How long does it take to break even with solar panels?
Buying solar panels for your home is a large investment. How many years will it take for that investment to pay itself back?
The answer is a little complicated, but that’s what The Solar Nerd calculator is for. If you put in a few details about where you live, what direction your solar panels will face, how much electricity you use, the calculator will give you a quick estimate of how many years it will take for you to earn your initial investment back.
After your investment is paid off, your solar panels will continue to generate clean electricity for free, and will continue to do so for as long as your equipment lasts. Given that many solar panels and inverters come with 25 year product warranties, you can expect more than two decades of trouble-free operation from your solar array.
Interpreting The Solar Nerd payback graph
The graph above is a screenshot from The Solar Nerd calculator. The bottom axis shows time, and the vertical axis shows money.
On the far left side of the chart is the first year of solar panel ownership. In this example, the homeowner paid about $6,500 out of pocket, after all incentives and tax credits are accounted for. That’s why the chart is initially in the red, and the graph shows negative savings at the beginning.
As time goes on, the solar energy system starts earning the homeowner money though energy savings. The more electricity the system generates, the more the homeowner saves and the faster they’ll get paid back.
In this chart, the homeowner has saved the same amount of money as they spent on the system by around year 6. By the time this example system gets to 25 years, the homeowner will have saved approximately $19,000!
The chart goes out to the 25 year mark because that’s the typical limit for solar equipment warranties, but that doesn’t mean your system will necessarily stop working then. In fact, some solar panel systems installed decades ago are continuing to work after 30 and even 40 years!
Of course, the calculator can only make estimates, not guarantees. Still, this tool is an excellent way to quickly evaluate the financial impact of adding a solar panel system to your home.
There are a lot of components that go into the break even calculation.
Factors that go into a solar panel break even calculation
Calculating the return on investment (ROI) for a solar panel system is a little complicated, but it’s possible to make a pretty good estimate because the factors that go into it are well known, and important variables such as the retail price of electricity actually do not change very much over the long term.
When you use The Solar Nerd calculator, here are all the variables that go into the calculation behind the scenes:
The average price of a residential solar installation
Around the globe, the cost of solar panel hardware has been dropping like crazy - in fact, it’s dropped an amazing 89% since 2010!
While this has helped solar to get cheaper every year, hardware costs make up only 36% of the cost of a home solar installation. The remaining 64% is because of soft costs - things like taxes, labor, marketing, and overhead. Soft costs are harder to reduce.
In large part because soft costs vary from company to company, you’ll find that the average cost of solar is different in every state. We use research from Lawrence Berkeley National Laboratory that gives the most accurate picture of solar costs from state to state.
Local climate effects on solar production
You need sunshine to generate solar electricity, and the amount of sunshine you get depends on where you live.
Behind the scenes, The Solar Nerd calculator uses PVWatts, a tool from the National Renewable Energy Laboratory that uses climate data and a computer model of photovoltaic panel performance to estimate how much electricity a solar array will generate.
This computer model doesn’t just take into account how far south or north you are, but the average precipitation, cloud cover, and even how dusty the atmosphere in your location tends to be.
The orientation of your solar array
Even if you live in a perfectly sunny location, your home could still be in a bad location for solar panels. Maybe you have buildings or large trees shading your property. It’s also possible that you don’t have enough roof area facing the best direction for solar, and don’t have a good yard for ground mounted solar.
In fact, shade can have a major impact on the production of a solar array. If you only have a few branches or even a few trees that you can cut down, it will still make sense from an environmental point of view to cut those down to make it possible to have a good performing solar array.
But you can’t just knock down a neighbor’s house if it’s shading your roof. If you play with The Solar Nerd calculator, you’ll see that shade will have a major negative impact on your solar break even period.
Your equipment choices
One major decision in your control is the type of equipment that you choose for your solar array.
Solar panels range from relatively inexpensive, lower efficiency polycrystalline to premium quality (and more expensive) monocrystalline.
The lowest efficiency panels that you’re likely to encounter today turn about 16% of the incoming light into electricity. At the high end, premium panels from LG and SunPower are more than 22% efficient at converting sunlight.
In addition to maximum efficiency, some manufacturers incorporate technologies that help panels perform better in the shade, such as half cut cells.
If shade is a problem that you have, some types of inverters are less efficient at dealing with that. Some inverters, such as microinverters and power optimizers, will help you get the maximum energy in situations that cause other inverters to lose power.
Equipment choice is a careful balancing act between performance and cost, so be sure to work closely with a trustworthy solar installer to understand what you’re buying.
Roof orientation and time-of-use
Many utility companies, which includes all new solar installations in California, require that you have a time-of-use (TOU) plan when you interconnect a solar system to the grid.
What is a time-of-use plan? Simply put, it means that the price of electricity changes during the day. If you’re using electricity during peak hours when lots of other people use electricity too, the price is higher than if you use power in the middle of the night when demand is low.
TOU affects interconnected solar systems too. When a solar system generates more power than the home needs, it sends the power into the grid, and the credit you get for that is determined by the TOU plan.
This means that if you send extra solar electricity into the grid during peak hours, you’ll get a bigger credit than you would for sending the exact same amount of electricity into the grid during off-peak times.
How does this affect your payback calculation? If you tend to use a lot of electricity during peak hours, you’ll get less of a payback than if you shift your electricity use to off-peak times and instead let your solar electricity flow into the grid so that you can recoup higher peak time credits.
This gets a little complicated, which is why you want to pull out a copy of your bill, which will show your peak and off-peak, and share that with your solar installer so they can make an accurate financial estimate.
Net metering and net billing
Another issue when it comes to getting credit for your excess solar electricity is the concept of net metering. Net metering simply means that when you send extra power into the grid, you get a full credit for that power.
Not every state and utility has net metering. Others have schemes like net billing, under which you might get only a partial credit for your electricity.
For example, let’s say that you pay $0.18 per kWh for your electricity. If you have net billing instead of net metering, you won’t get an $0.18 credit when you send a kWh of solar electricity into the grid. Instead, you will get paid less - often the wholesale rate of electricity - which might be only half the retail rate.
Read our guide to net metering to learn more about this policy and to find out if it’s available in your state.
Solar tax credits
The availability of solar tax credits have a big impact on the amount of time it takes to break even on an investment in home solar.
In the United States, the most important incentive for solar is the federal residential energy tax credit. In 2019, it takes 30% off the cost of a home solar system. This credit drops to 26% in 2020 and 2021, 22% in 2022, and then will drop to zero after that unless renewed again by Congress.
There are also many state and local tax credits and incentives available throughout the country - too many to list here. If you use the solar pricing calculator, it’ll tell you about any state and local rebates available to you.
A few states, such as New Jersey, use a market-based incentive called Solar Renewable Energy Credits. The way they work is that you earn a credit every time you generate one megawatt-hour of solar electricity. You can then sell that credit on a marketplace such as SRECTrade.
With SRECs, you don’t receive your incentive in your first year like you do with solar tax credits, but instead earn them over time - meaning that your payback will be accrued as you operate your solar array.
There are other incentives too, such as property tax rebates that prevent your solar array from increasing the assessed value of your home and causing your property tax bill to go up.
To learn more about these, read our guide to solar rebates.
The price of electricity in your area
The higher your cost of electricity, the more you’ll save by going solar. Many states where home solar has become popular, such as Hawaii and California, also have much a higher than averaage cost of electricity.
In 2019, the average cost of residential electricity is about $0.18 per kWh. If you’re paying more, that’s another good reason to consider switching to solar.
Your electricity use
If you’re intending to generate 100% of your electricity use - or close to it - with solar panels, that means you’ll need more solar panels, which comes with higher cost.
However, a larger solar panel system can actually be more cost-efficient. It’s because of the soft costs we mentioned earlier. Some costs are about the same for an installer company whether you choose a small system or a relatively large one.
Because of this, a large system has a lower cost-per-watt then a small system. This means if you can afford it, even though it comes with a higher upfront cost, it can make financial sense to choose a larger system.
Keep in mind that most utility companies won’t let you install a solar energy system that generates more than 100% of your average annual electricity usage. This prevents you from installing an arbitrarily large system on your home.
Calculating your solar panel break even period
You can see above that figuring out your return on investment involves a lot of factors - both in terms of upfront costs, and also the value of the electricity that you generate over time.
Using The Solar Nerd calculator is a great way to quickly assess what your payback period will approximately be. For a more accurate and personalized report, work with multiple solar installers who will give you detailed cost proposals that include their estimated payback period for you.