How Long do Solar Panels Take to Pay For Themselves?
Updated: Apr 2, 2019
In recent years, as solar energy technology has become cheaper and more efficient, it has gained an advantage that’s piqued the interest of many homeowners - it can save you a ton of money.
But, finding the right solar panels can be confusing, so investing into one of these systems can seem daunting.
So, in this article we’re going to give you an answer to the question: how long do solar panels take to pay for themselves?
Let's dive in...
What is a payback period?
A payback period is the amount of time an investment takes to recoup its initial cost. Basically, it’s how long something takes to pay for itself.
As electricity costs continue rising, and as the cost of solar energy technology continues falling, the payback period on solar panels has steadily decreased. In fact, the cost for homeowners to switch to solar energy has decreased 70% in the past decade.
How do you calculate the payback period for your solar panels?
Your solar panels payback period is calculated by determining both the total cost of the system and the annual benefit of that system (we'll cover this in detail in a second).
The total cost of your system
The total cost of your solar system is simple to define. You just combine the cost of purchasing the system itself and the cost of installing the system in your home. The cost of the system will depend on:
The size of your home
The energy it requires
The climate you live in
Larger homes and homes that require more energy will need more solar panels, and smaller homes and homes that require less energy will need less solar panels. Simple enough, right?
The climate you live in also affects the number of solar panels you’ll need to power your home. Since solar panels create their energy by absorbing sunlight, if you live in an area that receives little sunlight then you will need more panels to create the energy you need.
It's important to realize that, while utility bills are subject to significant variability from year to year due to the cost of fossil fuels fluctuating, the cost of solar panel system is fixed. And on average, PG&E has increased its rates 6% year over year - which is very expensive when compared to the fixed cost of solar panels. And recently, PG&E rates jumped by 80 percent! On this increased cost path, the average homeowner will have a hard time affording power in the next few years.
The annual benefit of your solar panels
The annual benefit of your solar panels is why you’re here.
In recent years, to promote solar energy as a climate friendly alternative to fossil fuels, the U.S. government has created tax incentives to encourage homeowners to install solar panels on their home.
This incentive amounts to a 30% federal tax credit which significantly increases the annual benefit of your system. Also, in many areas of the country, solar panel owners are offered solar renewable energy certificates, or SREC which can be sold back to the utility company for as much as $300 each.
Homeowners who install solar panel systems to power their homes will earn one SREC for every 1,000-kilowatt hours that their solar panels produce. These SRECs can amount to $300 each.
This is how you save money by switching to solar energy and you can even make money in some cases. Additionally, since your solar system saves you more money the more energy you use, the annual benefit of having solar panels is higher for individuals who use more electricity.
The Payback Period
The payback period is simply the total cost of your system divided by the annual benefit of installing that system.
For example, take a hypothetical power system that costs $15,000 to purchase and $5,000 to install. The owner of this home paid $2,500 every year to the local utility company to power his home before purchasing this system.
So, the total cost of the system would be $20,000, and the annual benefit of owning that system would be $2,500. This means the system has a payback period of 8 years ($20,000 / $2,500 = 8).
If this calculation confuses you, the Frugal Analyst has provided a video that may help you to understand.
So, how long do solar panels take to pay for themselves?
It depends on where you live, how much energy you use, and how much your utility bills were prior to installing you solar panel systems.
For a typical home, the cost of your system can range from $20,000 to $30,000 to purchase and install. This cost is partially offset by the federal tax incentives that will amount to $6,000 to $9,000, meaning the total cost of a typical system would be between $14,000 and $21,000.
[ This is assuming you purchase the system. However, if you us one of our leases, you begin saving from the first month since you can get the system installed for $0 out of pocket.]
And the benefits of owning a solar panel system continue for the life of the system, meaning the annual savings you earn will continue long after the system has recouped its investment. If you purchase and install a solar energy system for your home, the long-term benefit can add up to tens of thousands of dollars.
How does leasing solar panels work?
Another option for installing solar panels for your home is entering into a solar lease. Leases let you to pay a low monthly rate for solar panels, which saves you from incurring the heavy initial cost of purchasing the panels.
With a leasing option, you get the panels installed on your home and you can power your home with solar energy - without spending the upfront cost of purchasing the system. Additionally, your bill is automatically lower from the time you turn your panels on which means you’re saving money instantly.
At the end of the day, solar panels are a perfect way to save money on your monthly utility bills. You have to pay these bills every month anyway and since they keep rising, you might as well take a few minutes to get a quote and see how much you can save with solar.
If you buy your solar panels, then it's easy to calculate how long they take to pay for themselves. If you lease, you’re saving money right away so you really can’t go wrong.
Let’s do the responsible thing and get solar for your home.