Posted 
Jun 12, 2023
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