Rooftop solar panel installations have reached an inflection point in recent years, going from a luxury that your well-to-do tree-hugging neighbor installed to a real money saving, or actually money making, asset that practical homeowners across the country are installing in record numbers. While solar power is commonly touted for its tangible environmental and climate benefits, as solar generation does not burn fuel and thus minimizes the need for carbon-emitting energy generation sources like fossil fuels, the real reason for the steep incline in residential solar installations comes from basic economics rather than a place of green intentions.
The economic benefits to solar panels are fairly self-evident; by generating energy from free sunshine and using that to partially power your home, you are directly reducing your reliance on electricity coming from your utility and thus dropping your electric power bill a commensurate amount. Given the several decades solar installations are designed to last, those monthly electricity savings add up to eventually pay for the entire capital costs of the original solar installation—with any money savings coming after that point being rendered a homeowner’s pure profit!
However, the ability and willingness of homeowners, especially those without excess capital to spare, to make that investment depends directly on how long before the solar panel installation recoups its initial cost. This length of time is known as the payback period, and being able to estimate and understand what determines the payback period is critical to encourage a homeowner to take the solar plunge on their own homes. Luckily, the math is straightforward and the evidence is convincing once you follow the following steps…
Step 1: Determine the Total Cost of Your Desired Solar System
The critical first step is to identify what the upfront costs will be to install the system. Solar power costs include not only the solar panels, but also ‘soft costs’ that include designing the system, the permitting process, the installation equipment and labor, connecting the system to the home’s power systems, and more. Many potential solar customers are surprised to find that these soft costs, in fact, account for a majority of the capital costs—64% of the installation, according to the U.S. Department of Energy.
This first step is also frustratingly the most difficult, as the exact cost will vary based on your region, the size and shape of your roof, the type and size of solar system desired, whether the system is paid for in full or needs financing, and more.
As an estimate, the average rooftop solar installation in the United States during 2018 cost about $19,000 for a 6 kilowatt (kW) system, though those costs could drop as low as $6,000 for a 2 kW system and raise as high as $79,000 for a 25 kW system. The National Renewable Energy Laboratory uses a 5.7 kW residential solar rooftop system as a typical benchmark installation, with a cost of $15,960.
However, that average value is simply a starting point. To determine the approximate cost of a system you’re interested in installing, a number of online tools exist that allow you to put in your specifications and come with a rough estimate. The solar calculator, for example, can spit out an estimate for your solar installation cost based on home location and roof size/shape/orientation, while also demonstrating the difference from paying upfront, leasing the panels, or buying them with a loan. But the most accurate quotes will of course come from an actual solar installer in your area.
But for the purposes of this exercise, let’s assume a total solar system installation cost of $16,000.
Step 2: Find Any Government Incentives
Because solar power and its clean energy generation is such a benefit to the environment, climate, and public health, many governments offer financial incentives for residential customers to install solar. These incentives, in the form of rebates, tax breaks, and more, are among the most valuable tools a solar customer has to make initial costs more accessible and reducing payback period even further.
The U.S. government offers all households who install rooftop solar a 30% investment tax credit (ITC). This uncapped ITC allows you to deduct 30% of the total installation cost from federal taxes during that year. On top of that, though, numerous cities and states offer rebates and incentives that could bring the capital costs down further. To determine if you live in such an area, refer to the Database of State Incentives for Renewables and Efficiency.
For our example, though, we can even assume a worst-case scenario where the 30% ITC from the federal government is the only assistance. As such, 30% of the $16,000 capital costs is worth $4,800 in value from government incentives.
Step 3: Calculate Yearly Electricity Use and Expenditures
How quickly you’ll make your money back by generating your own energy from the sunshine hitting your rooftop directly depends on how much your household is spending on electricity already. Based on the size of the house, the number of occupants, and the typical activities, power bills across the United States have a vast range. The greater the power expenditures, though, the greater the potential savings of the solar panels.
You can determine your average monthly and yearly consumption and associated costs by referring to the bills from your electricity provider. For this exercise, though, we’ll refer to the U.S. Energy Information Administration and their data that says the average U.S. household uses 867 kilowatt hours (kWh) per month or 10,399 kWh per year at an average price of 12.89 cents per kWh. These numbers come out to $1,340.43 of electricity costs per year.
Step 4: Estimate Annual Electricity Production from Solar Installation
The real meat comes from exactly how much energy you’re able to produce using solar panels on your rooftop. The greater the solar generation, the less you’ll need to tap into the grid for power and the more money you’ll save each month. As with each of these steps, though, the exact amount will vary according to factors like your location, the amount of direct sun your rooftop receives each day, weather patterns, size of the system, appropriate maintenance, and more.
Because of all of these factors, an estimated annual production is rather difficult to achieve on your own without consulting potential installers, but online tools can again provide a rough estimate to get you in the ballpark. One great example is the PVWatts Calculator from the National Renewable Energy Laboratory. If, for example, I put in my childhood home address and assume a 6 kW system while keeping the other estimates (such as system tilt) at their default, I find that I could expect to generate about 7,852 kWh of power during a typical year.
Step 5: Put It All Together in a Payback Period
The previous four steps provided the data puzzle pieces needed to finally calculate a residential solar installation’s payback period, all we need to do now is to fit it all together with simple math.
Installation cost = (total capital cost – value of government incentives)
Average power costs = yearly electricity expenditures / total annual electricity used
Annual savings = average cost of electricity x yearly energy production from solar system
Payback period = installation cost / annual savings
Given this, our example system would find:
Cost to install = $16,000 – $4,800 = $11,200
Average cost of electricity = $1,340.43 / 10,399 kWh = $0.1289/kWh
Yearly savings = $0.1289/kWh * 7,852 kWh = $1,012.12
Payback period = $11,200 / $1,012.12 = 11.1 years.
Such a payback period would actually be greater than the U.S. average, as the National Renewable Energy Laboratory reports an average payback period of 7.4 years. And of course all of these factors can be affected by digging into more of the weeds—whether the price of electricity will change, if utility policies on residential solar change, the effect installations will have on property values, etc. But with solar rooftop installations having expected lifetimes of greater than 25 years, such low payback periods demonstrate the financially wise investment that solar panels can be for homeowners even if exterior factors varied.
Solar panel installations are no longer the sole purview of the green nuts, but rather the responsible financial choice for homeowners across the country. If you run these calculations on your own home, odds are you’ll be calling up a solar installer in your area before long.