What’s a Solar Payback Period, and How Do I Calculate It?
Updated: Oct 5
If you have ever looked into getting a solar system for your home, one of the terms you may have come across is the “payback period.” This can help you figure out whether it’s a good investment. So what is a solar payback period, and how do you calculate that for your home?
Solar Payback Period
Solar payback period is like a return on investment. Most solar systems have either an up-front or a monthly cost that you pay to get the panels installed (if you decide to go with a solar lease the financing is much different, and a payback period calculation isn’t relevant). For most residential solar installations, you will either pay cash for the equipment and installation, or get some type of financing and pay that cost over time. You will also immediately get the benefits of a lower monthly energy bill, or in some cases, no monthly bill at all.
The break-even point of how long it will take for your monthly savings to equal your up-front costs is where your solar system pays for itself. You get little or no monthly energy payments, as well as increased home value if you ever decide to sell, according to a recent report indicating that solar systems result in a higher selling price.
How to Calculate a Payback Period
An average payback period is around eight years, but that can vary depending on several factors. Use these steps to calculate your specific payback period:
Step 1: Ask your solar provider what the total cost of the solar system will be, including equipment, installation, and fees.
Step 2: Identify all the financial incentives and tax breaks available from federal, state, or local government in your area. In 2020, you can deduct 26% of your system as a tax credit to offset any taxes you owe and can roll it over to a future year if you don’t use it all in one year. If you never owe federal taxes, you will not be able to take advantage of this tax credit. You may also get state and local incentives.
Step 3: Calculate how much electricity you use. The easiest way to do this is by looking at your power bills over the last year for total kilowatt hours (kWh) each month.
Step 4: Figure out whether your solar system will cover 100% of your needs. Grid-tied systems with no battery backup only get solar energy during sunlight hours (most people use more energy at night), but a battery backup or net metering can provide you with more usable solar energy.
Step 5: Add up all the costs, then subtract any of the incentives to get a total cost for your system. Divide that by your annual energy bill before you get solar, and you’ll get a number (in years) for your payback period.
$20,000 up-front cost for solar system
$6,000 in federal and state tax incentives
$14,000 for the total cost ($20,000 - $6,000)
$1,800 in annual savings for your power bill ($150/month)
$14,000 / $1,800 = 7.77
Your payback period is approximately 7 years and 9 months. If you plan to live in your home for 8 years or more, this is a worthwhile investment.
Want to learn more? Contact PRVL Energy today to discuss the cost of a solar system and how much it can save you.