How to Calculate Solar Payback or ROI
How to Calculate Your Solar Panel Payback Period
Calculating the payback period for your solar panels involves two key steps:
- Subtract any incentives or rebates you qualify for from the total installation cost.
- Divide the remaining cost by your annual savings on electricity bills.
The result is the number of years it will take to recoup your investment. Use this formula to guide your calculation:
Step-by-Step Formula:
- Total Installation Cost – Incentives & Rebates = Investment
- Investment / Annual Electricity Savings = Payback Period
For ROI just use the inverse:
Annual Electricity Savings / Investment = ROI
Factors to Consider Before Calculating
Several factors can affect your payback period. Take these into account:
- Electricity Usage and Rising Rates
- Total System Cost
- Solar Tax Credits, Incentives, and Rebates
- Solar Panel Efficiency
Read on to learn how to assess each of these factors.
1. Electricity Usage and Rising Rates
Start by calculating how much electricity you consume each month. This helps estimate your potential savings with solar power. Use the following formula:
Utility Rate × Annual Electricity Usage = Annual Utility Cost
Electricity prices often increase over time—typically by 1-3% annually in the U.S. By transitioning to solar energy, you protect yourself from these rising costs, increasing your long-term savings and reducing your payback period.
2. Total Cost of Your Solar Panel System
To calculate the total system cost, determine the size of the system you need based on your annual electricity usage. Use this formula:
System Size (kW) x Price Per Watt x 1000
Once you know the required size, explore pricing. On average, solar systems cost between $2.75 – $3.25 per watt.
3. Solar Tax Credits, Incentives, and Rebates
Governments and utility companies offer various financial incentives to lower your solar installation cost.
- Federal Solar Tax Credit (ITC): A 30% tax credit for the total cost of solar installation.
- Net Metering: Earn credits for feeding excess electricity back into the grid, reducing future bills.
- Solar Renewable Energy Credits (SRECs): Some states allow you to sell SRECs earned from solar production to utilities, creating an additional revenue stream.
4. Efficiency of Your Solar Panels
Over time, solar panels may produce slightly less electricity due to efficiency decline. This may result in relying on grid electricity during the later years of their lifespan.
Factors affecting efficiency and payback include:
- Production Offset: The percentage of electricity your panels replace.
- Sunlight Levels in Your Area: States with higher sunlight exposure, like Hawaii, often see faster payback periods compared to states like Washington.
What’s a Good Payback Period?
Solar panels typically last 25 years or longer with proper maintenance. A “good” payback period is about half the lifespan—12.5 years or less. This allows you to enjoy over a decade of savings after recouping your investment.
At Pennstar Solar, our panels maintain at least 85% efficiency after 25 years. Our systems in the Philadelphia metro area generally see payback periods ranging from 6-10 years.
By evaluating these factors and using the outlined formulas, you can confidently calculate the payback period for your solar panel investment.