How to Calculate Solar Payback Period & Return on Investment
One of the strongest incentives to go solar is the prospect of saving money on your electric bills and turning a profit over the life of your solar panels.
This article will outline a complete step-by-step overview of how to calculate your solar payback period and return on investment based on factors unique to your project, like local electricity costs and your personal energy usage habits.
What is Solar Payback Period?
Your solar payback period is the time it takes to break even on your investment into solar.
When you go solar, you can reduce or completely eliminate your monthly electric bill. Those savings add up each month until they eventually pay back your investment into solar.
Your payback period is the amount of time for your energy savings to completely offset the costs of going solar. To figure this out, we want to account not only for up-front system costs, but also the cost of labor and any scheduled replacements of major components when their warranty is up.
How the Federal Solar Tax Credit Impacts Payback Period
The solar investment tax credit is a government program that offers a major financial incentive for going solar. Under the program, US residents who install solar can claim 26% of their total project costs as a credit toward their federal tax return.
That means that for every $10,000 you spend on solar, you’ll get a credit that erases $2,600 of your tax liability.
The solar tax credit is a major incentive that significantly speeds up your solar payback period. To be eligible to claim the credit, you must owe taxes on your return for the year that your system was installed. If your credit is larger than the amount of taxes you owe, the credit can be carried forward for up to 5 years.
When evaluating your investment into solar, be sure to factor the tax credit into your calculations if you are eligible.
The 26% solar tax credit lasts through the end of 2022. It will drop to 22% in 2023, before expiring for residential projects in 2024.
Calculating Payback Period For Grid-Tie Solar Systems
Let’s walk through the payback period calculations for a sample 7.2 kW grid-tie system built in Anaheim, CA (where GoGreenSolar is headquartered).
For the purpose of this example, let’s assume our system uses a SolarEdge HD-Wave inverter with a 12-year warranty. We’ll need to budget for one inverter replacement over the 25-year life of the panels.
Sample system specs: 7.2kW SolarEdge + PV Optimizer system
- System type: grid-tie
- System lifespan: 25 years
- Energy usage: 900 kWh / month
- Cost of electricity (in Anaheim, CA): 15.18 cents per kWh
- Cost of solar kit: $11,640
- Cost of wires & small parts (not included in kit; sourced from local hardware store): ~$500
- Cost of installation: $7,200 (or $0 for self-installed systems)
- Up-front system costs: $19,340
- 26% federal tax credit savings: $5,028.40
- Up-front costs after tax credit: $14,311.60
- Scheduled inverter replacement: ~$2,000
- Total lifetime costs: $16,311.60 (or $10,983.60 for self-installed systems)
Once we have added up our lifetime system costs, we can figure out how much money we expect to save on electric bills each month by multiplying monthly energy usage by the local cost of electricity:
900 kWh / month * 0.1518 = $136.62 monthly electric bill erased
Then, take the total lifetime cost of solar and divide by your monthly savings to figure out when you will break even on your investment:
For DIY systems: $10,983.60 / $136.62 = 80.4 months, or about 6.7 years
For professionally installed systems: $16,311.60 / $136.62 = 119.4 months, or about 9.9 years
In this example, a DIY system would break even in about 6.7 years, leaving you with 18+ years of free power from solar. Hiring an installer would extend the payback period to 9.9 years, giving you 15+ years to reap the profits of free solar power.
Factors That Influence Solar Payback Period
Local Cost of Electricity
The cost of electricity varies by location, as each utility sets their own pricing and usage terms. The average cost of electricity can range anywhere from 9-32 cents per kWh (kilowatt-hour) depending on what state you live in.
If you live in an area with higher electricity costs, you’ll enjoy a faster payback period because you’re knocking out a larger electric bill each month.
States with low electricity costs can still see a positive return from going solar, but the payback period will be extended because the utility bill you’re offsetting isn’t as steep.
Not all build sites are created equal; some get more sunlight than others. To use an extreme example, a solar system in the Arizona desert will be exposed to twice as much sunlight, and produce twice as much usable power, as one installed in the frigid reaches of Minnesota.
While grid-tie solar provides a positive return on investment no matter where you are in the US, the payback period will be extended in areas with low solar exposure. To see how many sun hours you get in your location, check NREL’s solar resource maps.
A quick note: the term “sun hours” does not refer to the number of daylight hours in your location. Instead, a sun hour is a specific unit of measurement, calculated as an hour of sunlight that reaches 1,000 watts of power per square meter.
In layman’s terms, “sun hours” refers to the amount of time the sun is shining strong enough to power your solar panels. Most locations in the US receive an average of 4-6 usable sun hours per day.
When calculating payback period and ROI, be sure to account for any scheduled replacements over the life of the system. Specifically, batteries and certain inverters will need to be replaced at least once over the 25-year life of your panels.
In our example, we highlighted a SolarEdge HD-Wave system, which comes with a 12-year warranty. In comparison to microinverters like the Enphase IQ7+, a SolarEdge system will cost slightly less up front.
However, the IQ7+ features a 25-year warranty, so it won’t need to be replaced. That makes microinverters more cost-effective over the life of the system.
DIY vs. Professional Installation
If you hire a professional to install your solar power system, you’ll likely be quoted a rate between $1 to $1.25 per watt for the job. For our sample 7.2 kW (7,200-watt) system, an installer would likely charge us $7,000-$9,000 for their labor.
That’s about one-third of the total project costs, and it extends the payback period for our system by more than three years!
If you feel inclined, you can skip out on those installation costs by purchasing a home solar kit and installing your own system. If you feel comfortable wiring an electrical outlet and climbing on your roof, installing solar should be well within your capabilities.
DIY installations typically require 2+ people and take 1-3 weekends to complete. It’s a great approach if you want to save money on your project and accelerate the amount of time it takes to break even on your investment into solar.
What is Solar Return on Investment (ROI)?
Your solar ROI is your total savings on electricity costs once you’ve passed your payback date. Let's look at how to calculate solar panel ROI.
Calculating Solar Return on Investment
Take your payback timeline and subtract it from 25 years, the expected lifespan of your system based on the standard length of solar panel warranties. Then, multiply by the amount of electric bills you knocked out by going solar.
Solar Panel ROI For DIY system:
25 years - 6.7 years = 18.3 years
18.3 years * ($136.62/mo. * 12 mos.) = $30,001.75
In this example, if we opt for a DIY installation, we can expect our solar panels to save us $30k in electric bills over the life of the system.
Divide the net profit by the total cost of going solar to figure out your ROI:
$30,001.75 / $10,983.60 = 273.15% ROI
Solar Panel ROI for Professionally Installed System:
25 years - 9.9 years = 15.1 years
15.1 years * ($136.62/mo. * 12 mos.) = $24,755.54
If we hire a professional installer, we can expect our solar panels to save us nearly $25k in electric bills over the life of the system.
Divide the net profit by the total cost of going solar to figure out your ROI:
$24,755.54 / $16,311.60 = 151.76% ROI
Solar Payback Period & ROI For Battery-Based Systems
The above examples highlight typical ROI calculations for a grid-tie solar system ‒ one that connects and stores power in the public utility grid. A grid-tie system is the most cost-effective option for homeowners looking to eliminate their electric bill.
Adding batteries to your system gives you a local energy storage option, giving you more independence and control over the power you generate. In grid-tie systems, a local battery bank provides backup power to keep appliances running during an outage. In off-grid systems, your battery bank is what allows you to deliver power to a remote location that can’t be reached by utility power.
Batteries are the most costly part of any solar system, which is why grid-tie homeowners often opt to skip them if their primary goal is to save on their monthly electric bill. If you choose to add batteries, know that it will extend your solar payback period, and you likely won’t turn a monetary profit from your solar panels.
However, the value of batteries shouldn’t be compared to the cost of grid power, but to the alternative of going without them. In grid-tie backup systems, batteries can be invaluable if you suffer frequent outages due to fierce storms or an unreliable power grid. In off-grid systems, solar + batteries is often cheaper than the cost of bringing a power line to your property, or powering your home entirely off a gas generator.
Ready to Go Solar?
If you’re interested in going solar, give us a call at (866) 798-4435 or request a free solar design consultation online. Tell us exactly what you want to accomplish with your solar project ‒ if our pre-sized solar kits don’t suit you, we can design a custom kit to meet your needs.