Solar payback period: How soon will it pay off?

There are plenty of factors that can help you decide whether installing solar panels is a smart financial move, but there’s one metric solar shoppers should focus on in particular: the solar payback period, or breakeven point.

The solar payback period represents the amount of time it takes to recoup the cost of installing your solar system. Depending on your installer, the number of solar panels you install, and how you pay for your system, the length of your solar payback period will vary. The average solar payback period for EnergySage customers is under eight years.

Here's what you need to know about how long it's likely to take you to break even on your solar energy investment.

To calculate your solar payback period, you simply divide the cost of installing your system by the amount of money you’ll save each year.

For example, let's assume your solar installation costs $20,948 after incentives (the average cost on EnergySage). If you spend about $2,800 annually, or $233 monthly, on electricity, you'll break even on your solar investment in 7.5 years ($20,948/$2,800 = 7.5). That's the average payback period on EnergySage.

At the end of those 7.5 years, your solar panels will have saved you enough money on your electric bill to cover the upfront cost of your system. Year eight in the example is when you technically start saving money, having finally broken even on your investment.

Comparing the different payback periods of multiple solar installation quotes is one of the simplest ways to understand each option's financial benefits and understand what year your solar investment will start to save you money.

Payback periods vary by state, depending on the availability of incentives, the cost of solar, and the cost of electricity. Here's a quick breakdown of the payback periods we see on EnergySage:

To calculate your solar payback period, you'll need to take the following steps:

1. Determine your combined costs: Subtract the value of up-front incentives and rebates from the total price of your solar panel system.

2. Calculate your annual savings: Add up your annual financial benefits, including eliminated electricity costs and any additional incentives like the federal solar tax credit.

3. Divide your combined costs by your annual financial savings: The result will be the number of years it will take for you to break even. You can count every month afterwards that you don't pay a bill as savings.

Let's walk through an example to help you calculate your solar payback period:

Combined costs

To determine your combined costs, you'll need to know the total price of your solar panel system before tax credits and incentives. Let's assume your total system cost is $29,926 (the average cost of a system on the EnergySage Marketplace based on an average system size of 11 kW).

We need to understand the tax incentives available to you, including the federal solar tax credit (ITC) and local rebates or incentives. Given that the federal tax credit is currently 30%, with a $29,926 solar system, you'll be eligible for a $8,978 credit. Now, let's also assume you can take advantage of an additional $2,000 in local rebates: This brings your tax incentives to $10,978 and your combined installation costs to just $18,948.

Total cost ($29,926) - tax incentives ($8,978) - rebates ($2,000) = combined costs ($18,948)

Annual savings

To calculate your annual savings, you'll need to know how much you'll save each year on electricity costs. Let's assume your monthly electric bill is about $175. Eliminating that cost by going solar amounts to about $2,100 in annual energy savings, assuming your system's energy production covers 100% of your electricity needs.

You'll also need to know how much you'll receive from other annual incentives, like solar renewable energy certificates (SRECs). In this example, we'll assume you're earning $425 annually from selling SRECs, which means you'll receive $2,525 in annual benefits.

Eliminated annual electricity costs ($2,100) + annual incentives ($425) = annual savings ($2,525)

Final calculation

To calculate your solar payback period, divide your combined costs by your annual savings.

Combined costs ($18,948) / annual savings ($2,525) = solar payback period (7.5 years)

In this example, your payback time would be 7.5 years, which is the average solar payback period for most EnergySage shoppers.

Average monthly electricity use and cost

Your monthly energy usage determines the size of the solar system you need as well as the amount of electricity you’ll need to offset each month. Specific energy costs in your area also directly impact your return on investment (ROI) from your solar power system. The higher your monthly electricity bill, the more quickly you tend to recoup your investment because it shortens your payback period.

Solar installers will try to provide you with a system that matches 100% of your electricity consumption, but practical constraints like the size of your roof and seasonal weather variation may impact the amount of electricity you can produce on your property.

Value of tax incentives

Tax incentives and rebates can dramatically reduce the total cost of going solar. The ITC provides a credit worth 30% of your entire system costs on your federal tax bill. Additional state and local solar incentives may further lower your expenses, depending on where you live.

Additional financial incentives

In some areas of the country, you can earn extra incentives through SRECs or net metering programs that give you a per kilowatt-hour credit for any extra electricity your solar panels generate and send to your local electric grid. Depending on the size of your solar energy system, these credits can represent a significant monetary benefit.

A version of this article originally appeared on Mother Earth News.