Solar ROI: how long does it take for solar to pay for itself?
Getting a good financial payback on a home solar installation is a key consideration for most homeowners. Here's how to find out what your ROI would be.
Going solar is a big investment for any household. An average sized home solar system will cost several thousand dollars even after incentives, so knowing how long it will take to pay back the investment is a key question for most people.
On average, an investment in home solar panels will be paid back in roughly six to eight years, but this will depend on the amount of sunlight the system receives, the net metering agreement, and other factors.
This guide will help you understand how a home solar system pays for itself and how to calculate your own return on investment.
Solar payback period explained
When you install solar panels, you’re investing in a system that will generate electricity for your home and reduce your monthly utility bills. In this way, your solar panels will earn you money every month.
You can think of it as being similar to other types of financial investments, such as bonds. If you buy bonds with a fixed interest rate, you’ll earn a predictable return on investment every year. The annual return from solar panels isn’t quite as consistent because the weather varies every year, but the power production estimate you get from a good solar installer will be accurate enough to let you calculate your payback period.
The payback period for solar panels is the number of years it will take for your utility bill savings from solar to equal the amount of money you paid for the system.
For example, if your solar array saves you $100 per month ($1,200 per year) on your electricity bills and the price of the system was $12,000, the payback period would be 10 years ($12,000 divided by $1,200).
How much money will your solar panels earn every year?
When you get a quote from a good solar installer, you’ll get a customized report that estimates how much electricity the panels will generate each year, and how much in utility savings that will translate to.
You can get a simplified version of this with The Solar Nerd calculator. When you plug in the basic details of your home, the calculator will use historical weather data and your location to estimate how much solar electricity a system would generate, how much you’ll save every year, and the number of years for the system to pay for itself.
Solar installers use a more sophisticated analysis that incorporates the actual placement of the panels on your roof, but the calculations that go into it are similar to our Solar Nerd calculator.
The format of the reports vary from installer to installer, but the information you’ll get is similar. I’ve got a couple examples below.
This quote tells you the system price, the estimated average monthly electric bill after the system is producing electricity, the lifetime savings based on a 25-year lifespan, and the internal rate of return (IRR).
The IRR is the estimated return on investment. In this case, the installer is estimating that the $17,612 price of the system will end up giving the homeowner the 20.5% return on investment every year. This is equivalent to putting this money into a savings account that earns 20.5% interest. That’s pretty good!
Finally, the last line is the estimated payback period, which is just over 5 years for this quote. That’s a really short payback period, so the homeowner who received this quote would be making a good financial move by installing solar.
Here’s another example:
This is a quote from SunPower, and it includes some of the same details, except that it doesn’t calculate the payback period for you. That’s no problem, because they give an estimated average monthly savings of $235.
$235 per month multiplied by 12 months equals an annual savings of $2,820. If you divide the $21,371 price of the system by $2,820, you end up with a payback period of about 7.6 years.
That’s about an average payback period, so this homeowner would do well financially by making this investment.
Solar panels don’t always have a good payback period
Once you’re looking at a payback period of about 15 years or more, an honest solar installer will let you know that the financial return of the system won’t as advantageous as it would be if you had a better site for solar. In some cases, there might be issues that you can address, such as trimming neighboring trees. However some things, such as your net metering arrangement, may be outside of your control.
When does a home solar panel system have a good payback period?
There are several factors that can improve the financial payback for a home solar system. These include:
- A south-facing roof without any shading
- A sunny climate
- A roof made with metal or asphalt shingles. (Tile roofs are more difficult and expensive for solar installers to work with.)
- Local or state incentives
- A favorable net metering arrangement
- High electricity prices
- Your roof is in good condition and won’t need repairs for at least 25 years
If some or all of these factors apply to you, then it’s very likely that you’ll have a good payback by installing solar.
Financing changes the payback equation
When you get a solar quote based on financing, you generally won’t see a bottom line price, but a monthly loan payment instead. You can still use this to calculate your financial payback: your total amount paid for the system is equal to your monthly loan payments multiplied by the total number of payments over the full term of your loan.
Just know that if you’re getting a loan from your installer, you should be aware of dealer fees. To avoid this, consider getting a conventional loan from your bank instead.
Finally, if you choose a solar lease or power purchase agreement (PPA), you need to be very careful and read the contract. Sometimes, not only will a lease not save you money, but you can end up paying more for electricity than if you didn’t go solar at all. Some companies have been accused of deceptive marketing practices, so be sure you understand the terms of the lease, especially when it comes to escalator clauses.
Should you install solar panels if your payback period is long?
Theoretically, even a system with an estimated 25 year payback period could pay for itself - if the system lasts at least 25 years. However, from a financial point of view, I would discourage homeowners from going this route, because you should budget for possible repairs or the need to have your roof repaired while the panels are mounted. If you have a long payback period, extra maintenance costs could make the project unprofitable over the long term.
However, not everyone who installs solar on their home does it for financial reasons. Climate change and energy independence are a couple other common reasons. Even if solar doesn’t save you much money, you might have other good reasons for going ahead with a solar installation.
How to calculate the solar payback for your home
As mentioned earlier, the Solar Nerd calculator will give you a real quick financial estimate for your home. For a more accurate picture, you’ll want to get a quote from a professional solar installer.