Often, many homeowners and business owners want to know the payback period for solar panels before installing them. It is crucial to think of going solar as an investment or an opportunity for long-term savings. However, answering the question of the payback time for solar panels is a bit tricky as it depends on each home’s and business’ power needs.
Though installing PV systems can help a business meet its sustainability goals and reduce its carbon footprint, the main reason for switching to solar is lowering the energy bills. As a result, businesses become more competitive by using their onsite-generated electricity to power operations. We are going to look at how to calculate the payback period for your solar system in detail. Let’s started.
Factors Determining Solar Payback Period
Every solar PV system is customized to suit each home and business’s needs. As such, no two systems are the same, meaning they will have a different payback duration. The exact payback period for solar panels depends on various factors, which include:
1. Your Electricity Consumption
The first step when looking at home solar panels payback time is to determine the size of your solar panel system. To do so, you need to evaluate your average electricity consumption. Then, design a PV system that generates enough electricity to meet this demand throughout the year. The same case applies to businesses that want to switch to solar.
2. The Cost of the System Before Incentives
Once you know your total energy demand for the year, you can calculate the system’s total cost. This cost incorporates the total installation costs without considering the federal incentives. From this figure, you can now subtract the incentives to determine the actual payback duration.
For example, an average home that uses a 6kW system can spend about 2.85 per watt. This is equal to $17,100 before the federal incentives. As a homeowner, you will need to pay cash or get solar funding, such as a solar loan.
3. Solar Rebates and Incentives
The federal government encourages home and business owners to switch to solar by offering tax credits and incentives. These incentives greatly reduce the cost, which affects the solar panel payback time. If you install solar panels, you can receive a tax credit equal 26% of the total installation costs. Additionally, several states have solar incentives that can reduce the average cost of solar.
For example, if you install a 6 kW system, you receive a tax credit of $4,446. This means that instead of paying $17,100, you will pay $12,654. This is the figure you use to calculate your energy bill savings.
4. The Amount of Energy Your System Generates
The amount of energy your system produces offsets the amount of power you would normally need from the grid. Additionally, this amount depends on the size of your system, the amount of direct sunshine, and how well you install the system.
For this reason, it is crucial to maximize the space available for solar panel installation. In addition, you need to ensure the location chosen receives the greatest amount of direct sunlight daily. You can choose your rooftop or ground location. Ensure the installation company evaluates your utility bill and energy usage then conducts comprehensive site viability to maximize energy production.
5. Electricity Costs and Their Rate of Increase
Many states in the US have net-metering services. This allows users to connect to the grid and receive credits for any excess energy generated by the system. If you enjoy this benefit, you can multiply the kWh generated by your system in a year and multiply it with your per-kWh from the utility company. You can then divide the system’s net cost with the average electricity cost annually to calculate the solar payback period.
However, it is not always that simple. This is because the electricity rates are always fluctuating, and they increase over time. Additionally, some states do not also offer net metering, while others have limitations on how you can enjoy the benefit.
The Average Solar Payback Period for Homes in the US
Many homeowners across the country expect a solar payback duration between 9 to 12 years. This number is mostly determined by the state in which you live. Homeowners living in states such as Hawaii or Massachusetts can enjoy a payback of about 5 years. Other states such as North Dakota and Louisiana can have extended payback duration of about 16 years or more.
The main contributing factor to this disparity is the amount of sunshine each state receives in a year. Additionally, the cost of electricity in these states is also a huge contributing factor.
Calculating the Ideal Solar Payback Period
Many PV solar panels have an average lifespan of 25 years. However, some modern brands last longer. When you want to calculate solar payback, you can consider 12.5 years of the system. During this time, the system is highly effective as the panels lose their efficiency over time.
Step by Step Solar Panel Payback Period Calculation
- Determine all the total costs combined. These include the cost of panels, solar energy system components like inverters, racking, power backup, if any, and installation.
- Calculate the value of all rebates and incentives from the gross cost of the solar system. For example, if you purchase a 6 kW system at an average cost of 2.85 per watt (inclusive of installation and other components). 6000 × 2.85 = 17,100
- Next, deduct the 26% tax credit from $17,100 (26% ×17,100 = 4,446). If we deduct 4,446 from 17,100 we get 12,654.
- After that, calculate the annual benefits. You will need to calculate the voided electricity cost annually. You need your annual electricity bill to calculate this amount.
- On average, many US homes can save up to $2,500 on energy expenses every year. We will take this as our value for demonstration.
- Divide combined costs with the annual benefits to get the average duration it will take to achieve a break-even point (12,654 ÷ 2500 = 5.0616). This calculation shows it will take less than 6 years to break even.
The period you take could be higher or lower depending on the factors we highlighted above.
Frequently Asked Questions
1. Does How You Finance Solar Affect the Payback Duration?
A cash solar financing or taking a low-interest loan can result in significant savings. However, you can also choose a lease option to acquire the system at the end of the lease duration. Ensure you go through the system’s total costs before signing any agreements to ensure you are not limiting your savings.
2. What does the solar panel payback period mean?
The solar panel payback period shows the estimated time it will take to break even on your PV system investment. It factors in increases in electricity costs, the cost of the PV system, and the annual energy bill savings.
3. What is the likely payback period for my solar system?
The typical solar payback duration in the US is over 8 years. The incentives and rebates from the government and the amount that you save annually when you forego paying electricity bills can bring this duration to around 8 years.