Solar Panel ROI: Are Solar Panels Worth The Investment?
Melissa Brock5-minute read
UPDATED: December 01, 2023
Before you get solar panels, one of your top-of-mind questions is probably about solar panel ROI, or the return on your investment. You want to make sure you'll decrease (or possibly eliminate) your monthly electric bill, meaning you'll see a good return on your investment.
We'll walk through how much solar panels cost, solar incentives, payback periods, how to calculate the return on investment and whether the solar panel costs are worth it for you.
How Much Do Solar Panels Cost?
How much do solar panels cost and what are the upfront costs? Understanding this is the first step of calculating your total ROI. Solar panel installation can require a hefty price tag upfront. We'll explain installation costs and the typical maintenance costs that go along with solar panels as well.
Your initial investment towards solar panel installation is measured in dollars per watt. The average cost for a residential system is currently $3 – $5 per watt. That means the average 5 kW residential system will cost between $15,000 – $25,000, prior to tax credits or incentives.
A solar-plus-storage system costs about $25,000 – $35,000, depending on the size of the battery and other factors. It is easier and cheaper to install the panels and a battery at the same time.
An inverter is one of the most important pieces of equipment in a solar energy system. It's a device that converts direct current (DC) electricity to alternating current (AC) electricity. Inverters usually range from $1,000 – $1,500 for an average-sized build.
Generally, most solar panel systems do not require active or routine maintenance, but you can add operations and maintenance (O&M) packages. These optional insurance plans for your solar panel system involve cleaning, electrical system checks and pest control measures. The extra protection can cost you a few hundred dollars per year.
What Factors Affect Solar Panel ROI?
Your ROI for having panels installed include the following:
- Your energy consumption habits
- Estimated electricity generation
- Your local utility provider
- Your roof orientation
- Solar tax incentives
- Cost of the solar panel system
- Upfront financial incentives
It's important to recognize that your factors may not look the same as someone else's due to your habits, where you live, your energy provider and more.
The good news is there are options to reduce the cost of solar panels.
Solar Panel Tax Credits
Getting solar panels may give you access to federal tax credits based on your installation costs if you qualify. If eligible, you can claim your solar panels on your federal income taxes for a percentage of the cost. In August 2022, Congress extended the 30% tax credit to systems installed through 2032. The credit steps down to 26% and 22% for systems installed in 2033 and 2034, respectively.
Local Solar Incentives
Homeowners who install solar panels can use several local incentives to their advantage, such as solar rebates and net metering.
Solar rebates work just like rebates for other consumer purchases – you mail in a form and receive cash back.
You may also use a net metering program, which means you sell excess solar electricity to your local utility company at a profit, which means you can attain $0 or even a negative electricity bills every month.
Understanding Solar Panel Payback Periods
Calculating a payback period is one of the easiest ways to determine if solar panels are worth it for your situation. Let's find out what a payback period is and how to calculate it.
What Is A Payback Period?
A payback period refers to how long it takes you to "break even" on your solar investment. It's based on the cost of solar, incentives and your electricity bill savings. Calculating the payback period can help you determine whether it's worth it for you to get solar panels.
Let's say you know that a solar panel system will pay itself back in 7 years. In other words, after you pay for the initial investment, minus tax credits (assuming you qualify), as well as the inverter and other parts, after 7 years, the system will have paid for itself in savings. Solar panels last for 25 or 30 years, so for the remainder of the 18 – 23 years, you could save significantly after the solar payback period.
How To Calculate Solar Panel Payback Period
Let's walk through step-by-step instructions on how to calculate a solar panel payback period.
- Calculate the overall cost (upfront costs and installation).
- Factor in incentives such as rebates or federal tax credits. (Be sure to consult a tax professional to discuss your specific situation and determine whether you are eligible for any federal tax credits.)
- Factoring in any fees if you're using a solar loan. (Dealer fees usually range from 15% to 20% of the cost of the solar system.)
- Calculate your average annual electricity costs. (The average home uses 10,715 kWh of energy.)
- Divide the total cost of the system by the annual amount you'll save on electric bills.
Let's say your overall upfront installation costs total to $20,000. You apply for the 30% federal tax credit, which you are eligible for, and your state does not offer additional incentives. The tax credit can reduce your tax liability by up to 30% of the cost for solar energy systems.
Let's say you are not using a solar loan so there are no additional fees, and the average annual electricity usage for your household is 10,715 kWh of electricity. Your local utility charges costs 14 cents per kWh. That means your annual electricity costs on average would be $1,500.10.
Divide the total cost of the system by your estimated annual energy savings to find your breakeven point, or your payback period:
$14,000/$1,500.10 = 9.33 years
How To Calculate Overall Solar Panel Return On Investment
Here's how to calculate the overall return of investment for solar panels over the course of the system’s lifetime to determine whether the solar panel return on investment makes sense for your particular needs:
- Lifetime cost of electricity − lifetime cost of solar = Solar ROI
Lifetime cost of your system include things like installation, permitting, equipment, grid connection fees, minus the rebates and incentives you qualify for.
To keep this simple, we are assuming the installation cost in our example above covers all lifetime costs of the system. Put into real figures, it can look something like this:
- Lifetime cost of electricity = $1,500.10 x 30 years = $45,003
- Lifetime cost of solar = $14,800
- $45,003 - $14,800 = $30,203
Assuming you continue to pay the same electricity rate, you’ll save about $1,000 a year or 67% for a lifetime return of nearly $30,000.
You can also use a solar panel ROI calculator online to figure out how much you'll save.
The Bottom Line: Are Solar Panels Worth It?
Before you decide whether you want to invest in this type of renewable energy, you may want to figure out your potential payback period, solar panel ROI and what it will do for your energy savings down the road. You'll also need to have a firm grasp on your current energy bills.
If you think you're ready to go solar, apply for a solar loan now!
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