Understanding the solar panel payback period

How to calculate solar panel payback period (ROI)

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The financial benefits of going solar are now well documented. Solar panel systems actually function as investments with strong rates of return, and homeowners generating solar electricity can avoid paying increased utility rates by eliminating their electricity bills. According to a 2015 report by the Lawrence Berkeley National Laboratory, installing solar panels on your home can even increase your property values. If you’re reviewing multiple quotes, there are plenty of metrics that can help you make a decision about which solar option is best for you, but studies show most solar shoppers rely on one metric in particular: the solar panel payback period or break-even point.


Solar payback periods summarized


  • Your “solar payback period” is the time it takes to make back your initial investment in solar
  • For most solar shoppers, you’ll break even in about 8 years
  • Start comparing solar quotes on the EnergySage Marketplace for maximum savings

What is the average payback period for solar panels in the U.S.?

The solar panel payback period is a calculation that estimates how long it will take for you to “break even” on your solar energy investment. Increased utility electricity rates and lower equipment costs are making it easier and less expensive to for homeowners to own, rather than lease, their solar panel systems. Comparing the payback period of various quotes from solar installers is an easy way to comprehend the financial merits of each option, and identify the point in time at which your solar investment will start to earn you money.

The typical solar payback period in the U.S. is just above 8 years. If your cost of installing solar is $20,000 and your system is going to save you $2,500 a year on foregone energy bills, your solar panel payback or “break-even point” will be 8 years ($20,000/$2,500 = 8).

How is the solar panel payback period calculated?

To calculate your solar panel payback period, you need to determine the combined costs and annual benefits of going solar. To understand each component, review the following information:

  • Gross cost of solar panel system: The gross cost of installing solar on your home is dependent on the size of the system you select and the equipment that makes up that system.
  • Value of up-front financial incentives: Tax breaks and rebates can dramatically reduce the cost of going solar. The federal investment tax credit allows you to deduct 26% of the cost of your system from your taxes, and additional state and local financial incentives may also be available in your area. 
  • Average monthly electricity use: The amount of electricity that you consume monthly is an indicator of both the size of system you need and the amount of electricity that you can offset each month with solar. The higher your electricity bills are, the shorter your estimated payback period will be, as you can reduce or eliminate this bill as soon as your panels are operational.
  • Estimated electricity generation: While solar installers will try to provide you with a system that matches your electricity consumption, practical constraints like the size of your roof and seasonal weather variation may impact the amount of electricity that you can produce on-site.
  • Additional financial incentives: In some areas of the country, you may be able to earn additional incentives in the form of solar renewable energy certificates (SRECs) or other utility programs that give you a per kilowatt-hour credit for the electricity that your solar panels generate. Depending on the size of your solar energy system, these can represent a significant monetary benefit. 

Take the following steps to calculate your payback period:

  1. Determine combined costs. Subtract the value of up-front incentives and rebates from the gross cost of your solar panel system.
  2. Determine annual benefits. Sum up your annual financial benefits, including avoided electricity costs and any additional incentives.
  3. Divide your combined costs by your annual financial benefits. The result will be the number of years it will take for you to achieve payback. Every month of savings after that point in time should be counted as a financial gain!
Solar Panel Payback Period

Three Tips for Solar Shoppers

1. Homeowners who get multiple quotes save 10% or more

As with any big ticket purchase, shopping for a solar panel installation takes a lot of research and consideration, including a thorough review of the companies in your area. A recent report by the U.S. Department of Energy’s National Renewable Energy Laboratory (NREL) recommended that consumers compare as many solar options as possible to avoid paying inflated prices offered by the large installers in the solar industry.

To find the smaller contractors that typically offer lower prices, you’ll need to use an installer network like EnergySage. You can receive free quotes from vetted installers local to you when you register your property on our Solar Marketplace – homeowners who get 3 or more quotes can expect to save $5,000 to $10,000 on their solar panel installation.

2. The biggest installers typically don’t offer the best price

The bigger isn’t always better mantra is one of the main reasons we strongly encourage homeowners to consider all of their solar options, not just the brands large enough to pay for the most advertising. A recent report by the U.S. government found that large installers are $2,000 to $5,000 more expensive than small solar companies. If you have offers from some of the big installers in solar, make sure you compare those bids with quotes from local installers to ensure you don’t overpay for solar.

3. Comparing all your equipment options is just as important

National-scale installers don’t just offer higher prices – they also tend to have fewer solar equipment options, which can have a significant impact on your system’s electricity production. By collecting a diverse array of solar bids, you can compare costs and savings based on the different equipment packages available to you.

There are multiple variables to consider when seeking out the best solar panels on the market. While certain panels will have higher efficiency ratings than others, investing in top-of-the-line solar equipment doesn’t always result in higher savings. The only way to find the “sweet spot” for your property is to evaluate quotes with varying equipment and financing offers.

For any homeowner in the early stage of shopping for solar that would just like a ballpark estimate for an installation, try our Solar Calculator that offers upfront cost and long-term savings estimates based on your location and roof type. For those looking to get quotes from local contractors today, check out our quote comparison platform.

This post originally appeared on Mother Earth News.

cost/savings content

25 thoughts on “How to calculate solar panel payback period (ROI)

  1. Travis

    Why does ROI matter? If there is 1:1 net metering in the area, isn’t the question ANY RETURN or NO RETURN for your light budget? Do we not all agree that eventually batteries will be financially and technologically viable, and that will be the end of oil and has as anything other than an emergency back-up? And that will probably be well within the lifespan of these tier-1 systems?

    It seems like a straw-man. Nobody argues about whether renting or buying a home is the “better option.” Do people normally calculate their ROI on their mortgage payments vs. rent? I live in an apartment, but I didn’t think so lol I thought the consensus was we BUY EVERYTHING WE CAN and RENT WHEN WE HAVE TO because it’s logical. (except boats planes and loose ladies according to my grandpa lol)

    In 10 years where do you want to be, looking for the best solar installers in your area, or in the beginning stages of forgetting purchasing electricity as a product was ever even a thing?

    Reply
    1. Steve Corcoran

      You seem to be under the impression that the only thing our society uses petroleum for is to operate power plants. 80% of the possessions you own are created from petroleum using chemistry (including most of the components that make up a solar energy system). While I agree that solar is definitely part of the solution to our world’s future energy supply, the better batteries today rely on lithium extraction, which is not only many orders more damaging to our environment than recovery of petroleum reserves, but the current processes to create lithium ion batteries require a much greater energy input than can ever be made up for during the life of the battery.

      Reply
  2. Paul

    I would fully support the comments above. Using the calculator on this site, it indicates a 13 year payback on a nett $47,000 cost for my property. I actually installed solar 4 years ago and the returns are well below the figure calculated by the company selling the system.

    To date the system has reduced the power consumption by around 35% to 40 %.as against the 60% which was indicated in the design and offer. Part of the reason was a failure to take into account a couple of trees that interfere with the operation of the east facing panels in the morning, but that does not account for all the underperformance.

    The annual savings provided by the tool on this energysave site is $2,700 per year, whereas in fact it is only $1,400. per year over the four year period since we installed the system.

    This provides a repayment period of around 33 years, not taking into account the opportunity value of the up front payment as Troy mentions above.

    Solar is not a good investment by virtue of the vendor companies siphoning off the grants available and overcharging for the equipment and installation.

    Reply
    1. Ricardo Stange

      Perhaps the shading of the trees in interfering with the output of the others panels as well. This is a known issue if you are using string inverters.

      Reply

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