You’ve probably heard someone online boast about how they save $1,800 a year installing solar or they recouped their investment in just five years. Maybe you’ve already gotten estimates, but they say it’ll take you 8, 10, or even 11 years to see a return on your purchase. What gives? Why aren’t you seeing the same results?
The length of time it takes to recoup solar cost investment isn’t a one-size-fits-all number. Your utility rates, location, installation costs, and other factors all directly affect just how long it’ll take you to ‘pay off’ your installation, as well as how much cash you can save by installing solar.
Let’s take a look at what factors affect your payback time, how to compare solar costs to utility rates, and discuss a few tips to help you see the fastest return on your investment.
How long does it take to recoup your solar costs?
The average solar installation needs around 8 to 11 years to recoup the entire investment. The number of years it takes to recoup your initial investment in solar depends on a wide variety of factors, but is most dependent on four key things.
Factors that affect your payback period
- Your installation costs: This one’s obvious: The less you spend, the faster you’ll see a return. Talking to multiple installers for estimates is key to installing a well-priced, high-quality installation. Incentives help lower your initial cost and see a faster return on investment. All homeowners are eligible for the federal tax credit, but many states offer additional incentives, either directly through state income tax credits or by requiring utilities to offer solar rebates.
- Your solar production: Solar panels in Arizona produce more electricity than in Oregon. The more electricity your panels produce, the faster you’ll recoup your money
- Your utility rates: Solar panels help you save money by avoiding purchasing all your electricity from the utility. If your utility charges higher rates, you’ll see a faster return on your solar investment, since you won’t be paying those high rates.
- Net metering: Your utility’s net metering regulations stipulate how it compensates you for any excess solar energy you produce, but don’t use in your home and therefore send to the grid to be used elsewhere. Some states require utilities to offer credits at full retail rates, while others only require utilities to offer credits at their ‘avoided costs’, which is typically about 1/3 of retail rates. Full retail-rate net metering is a basic building block of solar savings, as it allows you to stockpile your solar credits during the summer months when your solar installation is producing like mad, then pull from those account credits during the winter when your installation doesn’t produce as much.
Example solar payback
For a better understanding of how all these factors affect your payback length, let’s take a look at an example:
You live in Iowa. You install a 7 kW installation and pay $26,950 out of pocket.
In Iowa, a well-designed 7 kW installation will produce 9,600 kWh in the first year, which is worth about $1,400 if you purchased all that electricity from the utility at the state average of $0.15 per kWh. So, already you’ve gained back about 5% of your investment. Each year, you produce more solar energy and by Year 13, you’ve completely paid off that initial $26,950 through your energy savings.
13 years is a long time, but we’re not done quite yet. We’ve forgotten a major benefit: tax credits! Iowa homeowners are eligible for the 30% federal tax credit as well as Iowa’s 15% MA renewable income credit. Taking advantage of both of these incentives drops your total investment from $26,950 to just $16,400. And since your initial investment is so much less, your payback time drops to 11 years.
Compared to other states, that’s still a pretty slow return on your investment, mostly due to Iowa’s very-high solar installation costs. In comparison, if you installed the same system in New York you’d see a return on your investment after just 8 years. Even though a 7 kW installation will actually produce less electricity each year in New York, the state’s high electricity prices make solar an excellent financial investment.
Solar installation impact on home value
As mentioned, rooftop solar generally takes about 8 to 11 years to recoup costs. By modern standards, 11 years is quite a long time to stay in one home. You might be wondering how solar affects selling your home. Is it a burden? Does it add value?
If you own the system on your roof (financed via cash or loan), solar is absolutely a benefit when it comes time to sell your home.
In 2015, the Lawrence Berkeley National Lab studied the resale value of 22,000 solar and non-solar homes across 8 states (California, Connecticut, Florida, Massachusetts, Maryland, North Carolina, New York, and Pennsylvania). They found that solar installations added about $4/watt of additional value on average. With most solar installations around 6,000 watts, that’s an average premium of $24,000.
The researchers also found that the biggest determining factor to the installation’s value was the age of the system. As the panels age, the value goes down. They found that new installations between 6 months and 2 ½ years old added a premium of $5.90/watt, while installations 6 to 14 years old added $2.60/watt. So your 11 year old installation could still add $15,600 to your resale value.
So when it comes time to sell your home, you could actually recoup your entire investment just through the higher resale value. However, if you want to install solar but are planning to move within the next five to ten years, don’t just assume you’ll recoup your investment when it comes time to sell your home. Call up a couple local realtors to see if they’ve sold any homes with solar and if they brought a premium.
If you took out a loan to pay for your installation, you can take that premium you made from your home sale and pay off the loan early, helping you save a few bucks on interest as well.
Lots of homeowners are worried that leased solar will scare buyers away, but that’s really not the case. If you financed your installation via a solar lease or power purchase agreement (PPA), you don’t need to worry. LBNL also did a study of homes with leased solar and found that, while the leased solar didn’t add any value to the home, it didn’t detract from the value or extend the home’s time on the market either.
Comparing solar electricity cost with utility cost
Installing a solar installation allows you to save money by avoiding expensive electricity from the utility. If your solar installation produces electricity that is cheaper than the utility’s prices, installing solar is a wise financial investment. If your utility’s prices are so low that installing solar would be more expensive than continuing to purchase electricity from the utility, installing solar is a poor investment.
How do you compare the cost of solar vs utility costs? The easiest way is to simply compare the $/kWh cost of the electricity your solar installation will produce over its entire lifetime against what you’ll pay the utility.
For example, let’s say you paid $18,900 (after incentives) to install a 9 kW installation on your Colorado rooftop. Over 25 years, your installation will produce a grand total of 349,528 kWh of electricity. So, you’ve paid $0.05 for each kWh of electricity produced. In Colorado, the average utility charges $0.13 per kWh, so you’ve already come out ahead.
That’s not the whole story. On top of that, utilities raise rates an average of 2.6% each year. At this rate, while you’re paying $0.13 per kWh right now, by Year 25 you’ll pay the utility $0.24 per kWh! By installing solar, you’ve locked in that $0.05-per-kWh cost for the next 25 years.
If a state boasts lots of rooftop solar – like Colorado, North Carolina, California, and Arizona – you can likely assume that solar energy has reached grid parity. In other words, installing rooftop solar is cheaper than purchasing utility electricity.
If you live in a state with low electricity prices or few solar installations, you’ll need talk to your local installers to see if solar energy in your location has reached grid parity. If your neighbor has solar, chances are it’ll make sense for you as well.
Which states are the best for solar?
The best states for rooftop solar typically have a combination of high utility rates, full retail-rate net metering, and incentives to help drop the cost of solar. All these factors allow homeowners to cut their payback period to as short a time as possible.
As of 2019, California, North Carolina, Arizona, Nevada, and Florida lead the way in total solar capacity. California alone has installed over 25,000 MW of solar – that’s enough for about 4 million homes! California homeowners enjoy great weather that’s perfect for solar as well as excellent solar rebates (though most are gone now), but also suffer from high electricity costs. The average utility rate in California is $0.20 per kWh – that’s over 50% higher than the national average!
A 7 kW installation in southern California can produce about $71,900 worth of electricity over its lifespan. Assuming you spent about $17,710 (after incentives), you’d be producing electricity at about $0.07/kWh and you’d see a return on your investment after just 8 years!
Homeowners in states that offer no incentives and/or have low electricity prices generally have a harder time saving money by installing solar. Louisiana homeowners, for example, already have incredibly low electricity rates – just $0.09 per kWh – and no solar incentives beyond the federal tax credit. However, it does offer full retail-rate net metering and good, clear skies.
So how would a solar homeowner fair in the bayou? Not so well. It would take you 18 years to pay off an average-sized installation and you’d only save about $3,000 total. There’s a reason nation-wide solar companies like Sunrun and Tesla don’t work in the state, and why Louisiana has so little solar installed.
In states like Louisiana, the financial savings that solar can bring are slim, but that doesn’t necessarily mean it’s not worthwhile. Installing rooftop solar doesn’t just help you save money, it helps you live a cleaner life, with much less emissions. Exactly how much that is worth is something you’ll have to decide for yourself.
How can I see the fastest return on my solar installation?
For homeowners, the best way to ensure you see the shortest payback period is to ensure you’ve installed the lowest-priced, most efficient solar installation you can. Here are a few tips to make that happen:
Talk to multiple installers: Just like any home improvement project, you’ll get a wide variety of cost estimates for your solar installation. Reaching out to multiple installers allows you to find the best balance between cost and quality. It also gives you a chance to weigh each installer’s experience and customer service skills, which are crucial if anything unusual, like equipment shortages or roof issues, pops up.
Assess your equipment: Those ultra-high efficiency solar panels are extremely cool, but they’re also expensive. For most homeowners, standard-quality solar panels offer a good balance between quality and cost. Manufacturers like Canadian Solar, Yingli, and Hanwha produce well-priced, well-respected panels and offer decent warranties. You’ll see the fastest return on your investment with mid-quality components like these.
Take advantage of all incentives: We keep beating you over the head with this, but incentives are an easy way to drop your costs! Of course, there’s the federal tax credit (which is set to phase out at the end of 2019!) and some states also offer similar tax credits, but did you know many states offer property and/or sales tax exemption for solar installations as well? Depending on your local tax rate, the property tax exemption can save you $150 or more in the first year alone! Be sure to ask installers about any and all incentives that you could be eligible for.
Image Sources: Public Domain via Pixabay