How electricity rates impact solar savings

Have you heard that solar panels only make sense in sunny states? Well, don't believe it for a second— while it's true that solar panels typically produce more electricity in sunnier areas of the country, how much you can save from installing solar panels rests heavily on one major factor: the costs you avoid paying your utility company for electricity.

People all over the country—even those who live in cloudy areas—can reap solar savings. Generally speaking, the higher your electricity rates, the more money you can save by switching to solar.

Any electricity you use from your solar panel system reduces the number of kilowatt-hours (kWh) you need to draw from the electricity grid. Because of this, your avoided costs are a function not only of how much your system generates but the cost of the electricity your solar panel generation replaces.

The chart below illustrates how this works across the country. We used PV Watts—a tool developed by the Department of Energy's National Renewable Energy Laboratory—to estimate the amount of electricity a solar panel system will generate in various states and how that correlates to annual savings based on current electricity prices.

Annual solar savings by state

*Annual electric bill savings = cost of electricity x electricity produced
**Assumes a 30-degree tilt on a fixed rooftop mount and 14% system losses
***Production ratio = electricity produced / system size (kW)

The states most of us would consider the sunniest are spread out in the rankings. For example, solar panels in Colorado will produce the most electricity out of all of these states and will result in savings of $1,060 per year. That's similar to savings in New Jersey, even though a system located in the Garden State will produce about 2,000 fewer kWh per year.

Keeping up with that trend, the states with the highest estimated annual savings (California, Massachusetts, New York) are also the states that pay the highest rates for electricity. Neither Massachusetts nor New York experience as many sunny days as Arizona, but as far as solar savings are concerned, they make up for their cloudy days with high electricity costs.

Solar panel systems generate electricity for more than 25 years. When thinking about the opportunity for savings with a solar panel system, you not only need to consider how much you'll save in year one but also throughout the lifetime of the system.

That brings us to another important factor in solar savings: electricity rate inflation. While the chart above takes into account variances in electricity rates across different states today, it's not representative of the potential for annual savings to increase as time goes on.

The cost of residential electricity has increased 21 percent over the last ten years, and some states are bearing the brunt of these rising rates more than others. As solar electricity rates continue to rise, so too will your avoided utility costs and, consequently, solar savings. When you generate your own electricity with solar panels, you're essentially locking in the price of electricity and protecting yourself from unpredictable–and undoubtedly higher–rates in the future.

Besides electricity rates and sunshine, what other factors impact solar savings? Here are a few of the most important ones to pay attention to:

• Electricity bill offset: how much electricity do you use, and will your solar panel system generate enough energy to meet these needs? The more you can offset your electricity usage with solar, the more you can save.

• Upfront system costs: the cost to install a solar panel system depends on many factors, including your system size, state, equipment quality, and more. When comparing quotes, keep in mind that cheaper doesn't mean better, nor does it necessarily mean more savings: a smaller system will cost less upfront, but if it's not producing enough electricity to cover the majority of your energy needs, you'll continue paying your utility company more money than you need to.

• Financing: if you have a mortgage or have taken out a car loan, you won't be surprised to hear that the solar financing solution you move forward with can impact your savings over time. Take a look at our article that compares solar loans to leases/PPAs to learn about how this all plays out.

• Incentives: governments and utilities often provide financial incentives that can help reduce your solar costs – sometimes up to as much as 50 percent! Solar incentives come in all shapes and sizes; depending on where you live, you may be eligible for tax credits (like the federal ITC), rebates, or performance-based incentives.

How does solar energy reduce electricity bills?

Essentially, solar panels using solar energy allow you to power your home without relying on the energy grid and paying your utility company. Some solar users can cover 100% of their power with solar, meaning they pay nothing for electricity. Even if you can't power all of your usage, you'll still save money going solar.

How much electricity will I save with solar panels?

Your total savings will depend on several factors — including your energy usage, how much energy you're able to generate with your solar panels, your electricity rates as well as your average electricity bill, and also any incentives available in your area.

How long does it take solar panels to pay for themselves?

This is known as your payback period, and as with your exact savings, this depends on the factors mentioned above — your energy usage, the amount you can power with solar at your home, your total solar panel installation costs, and factoring in any incentives or rebates.

Community solar is a great way to save money compared to rooftop solar. By joining a solar farm project in your area, you can actually save 15 percent on your electricity bill by receiving credits. With community solar, most subscriptions involve no upfront cost, guaranteed savings, and allow you to cancel anytime without any penalty fees. Visit our marketplace to find a participating solar farm near you.

On EnergySage, you can compare solar options by using our Buyer's Guide: check out the best solar panels, solar inverters, and solar batteries available on the market today. You can also sign up for a free account for EnergySage today to explore options and get personalized quotes.