Calculating Solar Payback Period and Return on Investment

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Solar Panels ROI: How to Calculate Solar Payback

The average American household pays a monthly electric bill of $118.36. When you go solar, the power generated by your solar panels replaces the electricity you buy from the utility company, reducing or completely eliminating that bill.

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Though solar is a big purchase up front, that investment quickly pays for itself in energy savings over the life of ownership. The payback schedule is accelerated by state and federal tax incentives that reward people who invest in green energy.

A grid-tied system can pay for itself in around 3 to 6 years for DIY projects, and 5 to 9 years if you hire a contractor. Since solar panels are warrantied for 25 years, any energy you generate beyond the initial payback period represents a profit on your investment.

Wondering how to calculate your payback period and solar panel return on investment (ROI)? Let’s do the math.

How Do I Calculate the Solar Payback Period?

Your payback period is the time it takes to recover the initial cost of installing your system. Use our solar ROI calculator below for a quick estimate. If you want to learn how to do the math yourself, read on.

Solar ROI Payback Calculator

*Default values are based on national averages for electricity cost and usage. Several factors will influence the ROI of your solar panels. This payback period is not guaranteed.

Solar Payback Formula

To figure out payback period without the solar panel cost calculator, we first calculate the true cost of installing solar after incentives have been claimed. Then we compare that against the cost of electricity from the utility company, which tells us how long it takes to break even on the system. Use the formula below:

(Total System Cost – Value of Incentives) ÷ Cost of Electricity ÷ Annual Electricity Usage = Payback Period

System cost is the total cost to install your system, which includes equipment, permitting, shipping, contractor wages, and other associated project costs.

Value of Incentives covers any credits or incentives you receive for going solar. The main incentive is the Solar Investment Tax Credit, a 26% credit toward your federal taxes. Most people are eligible to claim it, so we factor that into our calculations. There may be other state or local incentives in your area.

Cost of electricity can be obtained from your utility provider. State-by-state averages can be found here.

Your electricity usage is printed on your electric bill. Take your monthly usage and multiply by 12 months, or gather a full year’s worth of bills from your utility for a more accurate estimate.

Payback Period Examples

Let’s calculate a few different payback scenarios.

Scenario #1: US national average electricity rates, installed by a contractor at $1/watt

Let’s assume your household is “average” in every way, using 914 kWh per month billed at a rate of 12.95 cents per kWh.

914 kWh/mo. x 12 months = 10,968 kWh/yr

A 6.9 kW system would completely offset your energy usage. We currently sell a 6.9 kW SolarEdge / Astronergy system for $10,224.70 (price is current as of 11/22/2019, the date we published this guide).

A local contractor might charge you $1/watt to install your system, which works out to $6,900 for this 6.9 kW (6900-watt) system.

We will also estimate $1,000 to cover permitting and shipping fees.

In total, the cost to install your system is $18,124.70. 26% of that can be claimed under the federal tax credit, a value of $4,712.42.

($18,124.70 – $4,712.42) ÷ $0.1295/kWh ÷ 10,968 kWh/yr. = 9.44 years

In this scenario, it takes 9.44 years to break even on your investment. That assumes you have average energy costs and hire a contractor to install your system.

Scenario #2: US national average electricity rates, DIY install

You can also choose to install your system yourself. This will negate the $6,900 installation cost, but we should add another $500 for tools and the cost of an electrician to complete the final hookup. We also keep the $1,000 estimate for shipping and permitting.

That brings your system cost down to $11,724.70, with a 26% tax credit of $3,048.42.

Here’s how the payback period changes if you DIY install:

($11,724.70 – $3,048.42) ÷ $0.1295/kWh ÷ 10,968 kWh/yr. = 6.11 years

When you install the system yourself, it takes 6.11 years to recoup the initial cost of the system. Taking on a DIY install allows you to pay off your system about three years faster than hiring an installer.

Scenario #3: High electricity rates

If your electricity costs are higher than average, that makes your payback period even shorter, because you are saving more on utility bills each month.

Let’s use Rhode Island as an example, which has the highest cost of electricity in the contiguous 48 states. At 21.74 cents per kWh, it’s nearly double the US national average.

Let’s assume average energy usage with installation help from a local contractor:

($18,124.70 – $4,712.42) ÷ $0.2174/kWh ÷ 10,968 kWh/yr. = 5.63 years

And the same scenario if you choose to DIY install:

($11,724.70 – $3,048.42) ÷ $0.2174/kWh ÷ 10,968 kWh/yr. = 3.64 years

As you can see, solar is even more appealing in states with high electricity costs. Eliminating high electric bills leads to quite a speedy payback period of 3.64 years if you take on a DIY install, or 5.63 years if you hire a contractor.

Scenario #4: Low electricity rates, more expensive system

For comparison’s sake, let’s go to the other end of the spectrum. We are going to try to find the worst-case solar scenario: the lowest electricity costs in the country (Louisiana, at 9.09 cents/kWh).

How long would it take to pay off the same 6.9kW system?

($18,124.70 – $4,712.42) ÷ $0.0909/kWh ÷ 10,968 kWh/yr. = 13.45 years

The payback period balloons to 13.45 years if you hire a contractor for installation. Even taking this worst-case scenario into account, you still break even about halfway through the life of your 25-year panel warranty and stand to make a reasonable return on your investment.

How Do I Calculate Solar Panel Return on Investment?

The other figure you’re probably interested in is how much money you stand to save over the life of your system.

For that, we want to calculate the cost of ownership over the life of your panel warranty (25 years), and compare it to the cost of buying electricity from the utility company over that same time period.

Also note that inverters have shorter lifespans than solar panels. You’ll need to replace your inverter at least once over the system’s lifetime, which should be factored in to your ROI calculations.

At its simplest, here’s how to calculate your return on investment into solar:

Lifetime cost of electricity from utility – lifetime cost of solar = Solar ROI

The lifetime cost of solar includes:

  • Equipment
  • Shipping
  • Permitting & inspection
  • Installation
  • Incentives & rebates (Federal tax credit applies to all above line items)
  • Financing fees (if applicable)
  • Grid connection fees
  • Part replacements

And here’s how to calculate lifetime cost of electricity:

Cost of electricity per kWh x Monthly kWh usage x 12 months x 25 years

Sample ROI Calculations

Let’s use the same 6.9 kW system from the scenarios above. In our example, the system costs $8,676.28 if you choose to install it yourself, or $13,412.28 if you hire a local contractor to install it at $1/watt.

That system contains a SolarEdge string inverter with a 12-year warranty, currently priced at $1,691. Replacing the inverter at the 12-year and 24-year mark adds another $3,382 to the costs outlined above.

The utility will charge a monthly fee for access to connect to the grid. That’s about $15/month, or $4,500 in grid connection charges over 25 years.

Taking these additional costs into consideration, the lifetime cost of owning this system is $16,558.28 if you self-install or $21,294.28 if you hire a contractor.

Using national averages, here’s how much it would cost to buy electricity from the utility over 25 years:

$0.1295 x 914 kWh x 12 x 25 = $35,508.90

Compare these figures to calculate the lifetime solar panel return on investment:

ROI for DIY systems:

$35,508.90 – $16,558.28 = $18,950.62 in savings over 25 years

ROI for systems installed by a contractor:

$35,508.90 – $21,294.28 = $14,214.62 in savings over 25 years

What Are Some Factors That Affect Solar ROI?

Several factors can influence the ROI of your solar system. Here are some top contributors that affect the ROI of your solar investment:

Installation Costs

Installation makes up a major portion of the cost of your project.

2018 report by the National Renewable Energy Laboratory cites $2.65 to $3 per watt for systems built by Vivint and Sunrun. However, the equipment itself costs just $1.20 to $1.50 per watt, with the remaining charges going toward installation and overhead costs.

That’s more than 100% markup on the installation fees from national solar installers.

Local contractors offer better rates, but they still charge 75 cents to $1/watt to install the equipment you order. You’re still looking at several thousand dollars for the installation.

Many of our customers save money by choosing to self-install their system, cutting out the installation fees. Some bring in an electrician for the final hookup to the grid, a visit that costs just a few hundred dollars.

Wondering what it takes to self-install a solar system? Check out our DIY Solar Timeline. We provide free system design consultations and installation guidance to give you the tools you need to install your system yourself.

Tax Incentives

Through 2020, the Federal government is offering a 26% tax credit off the entire cost of your system, which includes equipment, shipping, fees, installation, etc. Most people are eligible to claim this incentive (you must owe federal taxes to claim the credit).

The credit steps down in value starting in 2020, until the program expires in 2022. Learn more about the Federal Tax Credit.

There might also be state or county-specific rebates and grants for your area, which further reduce the cost of solar. Check our State and Local Incentives page to search for additional programs in your area.

These incentives should be deducted from the cost of your project when evaluating your return on investment into solar energy.

Fees & Permits

States and counties usually charge a fee to inspect and permit your new solar installation.

This varies by location, but typically total less (sometimes much less) than $1000. To start the permitting process, you’ll need to contact your local authority having jurisdiction (AHJ).

The AHJ is the organization responsible for permitting and inspecting new solar installations where you live. There may be multiple AHJs that oversee the process. Common places to look are:

  • Your Electric Utility
  • Your City/County Planning Department
  • Your City/County Fire Department

A quick call to your city hall or planning department can help you get started. For more guidance, download our solar permitting guide.

Maintenance & Replacements

Solar systems contain few moving parts, and as a result, there is very little maintenance involved. Beyond keeping the panels clean and clear of debris, you don’t need to perform much maintenance on grid-tied systems.

However, you should budget part replacements into the equation when calculating your return on investment. Solar panels are warrantied to last for 25 years, and they often last quite a bit longer than that (albeit at reduced efficiency). String inverters are typically warrantied for 10-15 years, which means you should expect to replace your inverter at least once over the life of ownership.

This replacement cost should be factored into the solar panel ROI equation. You can handle it one of two ways:

  • Buy a replacement inverter when you need one.
  • Buy the extended inverter warranty up front to extend the replacement warranty to match the life of your panels.

The second option is more cost-effective but requires you to pay a bit more up front. Either way, the cost of an inverter replacement should factor into your ROI calculations.

Read our article on solar warranties for more info.

Leasing & Financing

We do not recommend entering into a solar lease or power purchasing agreement (PPA). They eat into the value of your investment, and can actually cause you to lose money in some cases.

Leases have high lifetime costs due to compounding interest built into the lease structure. They also prevent you from claiming the Federal Tax Credit or any other incentives. Those benefits go to the company offering the lease—they own the equipment, which means they retain the right to claim the incentives.

Leases also make your home harder to sell. We recommend reading this Bloomberg article: “What Happened When I Bought a House With Solar Panels“, which reflects on the headaches caused by purchasing a house and inheriting solar panels leased from Sunrun.

If budget is a concern, we recommend financing your system instead. Banks offer better lending rates, and you get to keep the incentives because you own the system. You may also be eligible for reduced rates through an FHA (Federal Housing Administration) loan, which covers home improvement projects like adding a solar system to your home.

Utility Billing Structure

The cost of electricity can vary based on your location, with averages falling in a range of 9-22 cents per kWh. (Hawaii is an outlier at 33.82 cents per kWh, due to the need to maintain their own utility grid because they are separated from the mainland).

What’s more, most utilities don’t bill a flat rate for electricity. Most will charge higher rates during peak use periods, and some set different rates for energy generated by solar vs. energy provided from the grid.

Your utility will outline the billing structure as part of your contract with them, called a net metering agreement. The billing model can have an impact on your solar panel return on investment. Here are some terms to keep an eye out for:

Net Metering Agreements

You may be able to sell excess power from your system back to your electric utility. This is called “net metering” or “net energy metering (NEM).”

In most cases, your electricity generation vs usage is tracked each month, and any excess is returned to you as energy credits that apply to future bills.

Some utilities buy and sell energy at the same retail rate, while others pay a reduced rate for the solar energy you feed into the grid ($0.08/kWh in credit value vs. $0.13/kWh sale price, for example).

Other companies offer month-to-month rollover credits, but don’t give a cash refund. Under this scheme you cannot get cash for excess generation, only bill credits.

Time-of-Use Metering

Utilities charge more for electricity during peak usage periods—typically the evening, when most people are home from school and work. This also applies during the middle of summer and winter months, when people are running their heater or A/C at full blast.

Utilities do this to better adapt to the hourly supply and demand curves they see, both for financial and practical reasons. Sudden spikes and dips in electricity usage can be hard for traditional power plants to keep up with, because it takes time for them to ramp their production up or down.

The benefit to the solar homeowner is that—with the right equipment, in the right jurisdiction—you can sell solar power back to the grid at peak daytime rates and buy it back at lower nighttime rates.

This setup requires a grid-tie system with energy storage. These systems use a battery bank to facilitate energy resale and provide backup power in the case of outages.

The marginal savings from time-of-use metering may or may not pay for the additional costs of adding a battery bank to your system. However, the peace of mind from having emergency backup in case of outages may be worth it to you—especially if you live in an area with an unreliable power grid, or a climate that is susceptible to flooding or extreme weather conditions.

Feed-In Tariffs (FITs)

While most states offer Net Metering programs, a few also offer “feed-in tariff” schemes. This means the utility installs two separate meters, one for the power you use and one for the power you generate, and charges each at a different rate. Contact your utility to find out if this is applicable to you.

Sun Exposure

This is a measure of how much sun an area receives throughout the year. Your system hits peak production when it is exposed to full sunlight, and some areas receive more “sun hours” than others.

A system in Arizona or Southern California will enjoy much longer peak production windows on a daily basis than one built in Michigan or Alaska.

The amount of sun exposure your system receives has a huge impact on production, and higher production translates to a quicker payback period. That said, solar is still financially viable in cold and cloudy climates. (This case study from a Wisconsin customer does a great job demonstrating how solar produces in a heavy snow region.)

Take a look at our US sun hours map to get a sense of how much sun exposure you can expect in your location.

Solar insolation map


Continuing with the last point, shading on your panels prevents exposure to sunlight, which will reduce their output. If your system is built under trees, chimneys, or other obstructions, it won’t produce at maximum efficiency, which will negatively impact your solar panel ROI.

Certain products like power optimizers and micro-inverters help mitigate shading issues. They come at a higher up-front cost than string inverters, but the extra production from shade mitigation more than makes up for the initial purchase price.

If you think shade will be a concern, look for systems managed by optimizers or micro-inverters, like the SolarEdge HD-Wave or the Enphase IQ7+, and factor the higher system cost into your payback calculations.

These products help manage sites with partial shade. Full shade still needs to be avoided, as solar won’t be a viable solution if the panels are never exposed to sunlight.

Mount Angle & Orientation

Solar panels work best when they face directly into the sun. But that task is complicated by the fact that the sun moves across the sky throughout the day. It also changes angle in the sky as the seasons change.

You can buy pole mounts or trackers to adjust your panels to the optimal angle throughout the year, but the production gains from these adjustments are minimal. Most system owners will be happy enough to mount panels at a fixed angle, which saves money on racking and installation costs.

Ideally, solar panels should be tilted at an angle that is equal to your latitude. The natural slope of your roof should come pretty close to this angle, so you usually don’t need additional adjustments.

You also want to point your panels toward the equator so that they are facing the sun. In the US, south-facing arrays offer the most production. You can generally make do with east or west-facing arrays, but will need to oversize your system to account for a dip in production.

PVWatts is an invaluable tool for calculating the efficiency of your system based on the above factors.

For more info, check out our article on angle and azimuth, which explains the optimal position to mount your panels.

Panel Degradation

As a normal part of their lifecycle, solar panels very slowly lose performance over time, at a rate of about 0.5% to 1% per year (source: NREL study).

A good manufacturer warranty will include this degradation explicitly in their terms. A typical guarantee is for panels to still produce at least 80% of their initial output after 25 years.

This means a 300-watt panel today would be guaranteed to still produce at least 240 watts 25 years from now. Panel degradation should be factored into ROI calculations and solar panel return on investment calculations, since panels will put out a bit lower production near the end of their lifespan.

Electricity Costs

Electricity rates have risen gradually over the past few decades, from 1% to 6% a year depending on the area. On paper this may look like electricity is getting more and more expensive, but in practice, the annual rate of inflation must also be taken into account.

In short, the “real” inflation-adjusted cost of electricity has decreased significantly since 1960 and risen only slightly since its lowest point in 2002 (source: EIA).

While it’s hard to predict future rate changes, solar can offer financial security by locking in a fixed electric rate over the next 25 years. It keeps your bill predictable and shields you against future rate increases.

This guide focuses on investment value for grid-tied systems. Calculating payback period for an off-grid system is quite a bit more complex, based on two main factors:

Battery Banks

Battery-based systems cost quite a bit more up-front, and batteries have a shorter lifespan than your panels. Lead-acid batteries are the most cost effective batteries, but they are typically warrantied for 3 to 7 years. Lithium batteries come with 5 to 10 year warranties.

Plan accordingly and factor the replacement costs into your payback calculations.

Lack of Grid Access

For grid-tie systems, we calculate the solar panel ROI of your system against the cost of buying electricity from the utility company. Since you have access to power lines, the cost of solar is measured against the alternative of buying power from the grid.

Off-grid systems are built in remote locations without access to the power grid. As a result, we measure the value of solar against alternative methods of delivering power to a remote property.

That might include the cost of running power lines to your property, which can cost tens or hundreds of thousands of dollars depending on your proximity to the nearest grid hookup.

If grid connection is not feasible, you must provide your own power source—whether that be solar, wind, water, or a gas generator. In these cases, the cost of solar should be compared to other methods of energy generation for your property.

The Verdict: Is Solar Worth It?

So, to answer the question, “are solar panels worth it?” In most cases, yes; especially if you can connect to the grid and reduce the burden of energy storage costs, or if you need to provide power in a remote location.

DIY grid-tied systems pay for themselves in about 5 years on average, and contractors extend that window to 8 to 10 years. Considering panels are warrantied for 25 years, both options become a profitable investment in the long run.

Off-grid considerations are slightly different. Batteries add a significant up-front cost, and they will also need to be replaced over the life of the system. But it allows you to buy affordable, rural land and produce clean power where you need it.

System costs must be evaluated against other means of delivering energy to the property. Running power lines to your property can cost an estimated $20,000 for a half-mile run. Though battery storage is expensive, it may still be cheaper than the alternatives.

Need help designing your system or help calculating your solar panel ROI? Click here to get in touch for a free consultation or give us a call at 1-800-472-1142.

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