There are numerous advantages to installing solar panels on your home, but everyone is interested in learning about solar panels’ return on investment or ROI. Solar panels stand out from other home renovations because they pay for themselves over time by saving you money on your electricity bill.
The average power cost for a home in the United States is $118.36 per month. When you install solar, the electricity produced by your solar panels substitutes for the cost of the electricity you currently purchase from the power company, thereby lowering or eliminating this expense.
Despite being an expensive initial investment, solar soon pays for itself through energy efficiency over the course of possession—state and federal tax subsidies that encourage green energy investment speed up the payback period.
For do-it-yourself projects, a grid-tied solution can compensate for itself in 3 to 6 years and 5 to 9 years if you employ a professional. Solar panels come with a 25-year warranty, so any energy you produce after the original payback period constitutes a profit on your capital.
You can determine whether your renewable energy investment is financially worthwhile by estimating how much you will save over time. Financial experts do that by analyzing an investment’s financial returns using a tool known as the “internal rate of return,” or IRR.
You can determine if solar electricity is a wise purchase for you by contrasting the IRR you may anticipate from your solar project with the rate of return from your available alternatives.
How Solar Power Systems Recover Their Investment Costs
Owners of solar panels can profit from them in two different ways:
The first is via reducing electricity costs. Kilowatt-hours (kWh) are units used to measure how much electricity is used, and a set number of kWh are required each day to operate the appliances and electronics in your home. The right solar system can almost completely eradicate your electricity costs (other than small fixed charges needed to connect to the grid).
Solar subsidies are the other way that solar panels save expenses. If you reside in the correct state, government subsidies and ongoing cash bonuses for solar energy might result in significant financial rewards.
An investment in solar can yield significantly higher returns than you could expect from stock market investments with the appropriate combination of utility bill savings and incentives.
- Savings from solar on energy costs. The solar-generated energy is first employed to run the house during daylight hours. The excess energy is then transmitted to the network if it is produced in excess of what the home requires. Most states have a net metering program that allows extra power to be used as a credit against the amount of kWh the residence uses when the sun isn’t beaming.
Each kWh of electricity is valued equally in states that utilize full-retail net metering. Solar energy surplus is credited at a reduced rate, commonly referred to as the avoided cost rate, in jurisdictions without net metering.
While residing in a region with strict net metering regulations that require full-retail net metering will yield the maximum ROI on solar panels, you’ll still experience substantial cost reductions if your state uses the averted cost rate.
- Solar rewards. Installing solar panels can still be a wise financial choice even if you reside in a jurisdiction lacking net metering if the benefits are strong enough. Additionally, incentives can dramatically increase your ROI for solar panels in states that use net metering.
The federal renewable energy tax credit is the most well-known solar benefit that all Americans can take advantage of. The federal government will pay for 30% of the expense of your solar panel installation via your taxable income. This only applies if, upon deducting all other credits, you still owe that much (or maybe more). Any leftover amount of the credit may also be carried over to succeeding tax years.
Other solar benefits comprise SRECs, productivity payments, which provide system users additional revenue for each kWh their panels generate, and discounts, which lower initial installation costs. Additionally, financial advantages are available, such as waivers from paying property taxes for the worth that solar panels provide to a home.
These benefits are typically excluded from calculating ROI for solar panels since they are more difficult to characterize than advantages derived from system size and output.
How to Calculate ROI for Solar Panels
You can calculate solar power savings after determining the ROI of solar panels. Observations regarding solar panels ROI:
- You may easily calculate ROI using current spreadsheet applications if you have a solar budget with cost and savings forecasts.
The return on investment (ROI) of solar panels can be determined by comparing the net installation cost after one-time subsidies with the anticipated reduction in utility bills and continued rewards over time. Let’s be explicit that the payback period and ROI for solar panels are two different concepts. Knowing when solar panels will pay for themselves is only half the battle.
Only half of the information is required to determine when solar panels will pay for themselves. The remaining half relates to the return on investment you can anticipate based on the typical estimated savings with solar panels over the course of your installation.
The internal rate of return, or IRR, enters the picture in this situation. IRR means the return you’d have to earn on an expenditure equal to the return you anticipate obtaining from what you are evaluating.
It can be calculated using the following formula:
Luckily, several solar panel calculators are available that can calculate your IRR without you having to apply that difficult calculation. Numerous videos online demonstrate how to employ a solar panel calculator to calculate your solar system’s IRR using the information in an installer’s estimate.
If you want to do your own arithmetic, you can calculate IRR by entering all the relevant data into a contemporary spreadsheet application.
Factors That Influence ROI for Solar Panels
The ROI of your solar system can vary depending on a number of things. Here are some major factors that have an impact on the return on your solar invested capital:
- Power consumption
Given that it is completely specific to you, this is likely the most crucial factor to consider. Because utility rates vary during the day, it is important to consider how much power you use and when you utilize it. It counts whether you’re baking, drying clothes, or cranking up the AC.
Any other family residing in your property is expected to have a completely different power bill than you because of these characteristics, which are uniquely yours.
In order to create a system that will work best for your habits over the four seasons, it is crucial that your solar installation thoroughly examine your payment history (we suggest one year). The number of panels you need to buy, the cost, and eventually, your ROI will be impacted by this.
- Utility company in your community
Once the sun sets, solar panels cease producing electricity. Batteries can be utilized to store surplus solar energy from the day to be used at nighttime. Still, even the greatest batteries available today have limits regarding some areas’ high air conditioning requirements.
Most of the time, it is more cost-effective for a user to simply use grid power at night after the sun goes down and balance the bought utility energy throughout the day with solar. Users of interconnected solar systems have different pricing options from each utility, and on-peak and off-peak hours differ too. Maximizing your solar ROI depends on designing a system to take advantage of local programs.
- Permits and license fees
For an inspection and a license for your new solar system, states and municipalities typically impose a fee. This varies depending on the area but is often less than $1000. Call a local body with charge if you want to begin the licensing process.
The AHJ is the agency in charge of approving and evaluating new solar systems in your area. One or more AHJs supervise the process. It’s common to look in:
- Your Local Fire Department
You might make a brief call to the planning office or municipal hall.
- Replacement and upkeep
Because they have so few mechanical components, solar systems require extremely little upkeep. Grid-tied systems don’t necessitate much maintenance beyond maintaining clean, debris-free panels.
When evaluating your return on investment, you should, nevertheless, allow for component replacements. Solar panels have a 25-year warranty, although they frequently last significantly longer than that (albeit at decreased output level). Since string inverters normally have a warranty of 10 to 15 years, you should anticipate replacing your inverter at least once throughout the course of ownership.
The solar panel ROI formula should take into account this replacement cost. You have two options for handling it:
- When you require a new inverter, purchase one.
- To prolong the replacement warranty to complement the life of your panels, purchase the additional inverter warranty beforehand.
Although the second choice costs a little bit more in advance, it is more economical. In either case, you should consider the cost of an inverter replacement when calculating your ROI for solar panels.
- Utility billing arrangement
Depending on where you live, the price of power might range from 9 to 22 cents per kWh in typical. Due to the requirement to operate its own electrical grid since they are cut off from the mainland, Hawaii is an outlier for 33.82 cents per kWh.
Additionally, power is typically not billed at a set rate by utilities. Most will impose higher charges during times of peak usage, and some may set different tariffs for electricity coming from the grid versus energy produced by solar panels.
The terms of your net metering agreement with your company will include a description of the billing system. The pricing plan could impact your solar panel’s return on investment.
Key Takeaway
Solar panels are a good investment, particularly if you can link to the network and lessen the expense of energy storage or if you need to supply electricity in a distant area.
DIY grid-tied systems typically pay for themselves within five years, but contractors can extend this time frame to 8 to 10 years. Since panels have a 25-year warranty, both choices are worthwhile investments.
Off-grid factors differ a little. Batteries are a considerable upfront expense that also requires replacement over the system’s lifespan. But, it enables you to purchase inexpensive rural land and generate clean energy where it is required.
The costs of the network must be compared to alternative methods of providing energy to the property. An estimated $20,000 can be spent to run electric lines to your home across a half-mile distance. Although pricey, battery storage may still be less costly than the other options.
