Transitioning to solar power brings many benefits to your home or business, including significant savings and financial gains. On this page, let's hone in on a metric that many people use to think about solar: the payback period.
Elsewhere, we look more in-depth at other metrics, like the average annual return on investment and the equivalent price per kWh your solar investment represents, compared to our current and estimated future rates. It's important to have a holistic approach to evaluating the value of solar. We show all of these numbers in our proposals (and more), to help you fully understand the long-term savings potential and wealth creation that the accelerating clean energy transition offers.
Put simply, your solar payback period is the amount of time it takes for you to “break even” on your solar investment. This means calculating the time it takes for you to save as much on your electric bills as you spent on your solar energy system.
Most payback period calculations are based on averages, assumptions, and don’t tell the full story. For example, we do not include the added resale value to your solar home in any of our financial calculations, even though it has been proven that solar strongly increases the financial value of your home.
Let’s look at an example: you receive a proposal from our Solar Advisor team for a solar project with a payback period of 7 years. That means that it will take only 7 years for you to receive enough savings from lower electricity bills to cover the amount you paid for your solar power system, after factoring in the 30% federal tax credit and potentially including other incentives like Renewable Energy Certificates.
After those 7 years, you will enjoy nothing but electric bill savings with no more payments to make. From year 8 to year 25 (or 30 or even 40) you will accumulate tens of thousands of dollars in savings as long as your panels are producing clean, sweet, solar energy.
Yes and no. At ReVision, we believe that using the payback period exclusively to judge a solar investment seems like an odd metric for measuring home improvement projects. Do you consider the payback period for a bathroom or kitchen renovation? What about the savings of your solar project after it pays for itself?
There are many ways to derive tangible and intangible value from your home solar energy system. However, we understand that the decision to purchase a solar project comes with many questions, and while the "solar payback period" has its flaws, it is one method of analyzing a solar investment. Let’s dive in:
The payback period for a solar project is calculated using the net cost of your installation (total cost after incentives or discounts) and the electric bill savings you’ll see by not paying for electricity from the utilities. The most accurate payback period will also take into account external factors, such as the long-term trend for electric rates to increase and the degradation of your solar panels production over time.
Consider a 6.4kw solar project scheduled to be installed on a sunny site in eastern Massachusetts. Here is how we calculate the solar payback period for that project:
Initial Cost: $28,480
30% Federal Tax Credit: -$8,544
This system generates enough energy to save the homeowner $2,208 a year by reducing the monthly payment on their energy bill (we go over how to calculate savings per year below*). Using their cumulative Savings per Year we can find Solar Payback Period with the following formula:
$19,936 / $2,208 = 9.02 years
In 9 years, this system will have generated enough solar savings to cover the cost of the entire system. After reaching the 9-year breakeven point, every dollar saved on your electric bill is the growing value of your solar investment.
For an initial estimate, you can use your average electric bill to calculate your annual savings. If your system is designed to supplement your entire household energy usage, you can expect your solar to generate enough cumulative energy to offset the cost of your monthly bill during the course of the year (in the sunny months of summer you will generate excess solar power to gain credits that will cover the cost of your bill in the winter months).
If your average monthly utility payment is $184, you can expect to save that much each month, thanks to your solar array. Thus, you will see $2,208 in savings per year ($184 x 12).
Your savings can go towards paying off your system, and once you reach your payback period, those savings will go straight into your pocket for the full lifetime of the system!
In the simplified example above, we didn’t include factors that we include in our models for each project that impact the payback period. These include state specific incentives, increases in utility rates, and solar panel degradation:
You may be asking yourself, what if I want to finance my solar project?
Homeowners who pay for their solar installation through a loan still receive all the financial and environmental benefits of solar. However, rather than use the solar payback period method to understand the timeframe for the return on their solar investment, we can simply look at the length of their loan.
In the graph above, this solar project is being paid for with a 12-year loan at 6.95%. Since the monthly loan payment is slightly less than their old electric bill, this family is saving some each month. This means that their solar payback period is actually 0: in their first year they spend less on their solar loan than they would have on their old electric bills (this assumes that they use their 30% federal tax credit to pay down their loan). Once the loan is paid off in 12 years their savings really accelerate. Many solar projects can achieve immediate payback periods when using a solar loan!
Additionally, they are even saving a small (but not insignificant!) amount during the loan payment period, due to the projected 3% utility rate increase. Paying a constant loan payment instead of a slowly increasing electric bill saves the homeowner a little money even before the loan is fully paid off. Choosing a longer loan term will lower the monthly payments and allow for savings each month from the beginning!
Our Solar Design team can help you consider all these factors as you determine the best solar option for your home or business. During our proposal process we work with you to design your solar power system that meets your unique needs and energy goals, and part of that is calculating your expected solar payback period.
