Not only are you doing the environment a favor by using solar, but the investment is also worth it. Apart from bringing down your electricity bills, solar panels are an excellent long-term investment. In short, you can be assured that solar panels do pay for themselves.
You must be wondering, how long does it take for solar panels to pay for themselves? Stick with this article and learn more about the solar payback period. Once you know the basics, you’ll see what your investment is worth.
Understanding The Payback Period
A solar panel payback period is how long it will take your savings on electricity bills to pay off your solar power plan.
How do you calculate that? It is equal to the total cost of installation, minus solar incentives and all your monthly electric bills until it’s at zero cost.
For instance, if you invested $20,000 on your solar plan and got a tax break of $5,000, your total cost after the rebates is $15,000. If you used to pay $2,000 for your electricity, then in 7 and a half years, you’ll have achieved your payback period. This calculation is assuming the electricity rates are constant.
If you live in Nevada as of 2019, you would have received solar credit of $3,400 for a solar plan costing about $11,500.
The US average
On average, most US households take between 8 years for their solar plans to pay for themselves.
But the payback period can differ from state to state as it’s influenced by several factors and not just being on the sunny side of things. Some of these factors include electricity costs in those states and the tax break you get for your solar plan.
If, for instance, the incentives are lower in State A than in State B, the payback period in the former will be longer and vice versa.
Take Massachusetts, for example. It can take five years for your panels to pay for themselves. On the other hand, if you live in a state like North Dakota, your payback period can go for as many as 16 years.
Apart from these factors, other issues such as your payment method can determine your payback plan. Did you take a loan or pay cash for the solar system? If you used a loan, you need to factor in the interest in the repayment. [Leasing vs. Buying Solar Panels: Weigh All Your Options]
Average Electricity Price Increase (Cents per kWh) since 2008
Average Solar Payback Period in Years
How do I know if my payback period is reasonable?
Solar panels have a lifespan of not less than 25 years. Modern brands can serve you even longer. Therefore, if it takes 12 and a half years or less for the solar system to pay for itself, then the payback period is not bad.
Besides the lifespan, the Internal Rate of Return (IRR) comes into play when considering whether a payback period is worth the investment. IRR is a concept used to calculate the profitability of potential investments.
5. Issues to consider when calculating the solar payback period
To know exactly when your payback period is, you have to consider five factors as follows:
- What is your electricity consumption?
- What is the cost of the solar plan?
- How much are the solar rebates, incentives, and tax breaks?
- What is the output of your system?
- How much does electricity cost in your area?
1. The consumption rate
You must first ask yourself how many solar panels you need to power your home. The best determinant of this is checking how much electricity you use. Then invest in a solar plan that helps you cover that electricity usage for one year.
For instance, take a home that uses 17,000kWh of electricity annually. Let’s say this home is in California, where solar panels can produce 1,700 kilowatts per hour. This then means that your solar plan should be 10kw.
2. Your solar plan cost
Next, you should find your ideal solar plan, depending on your budget. How much will you spend on the solar system? Here, the cost is before subtracting any incentives, solar credits, or rebates. From this number, you will be deducting the amount you save to establish what the payback period will be.
Let’s say the 10kw solar plan costs you $19,000 before tax breaks. You can either choose to pay cash or pay with a loan.
3. The tax break factor
Solar is one of the most attractive forms of energy because you qualify for incentives just by installing it. Right now, you can qualify for a 22% tax break on the total cost of your solar installation. But only if you acquire the system and start using it before 2024.
Besides, you can still claim other forms of incentives, depending on where you live. For example, in Hawaii, you can get a 35% renewable energy technologies income tax credit. This incentive is in addition to the 22% tax break before 2024.
To find the net cost of your solar system, subtract the incentive amount from the original price. For example, if we’re to use the $19,000 cost, you can qualify for a credit of $4,940. In short, your net investment in the solar panel is $14,060. From this, you will subtract your savings.
4. The solar system’s output
By calculating this, you want to get the amount of solar energy your panels can produce yearly.
While still working with the 1,700kWh electricity production yearly, you can get the average the panels can output. So, multiply 1,700kwh by 10 kW (which was your solar system size). The panels can produce 17,000 kWh annually.
5. Your electricity bills
Multiply the number of kWh your system generates with the per-kWh rate from the utility. That’s how you’ll arrive at the amount you save annually by using solar. If you divide your net cost with these yearly savings, you can quickly get an approximate timeframe for your payback period.
Sometimes, however, the cost of electricity can change, affecting the whole calculation. Despite that change, the formula should still give you an estimate on your payback period. Furthermore, you can only correctly calculate this period if you live in a state with net metering.
Average Cents Per kWh
Average kWh Used Per Month
Average Monthly Bill ($)
What is net metering?
It’s a structure put in place through which any excess energy you make is sent to the power grid. But not for free. In states with proper net metering policies, your utility buys this excess at the retail electricity rate.
The beauty of this is you get credit to your power bill every time you produce excess energy. This credit becomes essential when you have to pull electricity from the grid when your panels fail to generate energy. Over time, you will have enough credits to offset your all your electricity bill.
The other advantage of net metering is it can shorten your payback period. Why? You’re bound to save more from your electricity bill in a state with net metering policies than one without. Not all states have net metering policies. So far, only 38 states have the policies in place.
Using the above example, if you earn 24 cents per kWh from your solar energy, the 17,000kWh will save you about $4,080 in the same period. If the panel’s net cost were $14,060, you would divide that by the amount you save per year.
In this case, it’s $4,080. It will, therefore, take about 3.4 years for your solar panels to pay for themselves. The calculations assume the electricity costs remain constant.
If you install the panels in 2021, you will have finished paying for them by 2024. The even better news is that you can still use them until 2046. Remember, the lifespan of your panels is about 25 years.
1. Change in electricity costs over the years
The tricky part about predicting payback periods is when you consider fluctuating electricity costs.
The US has seen an annual rise in electricity costs by 2.3% on average in the past 20 years. But, this still differs from state to state. To better predict future increases, use the history of your utility firm rate changes.
2. Lack of net metering in some states
If you live in a state without net energy metering, the utility credits your excess output to your bill. The utility will call it the “avoided cost rate” and it doesn’t pay much.
The Bottom Line
So, how long does it take for solar panels to pay for themselves? There are several factors to consider, such as your system’s cost, electricity consumption, incentives, or tax credits.
Other factors include the energy generated by your system and the cost of electricity.
The net cost of your system is its final price minus the incentives. It is from this cost that you will subtract the amount of money you save by using solar. The definitive answer shows you approximately what your payback period is.
Solar systems pay for themselves, and on average, Americans take 8 years to complete payment. But, the payback period can be shorter. When you consider the lifespan of solar, your investment is worth it.