How to compare solar to other investments

If you're considering solar, you're probably thinking of it as an excellent way to save on your electricity bill and possibly as a way to escape grid dependence. And it's true: solar can help you achieve those goals. What if we were to look at solar from another perspective, like a decision to invest money in the stock market or a money market account for retirement? Just like a traditional investment, putting solar in your home is a way to generate returns.

You may have encountered the term ROI (return on investment) while looking at investing, retirement, or even solar articles. It's a big buzzword and one of the most widely used financial metrics. ROI is a ratio that compares the gains or losses from an investment relative to its cost. If you bought one share of Daily Donuts stock at the price of $100 and later sold when the price went up to $150, your ROI in Daily Donuts would be 50 percent:

ROI = net return / cost of investment x 100%
ROI = ($150-$100) / $100 x 100%
ROI = 50%

Not so bad, right? So, how does this apply to solar?

Just like the stock you put $100 into Daily Donuts earlier, solar is an investment. You can calculate the cost of your solar investment by estimating the money you'll need to get your panels up on the roof and ensure they continue working for their 25-30 year lifetime – including buying the panels and paying for labor, inspection, permitting, and any maintenance costs –  minus your rebates and tax breaks.  

Cost of investment = money in (cost of system, install, permits, and maintenance) – value of incentives and rebates

Now that we know how much we're putting in, let's see what we're getting out of our investment or our net return. What you get out of the investment is how much money you will save on electricity for the lifespan of your system. Over the next three decades or so, as the cost of living (including electricity) goes up, so will your electric bill, as electricity inflation is much greater than overall inflation. With solar, you won't have to worry about that, which will lead to at least tens of thousands of dollars of savings. After an average of 8.8 years (your payback period), those savings will have recouped the cost of your system, and your panels will start saving you money.

Calculating your solar system's ROI

Let's say you use about 900 kWh of electricity each month and spend around $150 on your electricity bill. You'd need about an 8 kW system to offset most of your electricity needs. Now let's say the cost per watt is $2.76 in your area – if you purchase your system upfront, you'll spend $16,339 ($22,080, minus 26 percent with the tax credit factored in). 

While solar panels often last 30+ years, many manufacturers will cover the warranty for about 25 years. To calculate your ROI, you have to take into account the percentage of electricity your solar system covers, the degradation and term length covered by your warranty, and the inflation rate associated with electricity in your area. For the sake of this example, we'll assume the following:

• Your solar system covers 96% of your electricity consumption

• Your solar panels are warrantied for 25 years

• Your warranty states that your panels will degrade no more than 2% after year one and no more than 0.5% thereafter until year 25

• The electricity inflation rate is 2.2%

Putting this all together, we calculate that in year 25, your solar system will still cover about 82% of your electricity needs, and without solar, your electricity bill would be about $253 each month – about a 69% increase from what you pay now! Overall, in year 25, you will have saved about $55,767 in avoided electricity costs. 

So, you put $16,339 into your system and saved $55,767 over its warranty period – resulting in an ROI of 241.31% over 25 years!

Comparing solar ROI to similar investments 

As solar is a long-term investment, a good way to gauge its ROI is to look at the average annual ROI over the investment's warrantied 25-year lifetime (depending on the manufacturer). To provide some context, we can compare solar's ROI to returns on other investments. An ROI of 7% (accounting for inflation) is considered a good investment according to Forbes, as that represents the S&P 500, a basket of some of the largest – and most reputable – companies like Microsoft, Amazon, and Johnson & Johnson. 

However, compared to solar, stocks are very risky. While stocks may have greater return potential over the 30-year lifetime of a solar system, there's also a greater risk of loss due to market volatility. On the other hand, bonds and certificates of deposit (CDs) are low-risk (similar to solar) but result in low-return investments over time.

Let's explore some of the different types of investments you can make:

• S&P 500: a stock market index that contains the stocks of the 500 largest companies listed on the stock exchange in the U.S.  

• 5-year certificate of deposit (CD): a deposit with a bank that typically has a 5-year term and fixed interest rate, allowing you to earn more interest than a typical savings account. Early withdrawal of your money (i.e., before five years) results in penalties. 

• U.S. 10-Year Treasury bond (T-bond): debt issued by the U.S. government to raise money. When you buy a T-bond, you lend the federal government money, and it pays you a stated rate of interest until the loan comes due.

Keep in mind that the length of these investments varies widely. If you're looking to take a gamble to see how much you can earn in the next year, S&P 500 stock could be the best choice (but could also result in significant losses). If you're looking for a safe and guaranteed long-term investment, solar is a great choice because it results in significant savings on your electric bill and protects you from inflation. 

Solar is an excellent investment for reasons beyond ROI as well. We'll walk you through some key reasons you should be confident that solar will pay off long-term.

Assured returns

Unlike the stock market, which is subject to daily fluctuations based on global events, your solar investment is not affected by outside factors (other than some inclement weather). Unforeseen events like a global pandemic or a simple increase in oil prices won't wipe out your earnings. The volatility and risk associated with investing in the market on any level won't affect your solar earnings. As long as the sun keeps shining, your solar returns will only go up.

Steady, increasing returns

Solar provides steady, increasing returns over the years as your warranted system uses the sun to generate electricity.

Tax-free

Unlike investing in traditional ways, solar gains come in the form of monthly savings, not earnings, so they aren't taxable. With the high capital gains tax and rising income taxes, returns from more typical investments can be decimated before the money gets into your hands. However, since the money you save with solar is not income, you keep it as a whole – free to spend, save, or invest it as you see fit.

Protection against rising costs and inflation

Investing in solar protects you from rising electricity prices, peak expensive rate charges, and dependency on volatile fuel sources like oil. Utility electricity rates increase yearly: between 2010 and 2020, they increased by 30 percent! By generating your own electricity, rather than buying from your utility, you can protect yourself from unpredictable rate increases for the lifetime of your solar energy system.

Solar increases the value of your other assets.

Multiple studies found that installing solar increases the value of your home. In 2019, Zillow found that solar can increase the value of a house by 4.1 percent or about $9,000, on average. In California, a new law even mandates that most new construction houses must be equipped with solar panels or an equivalent. Solar coupled with a battery also insulates you, your appliances, and your home against events like blackouts that can cause damage to sensitive equipment and loss of productivity.

Now that you understand why solar is a great investment, you're probably wondering how to invest in it! There are two primary ways to purchase a solar system: buying it outright and using a solar loan.

Buy the system outright.

Paying for the system in full is the easiest way to maximize your returns from solar. While the sticker price can look intimidating, there are numerous tax incentives and rebates to reduce the cost. The savings will outweigh the initial outlay, and you will break even at about eight years, on average. Also, unlike most large purchases (think a car), solar won't need constant maintenance and small investments down the road.

Buy the system with a solar loan.

If paying full in cash is not an option, many banks and other financial institutions, including specialized solar credit unions, offer $0-down, low-interest solar loans to help with your purchase. Monthly payments are typically lower than your monthly electricity bill, enabling you to save money immediately. Solar loans are a great option and allow homeowners to see amazing returns while paying as they go.

The first step when considering solar as an investment strategy is determining how much solar can contribute to your portfolio, given your geographic location. EnergySage's Solar Calculator can give you a quick snapshot of the relative value of different solar financing options in your area based on your electricity bill and the incentives available. If you're ready to start comparing solar quotes, register your property on the EnergySage Marketplace to receive multiple offers from pre-screened solar companies at no cost.