How much money can I save with solar?

Home solar has become immensely popular. According to surveys, the reasons homeowners go solar include helping the environment, energy independence, and relying less on a utility company. But the biggest reason? Saving money.

The savings can be substantial. Over the expected 25 year lifespan of a home solar system, a homeowner can save tens of thousands of dollars. If you want an exact dollar estimate, you need to know your cost of electricity, the system design, shading conditions, net metering scheme, available incentives, and other factors.

Getting multiple quotes, which will include estimates of the financial payback, is the best way to know how much you can save. However, in this article, we’ll look at some of the key factors in determining whether going solar will be a good financial move for you.

Solar savings depends a lot on the price of electricity

Having solar panels means that you need to buy less or even no electricity from your utility company. Because of this, your potential savings from solar depends on how much you can minimize your electric bill.

A big part of this is the price of electricity, which can vary massively across the United States. For example, the average price of electricity in Nebraska is 9.35 cents per kWh, while in Hawaii you will pay an eye-watering 44.96 cents/kWh on average - almost five times higher.

This means that it’s much more likely that a homeowner in Hawaii will have a good financial payback from investing in a home solar system than a homeowner in Nebraska.

Another factor to consider is your electricity usage. If you have a relatively small electric bill, going solar will tend to return lower savings because the cost of a small system is higher on a per-watt basis.

Are you familiar with your electricity consumption? While every home is different, there is a state-by-state trend in the average household electricity usage. This is because heating and cooling patterns differ by state. For example, heating with electricity is more common in some states than in others, and air conditioning is practically a necessity is hot and humid climates like Florida.

The table below lists the average monthly electricity usage by single-family detached homes, the average price of electricity, and the average annual electric bill for those homes. This data was obtained by the US Energy Information Administration.

According to this data from the EIA, the average single family home in the United States pays $1,697 for electricity every year. If you were to eliminate that bill with a home solar system, the 25 year savings would be $20,364 - if you simply multiply that number by 25. However, according to the US Energy Information Administration, the annual rate of inflation for electricity has been around 2.9% since 1960. This means that if you increase the cost of electricity by 2.9% every year, the total cost of electricity that our average homeowner will have paid after 25 years is $61,056 - a big number that illustrates the compounding effect of inflation.

After including the federal tax credit, a home solar system might cost only 1/4 of that, which is a big savings. Another way of thinking of this is for approximately 3/4ths of the expected life of a home solar system, the homeowner will be getting free electricity.

The median cost of home solar panels

With a small solar installation, so-called “soft costs” are a majority of the total price. Soft costs includes things such as installation labor, permitting costs, overhead, and profit margin. Hardware costs are a smaller proportion of the expenses for a small system.

This is a key reason why there is a lot variability in the price of a home solar installation. Different companies will have different labor costs, overhead, profit margins, and other costs. Even within the same city, you might find that two installers give you estimates that differ by thousands of dollars.

However, there’s enough data on installed systems to give us a rough idea of what kind of prices you can expect. Lawrence Berkeley National Laboratory has collected price information on over 3 million solar installations in the US. Based on that data, we know that the median size of a home solar installation is 7 kilowatts and the median price is currently $3.80 per watt.

1 kilowatt is 1,000 watts, so that works out to a price of $26,600 for the typical home solar installation in the US. The federal tax credit for solar is 30%, so after receiving the credit the final cost would be $18,620.

Berkeley Lab also shares the 20th and 80th percentile prices in the US. The 20th percentile cost is $2.90/watt, which works out to $20,300 for a 7 kW system or $14,210 after the tax credit. (20th percentile means that 20% of systems will be cheaper.) Meanwhile, the 80th percentile price is $4.80/watt, which translates to $33,600 for a 7kW system and $23,520 after the tax credit. (80th percentile that 20% of systems will be more expensive.)

Another big factor in price variability is location. Median costs vary by state by as much as $2/watt. While many states fall close to the $3.80/watt median, New Hampshire, Rhode Island, Colorado, and others differ significantly. Here’s a table showing the median prices of home solar in some of the largest markets in the US.

An important note is that the federal tax credit is not a rebate. You can use it to reduce the federal income tax you owe, but if don’t have much of a tax liability, you might not be able to take full advantage of it. My article on the solar investment tax credit explains it in further detail.

Finally, a 7 kW system is the average system size installed today, but you might need more or fewer panels, depending on your electricity usage and how much of your electric bill you want to eliminate.

Study your utility bill to find out how much electricity your household uses

The table above tells you what the average electricity usage is in any state, but every household is different. The energy efficiency of a home, the number and type of appliances, and the number of occupants in a home are some of the things that affect the size of your utility bill. In addition, many homes have time-of-use rates with their utility company, which means that the price of electricity changes throughout the day.

How much does your household use? If you’re not familiar with your electricity bill, now’s the time to take a closer look.

Your bill will tell you how many kilowatt hours you used in the previous month, but what you really want to know is how much you use in a year. This is because most homes have seasonal patterns to their electricity usage, and as a potential solar homeowner, you want to understand what your costs are over an entire year.

A lot of bills display a little chart like the sample above that shows your electric usage in the previous 12 months. Sometimes it will list the actual kWh numbers as well. In any case, if you study your bill closely you should be able to determine how many kilowatt-hours of electricity you used in the past year. This will be a key piece of information that a solar installer will want to know when designing a system for you and helping you understand what your potential savings will be.

The impact of net metering on your savings

Because of daily and seasonal variations in your electricity usage, there are times when your solar panels will generate more electricity than your home uses. When this happens, your excess electricity will be sent into the electric grid and you will receive a credit from your utility company.

If you receive a full credit, that’s called net metering. However in many states, including California, you will only receive a partial credit for electricity you sell back to the utility company. For example, if your price of electricity is 15 cents/kWh, the utility company might pay you only half of that for electricity that you sell back to them.

That’s called net billing, and more utility companies are pushing for it because home solar threatens their profits. The latest changes in California, called NEM 3.0, is their latest victory, and it substantially reduces the credit that solar homeowners receive for their excess solar electricity.

Net billing and other schemes that don’t fully compensate solar homeowners make it harder for home solar to be a good financial investment, but in many cases it will still be profitable. In California, for example, utility electricity is very expensive. If you can shift your electricity usage so that you consume more of your own electricity when the sun in shining, solar panels can still pay for themselves in less than a decade.

You can read my article on net metering for a deep-dive into this topic.

State and local incentives can save you an additional thousands of dollars

The 30% federal tax credit is the most important solar incentive in the nation, but it’s not the only one. There are many state and local tax credits and rebates that you can also take advantage. After combining all the available incentives, some homeowners will pay less than half the original invoice price for their solar systems.

Here’s a list of state income tax credits for home solar (current as of 2023):

• Arizona provides a credit of 25% of the system price, up to a maximum of $1,000
• Hawaii has a credit of 35% of the system price, up to a maximum of $5,000
• Idaho lets you deduct up to 40% of cost of a home solar system from your income, up to a maximum deduction of $5,000 in one year, with an additional deduction of 20% of system costs deducted each year for the next three years, for a total cumulative deduction of 20,000.
• Massachusetts has a credit of 15% of the system price, up to a maximum of $1,000
• New York has a credit of 25% of the system price, up to a maximum of $5,000
• Utah has a credit of 25% of the system price, up to a maximum of $400

In addition to these government incentives, there are also numerous local incentives. For example, the Focus on Energy program is a partnership among 107 Wisconsin electric utilities that offers a flat $500 rebate on a home solar installation.

A good way to find out about incentives available to you is to use the Solar Nerd calculator. After entering your details, it’ll summarize the rebates in your area.

Your savings will depend on how good your home is for solar

Even if you live in one of the sunniest cities in the country, you can still have a bad location for solar.

Local shading, such as trees or a complicated roof shape that casts shadows on itself, can make an otherwise promising site a bad candidate for solar.

The type and age of your roof is also an important factor. If you have an older roof and would need to replace it while you have solar panels installed, there’s an extra expense to remove and replace the panels. Having a clay tile roof will also make a solar installation more expensive because the tiles are so brittle that they make it difficult for installers to work around.

Other costs, like a required electric panel upgrade, can increase your costs and eat into your potential savings.

Financing can really eat into your future savings

One of the biggest factors that affect whether solar panels will save you money is how you pay for your system.

Paying cash or obtaining a home equity loan with a low interest rate are often the lowest cost ways to pay for solar panels.

An alternative is to obtain a loan directly from your solar installer. While this is convenient, it can come with hidden expenses known as dealer fees. A dealer fee is often not disclosed to the consumer, and can add thousands of dollars to the cost of a system - as much as 30% of the total cost.

This is a huge expense that can be avoided by shopping around for your own financing, especially a HELOC or home equity loan. While origination fees may also be a part of these types of loans, at least the fees will be transparent - something you often don’t have with solar loans.

Finally, the worst way to pay for solar panels for most people is to lease them. With leasing, you lose all of the incentives - including the federal tax credit - and usually have price increases built-in that match or even exceed the price inflation that you might get with your utility company. Solar leases are such a bad idea for most consumers is that my advice is to put off a solar installation if they can’t get afford it otherwise.

Estimate your solar savings with the Solar Nerd calculator

Of course, I should mention the Solar Nerd Calculator as a way of getting a rough estimate of your potential solar savings. It only takes a few seconds, which is hard to beat.

Just plug in your zip code and a few details about your home. After you hit calculate, you will see an estimate of how much electricity you could produce, what the system would cost, and how long it will take for you to recoup your investment.

This takes into account federal, state, and local direct incentives and tax credits so you can get a pretty good estimate in just a few seconds. It uses the most recently available data on the average solar installation cost by state, but the price you get from an installer could differ significantly. There are important choices that go into designing a system, especially the panels and inverters. Labor costs also differ from company to company.

One limitation is that it doesn’t handle the impact of net billing very well, because your compensation for electricity you sell back to the grid will depend on your utility company and the daily pattern of your electricity usage. At the moment, the calculator doesn’t take these factors into account.

The Solar Nerd Calculator is not intended to replace a consultation from a solar professional, but the rough numbers it gives are good enough to help you find out if a photovoltaic system might be a good investment for you.

Bottom line: many homeowners will be able to save money with solar - but it depends on many factors

If you simply look at the average cost of solar, the average household electricity usage AND the average cost of electricity, you’ll find that a homeowner can net about $42,000 in savings over the expected 25 year lifespan of a home solar system. That’s based on a system that costs $18,620 after the federal tax credit, and electricity bills that add up to $61,056 over that same time period, after including inflation.

Of course, the real story is that your exact savings will depend on many factors. The suitability of your roof, how sunny your climate is, the local cost of solar installation in your area, your price of your utility electricity, and the availability of net metering are some - but not all - of the factors that will determine how much money you can save with solar.

The best way to find out is to get estimates from multiple high quality local solar installers. The estimates will include an estimate of how much electricity you can expect to generate and how long it will take for your system to pay for itself.