How much money can I save with solar?
A step-by-step guide to calculating your solar savings, starting with understanding your electric bill.
In most places in the United States, if you install home solar panels, you will eventually save enough money on your electric bill that the system will pay for itself.
While it varies significantly across the country, the average monthly electricity bill in the US is $115, or $1,380 per year. If you install a home solar system that generates 100% of your electricity needs, over the expected 25 year lifespan of a solar system you could save around $34,500 in total. This far exceeds the average after-rebate cost of a typical system.
That’s a simplified view, though. And what exactly does “eventual” payback mean? It depends on your specific situation, but the payback period - that is, the amount of time it will take for your total electricity savings to equal the cost of your system - can be as short as 4 years, or as many as 20 years or more.
Solar panels last a really long time. Any panel sold for the residential market in the United States will come with a 25 year power warranty and at least a 10 year product warranty. In addition, a majority of homeowners now choose microinverters or power optimizers, which typically come with 25 year warranties.
With such a long expected lifetime, a home solar system should give you plenty of years of service during which it will work to repay your initial investment. But a 4 year payback is obviously better than 20 years. How long it will be for you depends on 5 major factors:
5 things that determine how quickly solar will pay for itself
- Suitability of your home. Even if you live in a very sunny location, such as southwest Arizona, if you don’t have a good, sunny location for your panels, your system won’t be economical. It doesn’t matter how much sun your city gets if your rooftop is shaded by trees or nearby buildings.
- Available incentives. Homeowners can apply for a 26% federal tax credit on the total cost of their system. On top of that, many states, cities, utility companies, and local organizations offer their own tax credits and rebates. This can have a big impact on your total cost, reducing the price tag by 50% or more in some cases.
- Net metering. When you have a net metering arrangement with your utility company, it means that you get full credit for any extra solar electricity that you send into the grid. If full net metering isn’t available to you, it can significantly reduce the financial benefit of your system.
- Your personal finances. For most homeowners, the best way to get solar panels is to purchase them outright, either by paying cash or taking out a loan. Going with a solar lease or power purchase agreement means no upfront cost, but carries big risks. It’s better to take out a loan if you don’t have cash on hand, but the interest rate will reduce the financial benefit.
- The cost of electricity. When electricity is expensive, home solar panels will pay for themselves more quickly. While the average American pays 13 cents per kWh, the retail price of electricity varies wildly across the country, from as low as 9.59 cents per kWh in Louisiana to as high as 32.47 cents in Hawaii. If you have low cost electricity, solar might not make sense.
Let’s review each of these in detail.
Is your home a good candidate for solar?
For solar to be viable for your home, you need a location for solar panels that gets as little shade as possible. This is usually a rooftop, but ground-mounted racking systems are also a possibility. If there are trees or nearby buildings that cast shadows on your solar array, this can significantly reduce the amount of electricity produced.
This is not just because shading blocks sunlight from reaching your panels. Due to a quirk of how conventional solar inverters work, even if only part of an array is covered by shadows, the output of the entire array can be affected.
Microinverters and power optimizers are more advanced inverters that get around this problem, but they cost more. You can also choose solar panels with technology that makes them more resistant to shading problems, such as panels with half-cut cells, but they also come with a higher price tag.
If you’re not willing or able to remove obstructions, such as by cutting down trees that shade your solar panels, the reduced production can make it uneconomical to have solar panels, even if you live in the sunniest region of the US.
Rebates on home solar panels
We wrote an entire article on solar rebates, but the basic gist is that there are a lot of different financial incentives for home solar across the country.
The most important program is the federal tax credit for renewable energy. In 2021, this tax credit is worth 26% off the total cost of your system, but the credit is being phased out over time. After 2023, the credit will drop to zero for homeowners and 10% for businesses.
Across the country, there are many other solar tax credits and upfront rebates available. State and local governments, other government agencies, utility companies, and even non-profit organizations offer various types of rebates that reduce the cost of solar systems for homeowners.
Some of these rebates come as tax credits, others are upfront rebates that reduce your invoice price, and others are credits that are tied to the amount of solar electricity that you generate and are paid out over time.
These rebates stack, which means that you can take advantage of multiple programs. This can knock a big chuck off the cost of your system.
For example, if you live in Rhode Island, you get the federal tax credit of 26%, plus you can be eligible for the Rhode Island Renewable Energy Growth Program which pays solar homeowners $0.2965 per kWh of solar electricity they generate. For the home with average electricity usage, this will add up to around $1,992 in earned credits per year.
In contrast to states like Rhode Island that offer multiple rebates, there are many states where the only rebate is the federal tax credit. This is still a significant 26% discount, but it does mean you’ll need to wait longer to financially break even.
Is net metering available to you?
Net metering can seem complicated, but it’s really not. In a nutshell, net metering means that you get credited the same amount for extra solar electricity that you send into the grid as what you pay to take electricity from the grid.
For example, the average price of electricity in the United States is about 13 cents per kilowatt hour. If it’s nighttime and your solar panels aren’t generating any power, your house will pull electricity from the grid, and you’ll be charged the retail rate by your utility company.
If it’s the middle of the day and your solar panels are cranking out electricity while you’re at work, the extra electricity will get sent into the grid. With net metering, you’ll get a credit at the same retail rate - again, 13 cents per kilowatt hour for the average American.
That’s the ideal scenario. However, full net metering isn’t available to everyone. In those cases, you will be paid less than the retail rate for electricity that you sell back to the utility company. It varies, but that rate might be only half as much as the retail rate, or even less.
Solar panels generate most of their electricity during the middle of the day, but many households use the majority of their electricity during the early evening and night when people are home and solar production is tapering off. In that situation, you’ll pay full price for much of the grid electricity you use but get only partial credit for your extra solar electricity.
This can significantly hurt your financial payback period. On top of this, some places in the US are actively hostile toward solar power. Possibly the worst is Alabama, which actually punishes solar homeowners with a fee called the Alabama Power Capacity Reservation Charge. This is a monthly charge of $5 per kilowatt of installed capacity. Given that the average system size is around 6 kW, this means if you live in Alabama, you’ll have to pay about $30 every month just for the privilege of having solar on our roof.
Thankfully, most states aren’t this bad, and many have renewable portfolio standards, which are policies that require states to generate a certain amount of renewable energy, including electricity from home solar.
To learn more about this topic, you can read our guide to net metering.
How will you pay for solar panels?
In general, there are three ways to pay for a home solar panel system:
- Pay cash.
- Take out a loan, then pay cash.
- Get a solar lease or power purchase agreement.
The first two options are good if you have the financial means. If you don’t have enough cash to buy a system, you might be tempted by the “free” approach of a solar lease or PPA, which usually costs nothing upfront.
You probably shouldn’t do it. Solar leases and PPAs can be enticing because they promise “free” solar panels, but the risks outweigh the benefits for most people.
If you don’t have the cash or have good enough credit to afford to purchase a solar system, there are options for low income households and alternative financing options such as PACE. Read our guide to solar financing to learn more.
You can also find out if there is a community solar program near you. Community solar gives you a share of a solar farm and doesn’t involve installing solar panels on your house.
Finally, if none of these options are open to you, it’s probably best to wait until you’re in a financial position to purchase your system. Don’t go with a solar lease or PPA: it’s often worse than not having solar at all.
Cheap electricity means longer payback times
Some states, like in the Pacific Northwest, have low-cost electricity while other states, like Hawaii and in New England, pay a lot more.
Home solar panels offset your electricity usage. This means that if you pay only 9.75 cents per kWh like they do in Washington state, every kWh of solar electricity your solar panels generate will be worth 9.75 cents.
But if you live in Alaska where electricity costs twice as much - 21.94 cents per kWh - your solar electricity will also be worth much more.
At a minimum, you can expect to pay several thousand dollars for a solar panel system. If you have cheap electricity, it will take a longer for solar panels to make enough electricity for the system to be worth the cost.
In addition, some households use less electricity than others, and this also varies by state. If you don’t use much electricity, it makes less sense to go solar than if you are a big consumer.
Here’s a table of average electricity prices and consumption by state:
|State||Average consumption (kWh)||Average price per kWh (cents)|
|District of Columbia||787||12.84|
Checking how much you pay for electricity
As you can see, the price of electricity and the average amount of power that households use varies a lot across the country. Some states use a lot of air conditioning, while in others electricity for heating is common.
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 people have large seasonal patterns in their electric usage, and as a potential solar homeowner, you want to understand what your costs over the entire year are.
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, but this one doesn’t. If this is your case, you’ll need to go back through your billing history to sum up your total kWh for the year if you want an accurate number. However, if you’re good at reading charts, you could just estimate your year total using the chart alone. It won’t be as accurate, but a good estimate is fine for this exercise.
This is because your electric usage isn’t the same every year. Your air conditioning or heating usage changes with the weather, or maybe one year you decide to add or upgrade appliances.
Solar generation varies from year-to-year with the weather as well. So, it’s not really possible to size a photovoltaic system to match exactly 100% of your annual electricity needs every year. You’re aiming for the average, so your best estimate here is fine for now. If you work with a solar installer, they will ask to look at your utility bills.
How much you’re paying for electricity per kWh (variable costs)
Next, you want to know what you pay for electricity. Reading this part of your bill can get confusing really fast, because the price is often broken down into many components, including separate charges for electricity generation and electricity delivery. Taxes are also listed separately, as well as any miscellanous surcharges.
In addition, you might be on variable time-of-use pricing that charges you different rates for on-peak and off-peak hours. This becomes important if your utility company has a solar net billing scheme. Net metering is covered in the next article.
Except for variable pricing, the sub-components of the price aren’t important for this exercise, because you just want to know the overall variable cost portion of your bill, which is usually broken down into line items that are a mutiple of your kWh usage like in the sample below.
Every electric bill looks different and has different labels for the individual components of your pricing, but none of those matter in the big picture of understanding what your overall costs are. In this sample, you can see many line items that include “260 kWh” (your number will be different each month). These are the parts of your bill that increase or decrease with your electric usage. Taxes are also part of this, because the more electricity you use, the more tax you pay.
On this bill, the numbers are added up and summarized as “Total Electric Service”. Your bill will label this differently, but it will have a similar summary.
Take that number and divide it by your total kWh usage. Here, that would be $52.78 ÷ 260 kWh. This gives you $0.20 per kWh.
You want to understand this part of the bill because it’s the money you can save by going solar. For example, if you have solar panels that generated 260 kWh in that month, this portion of your bill would be zero. If you generated more, under net metering you would actually earn a credit.
Now that you know your cost of electricity, you can use it to help decide whether you should go solar. This is because having a high cost of electricity makes every kilowatt hour of solar electricity you generate more valuable.
Next, let’s understand the parts of your bill that cannot be eliminated with solar. Those are your fixed charges.
Your monthly fixed service charges
There are parts of your electric bill that you pay every month, no matter how much or little electricity you use. It’s often called a “basic service charge”, or something similar. It’s the basic fee you pay for having electric service hooked up to your home.
Having photovoltaics will not eliminate this part of the bill, so whenever you are doing the math to determine your solar payback, factor this part of the bill into your calculation.
Now that you understand your electric bill and how much electricity you’re using, you can start to think about how big a photovoltaic system you want. It’s common to size your system to produce 100% of your average usage, but you don’t have to do that. If you want to get a less expensive system that reduces your bill by 50%, that’s still a great benefit.
What you can’t do with a grid-connected system is generate significantly more than 100% of your average yearly consumption. Utilities don’t permit that, and some incentive programs have an explicit rule against that too.
How do you figure out how many panels you need? Unfortunately, it’s not as simple as looking at the rated output of a panel and multiplying by the number of hours in a year. For example, my home has 18 panels with a rated output of 260 Watts each. If the sun was shining brightly 24 hours a day, 365 days a year, those panels would produce 40,997 kWh.
But of course, the sun doesn’t shine continuously or always directly overhead, but instead follows an arc across the sky. Clouds roll by, trees grow leaves in the spring and shade your house, snow falls in the winter, birds poop on your panels, pollen settles and mottles everything a little orange. Also, the inverters that convert DC power from the panels to AC power that your home can use aren’t 100% efficient, so a little power is lost in the conversion.
All these different variables make the calculation quite difficult for the average person. One way to get the numbers is to contact a solar installer, who will examine your home (sometimes just by satellite images) and run the numbers through modeling software that takes into account many local variables such as the pitch and direction of your roof, the average climate and cloud cover for your city, electrical losses, and shading from trees. For this, many companies use an open source software package from the National Renewable Energy Laboratory called SAM.
This same software is behind our solar cost calculator. To use it, enter your zip code, which allows it to factor in the local climate and angle of the sun. Decide which part of your roof you want your panels mounted, then enter the angle and direction of the roof. It also asks you to enter a system size in kilowatts. If you’re not sure, just select the middle value.
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.
If the estimated annual electricity production is more or less than you want it to be, go back and choose a different number for the system size. Adjust it until the system configuration is producing how much electricity you want. Just remember that you don’t want to go very far over 100%.
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.
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. If the projected payback period seems like a reasonable time frame for you, then definitely work with a professional installer to get a true quote and a more accurate projection. (We can help with this too.)
Even if the payback period is longer than you would like, for many people there are non-financial factors such as contributing to a cleaner environment, helping your community to be energy independent, and supporting local jobs are as much a part of the decision to go solar. Ultimately, it can come down to a decision that is based on your personal values and the things that you believe are important to your community.
Once you understand your electricity costs, the next step is to figure out how solar can help recoup that investment. The next articles in this series are about net metering and the many types of incentive programs available to the solar homeowner.