Solar Payback Period | GreenLancer

Purchasing a solar energy system is one of the few home improvements that actually pays for itself over time due to the significant utility savings. For many potential customers, this is one of the primary reasons they invest in a home solar power system. Being able to articulate the return on investment and the solar payback period clearly will help you close more sales.

Understanding how the solar panel payback works will help your customers make an informed purchasing decision and help distinguish yourself as a solar energy expert. Earning customer trust is valuable for closing sales and creating a solid reputation as a solar energy installer.

However, it is critical to provide accurate information based on accurate data. If you overestimate the utility savings, your customers will likely be disappointed. But having overly conservative estimates about savings make the system seem less appealing than it actually is. Let’s explore the concept of the solar panel payback period.

The payback period is the amount of time it takes for solar system owners to recoup their solar investment and is usually expressed in years. The customer’s financial savings from the system are factored in, such as net metering credits on utility bills, the federal solar tax credit, utility solar incentives, and solar renewable energy certificates (SRECs). The greater the savings and incentives, the shorter the payback period.

If a solar PV system has a shorter payback period, it has a higher return on investment. Conversely, systems with longer payback periods have lower returns. Often, solar companies put information about the payback period and return on investment in their proposals.

If your customers can claim the federal tax credit, this will help decrease the solar panel payback period. Likewise, customers with sunny properties and higher energy costs will have a shorter payback period.

When calculating the payback period, you will only input ongoing financial factors. So, for example, the calculations don’t consider the environmental benefits or the increase in home value.

The average residential solar payback period is about 8.3 years, but it varies by location and property and is typically between 6 and 10 years. This is the timeframe it takes for someone to recoup their initial solar panel investment through electric bill savings and possible solar incentives. Because the lifespan of a solar panel system is generally around 25 or more years, the system will produce “free” energy after the payback period because it has already paid for itself.

Solar ROI (Return on Investment) and the payback period for solar panels are related concepts but represent different aspects of the financial performance of a solar installation.

• Solar ROI measures the overall return or profitability of the solar investment over its entire lifespan. It considers the total financial benefits, including energy savings, solar energy incentives, and potential increases in property value.
  
  Solar Panel Payback Period:

• The payback period focuses on the time it takes to recover the initial investment through energy savings. It is a specific metric that indicates when the cost of the solar system is fully offset by the savings generated.
  
  

While ROI provides a comprehensive view of the long-term financial impact, the payback period specifically addresses the time it takes to recoup the initial investment. Both metrics are crucial for assessing the economic viability of a solar power system. A shorter payback period and a favorable ROI are desirable outcomes for solar investments.

There are many factors to consider when calculating the payback period of a solar energy system. We’ll review a few major factors here.

This is the total upfront cost, including the solar panels, equipment, and installation costs, minus any incentives from the total cost, such as the federal tax credit, utility incentives, and state tax incentives. When calculating the payback period for commercial systems, there may be some tax incentives in addition to the investment tax credit (ITC), such as tax write-offs and possibly grant opportunities.

The cost of a roof-mounted solar system is usually a bit less than a ground-mount array. Using premium solar panels or installing battery storage will increase the cost. However, these additional costs can have some financial benefits also.

Usually, the cost per watt is a bit lower for bigger systems. Therefore, homes with greater electricity consumption that install a larger system will often have a slightly shorter payback period due to the economies of scale of a solar power system. And battery storage allows customers to have greater energy independence.

You also need to factor in the utility bill savings and any SRECs (if available). This is influenced by the cost of electricity and how many kilowatt-hours of electricity the system will generate using historical weather data for the given location.

If the roof is partially shaded or the panels are not facing south, this will decrease the total solar system output. Also, the solar resource impacts the payback period. If you live in a sunnier climate, like San Diego, California, or El Paso, Texas, the system will have a shorter payback period than a cloudier one, like Seattle, Washington, if all other factors are equal.

Many solar installers anticipate that utility rates will increase over time due to rate hikes. As electricity rates increase, so do the solar savings. However, a solar system will also produce a bit less electricity over time as the solar panels degrade.

Having solar batteries impacts the payback period and typically makes it longer. Also, in areas with time-of-use rates for electricity, having batteries allows homeowners to use power from the battery when rates are highest and recharge if necessary when rates are lower. Although this isn’t usually factored in, preventing power outages with batteries can also save money, such as spoiled food in the refrigerator or greater productivity for people with home offices.

There is a formula that solar industry professionals use for residential and commercial PV systems alike. The formula is:

Payback period in years = (Total solar system cost minus solar incentives and rebates) / annual cost savings

For example, if a solar panel system costs $16,000 after incentives and the homeowner saves $1,840 a year on average, the system pays for itself in the savings in 8.7 years.

$16,000/$1,840 = 8.7 years

Determine the Total Cost of Solar Installation:

• This includes the cost of purchasing and installing the solar panels, inverters, mounting equipment, solar permits, and any additional expenses related to the installation.
  
  Estimate Annual Savings from Solar Panels:

• Calculate the annual savings by multiplying the system’s annual energy production (in kilowatt-hours) by the cost of electricity per kilowatt-hour in your area. This provides an estimate of the money you save on your electricity bill each year.
  
  Plug the Values into the Formula:

• Divide the total cost of the solar panel installation by the annual savings. The result will be the solar system payback period in years.

Some solar design software will calculate the solar panel payback period for you after inputting all the required data. This can help simplify the process and promote consistency between proposals.

Because this is a pretty complex topic, let’s examine some common questions.

Solar power systems pay for themselves through energy savings, and the amount of time it takes is called the solar panel payback period. Overall, households with solar panels generate enough electricity to power the entire house. This cuts down on the amount of electricity the house draws from the grid, therefore reducing energy bills.

In areas with net metering (also known as net energy billing), utility customers get credits on their bills for surplus solar electricity they supply to the grid. Plus, some solar electricity directly delivers power to household loads, bypassing the electric meter. Viewing solar power monitoring data is the best way to determine the total energy savings.

If a solar panel system produces 100% of the power a home consumes throughout the year, the homeowner will pay only the transmission and distribution costs in areas with net metering. This is typically a flat fee that all electricity customers pay for service.

A solar energy system will dramatically lower monthly electric bills but usually not completely eliminate them. If the homeowner lives in an area with net metering and the solar panel system produces all the power the home consumes, then they will typically just pay a monthly flat fee for electrical service. If the solar panels generate, say 80% of the total electricity, the energy bills will theoretically be 20% of the power plus the monthly transmission and distribution charge.

Yes, it does. Typically, adding a solar battery bank increases the payback period because many of the benefits aren’t calculated into the payback period formula, and batteries add significantly to the total system cost. Solar batteries are a good fit for customers looking to have backup power during grid outages and increase their energy independence.

Unfortunately, electricity rate hikes periodically increase electricity prices over time. Between 2010 and 2020, rates increased about 14% nationally. If natural gas prices go up, electricity rates are likely to follow. Thus, many solar panel installers assume electricity rates will increase by a small percentage when making solar payback period calculations.

To calculate the solar payback period, divide the total cost of the solar installation by the annual savings from solar. For example, if the installation cost is $20,000 and annual savings are $2,400, the payback period would be 8.3 years ($20,000 / $2,400). This represents the time it takes for the savings to offset the initial investment, indicating the system’s financial viability.

You can help enhance the solar panel output with proper maintenance, solar system monitoring, and ensuring that the solar panels are free of shade. Review solar monitoring data to spot service issues and fix them as soon as possible. Likewise, minimize shading from vegetation by trimming trees as needed to avoid unnecessary shading. If the solar panels are soiled or dusty, wash them to keep them operating optimally.

Solar panels typically last 25 to 30 years, but their lifespan can extend beyond with proper maintenance. Over time, solar panel efficiency gradually decreases, and solar panel manufacturers often provide warranties, ensuring a certain level of performance. Regular cleaning, monitoring, and addressing any issues promptly can contribute to maximizing the lifespan and effectiveness of solar panels and shorten the solar payback period.

Yes, changes in energy prices can significantly impact the payback period of a solar system because it impacts solar savings. Electricity rate hikes enhance savings, shortening the solar panel payback period, while declining prices may extend it. Although electricity rates tend to increase over time, it can be difficult to predict future prices, especially multiple years in the future.

The increased home value from installing solar panels is not typically factored into the solar payback period calculation. However, it contributes to the overall financial benefits. Solar installations often enhance property values, offering homeowners a return on investment through increased home resale value. While not immediate, this added value should be considered when assessing the overall financial impact and benefits of a PV system.

Many potential customers will ask how long it takes for the solar panels to pay for themselves in energy savings. Therefore, calculating and explaining the solar backpack concept is essential for solar companies to earn trust and educate potential customers.

Whether you calculate it using a formula or solar design software, it is essential to find an accurate method that works for your business. Some PV installation companies create spreadsheets with formulas, and then they input different variables, such as the total system cost after solar incentives and energy bill savings.

Another essential business skill is obtaining solar permits for PV projects. The GreenLancer platform was designed to provide solar permit design and engineering services for contractors and solar EPCs. Create a GreenLancer account to get started.