What Is A Solar Panel Payback Period? The 6 factors
This is how long it takes to get your investment back from installing a solar panel system for your home. When calculating solar panel payback period you consider 6 factors.
- How much you spend on electricity annually
- Your solar panel set-up costs
- Cost of a solar loan
- The Federal Tax Break and state incentives you received
- Your estimated Net Meterage and SRECs earnings
- Your annual savings
Essentially, it’s the time it takes for the savings on your utility bill to pay the installation costs.
Something to remember is that during the year when your electricity costs are low, then the savings you make will also be low, which will affect the payback time.
To quickly work this out, we have created a Payback calculator for you.
If you want to get a thorough background into solar panel paybacks and go into it in more detail, then this article is for you as we are going to look at the solar panel payback period in full.
Average Solar Panel Payback Times For US Homes In 2021
Before we dive into the solar panel payback formula let’s look at some averages.
The US Department Of Energy estimates that the average payback time is 4 years. This study was based simply on the efficiency of the solar panels.
However, in reality it depends on your state, the incentives you have received, plus the average cost of your electricity bill from your utility company. This means it could range from 8 to 12 years,
The key thing to always consider is that your investment needs to be seen over the lifetime of the solar panel system you put in place, which is on average about 20-plus years.
Solar Incentives, SRECs, RECs, Net Metres And The Federal Tax Credit
When setting up a solar panel system you are entitled to incentives to offset the installation costs and to then provide a monthly income to go towards paying your electricity bill. Any surplus can then be sold back to the electricity company if your state allows it.
It’s essential to have these figures when you come to calculate your solar panel payback time.
The main incentives include:
Solar Renewable Energy Certificates [SREC’s] are an incentive scheme set up by certain states that allows a homeowner who generates their own solar electricity to sell some of the solar electricity they have generated back to the state’s energy providers. On average, you can you can earn one SREC for every 1,000 kilowatt hours (kWhs) your solar panels produce.
These are Renewable Energy Certificates. Similar to SREC’s they are certificates that can be issued if you generate electricity from any renewable energy source, such as wind or hydro electric.
Net metering is an electricity billing process for people who generate all or part of their own electricity. It works by selling electricity that isn’t used back to the utility company.
The Federal Tax Credit
This is has now been phased out. However, each state may have their own incentive schemes. There is also talk that it may be re-instated.
To look at incentives that are specific to your state then check out our Stae Incentive Calculator
The Solar Panel Payback Formula: The 6 Critical Factors
Now that you know what the solar payback averages are in relation to the lifetime of your system and the main incentives that offset your costs, let’s look at the factors within the solar payback formula in more detail.
Establish How Much You Spend On Electricity
The first part of the formula is to calculate how much you spend on electricity. To work out the total amount of electricity your solar panels need to generate is relatively straightforward.
You simply check your utility bill to find out your electricity use per month and that’s the kilowatt goal your solar panel system needs to generate.
Also, when working out the average, consider how much you use throughout the year as electricity consumption is seasonal.
Calculate Your Solar Panel Set-Up Costs
Now that you know how much electricity you need to produce on average per month you can estimate how many solar panels you need.
On average, for every square foot of roof you can generate about 15 watts of energy. A Photovoltaic (PV) solar panels have a wattage from 150 watts to 370 watts per panel.
To work out how many panels you need:
- Multiply your hourly energy consumption
- With the average daylight hours (based on the area you live in)
- Divide this by the solar panels wattage and you have the number
To make it easier, we have created this solar panel calculator for you at the bottom of the page.
Cost Of A Solar Loan
If you have borrowed money as a loan to pay for your solar panel system, then the costs for this need to be factored into the solar panel payback formula.
Often, the repayment aspect per month is offset by the savings you gain. However, that can change given the season. Also, the payment of the capital will make the overall solar panel payback breakeven longer.
Add the total cost of the loan to the set-up costs.
Subtract Federal Tax Break And State Incentives
Even though the Federal Tax Break has been shelved some states offer their own incentives. If you are lucky enough to have received any then this is deducted from the overall cost of the installation.
Estimate Your Net Meterage And SRECs
In Step #1, you determined your electricity consumption. Any excess electricity left over once you have used it for your personal use is where you earn income from SRECs and Net Meterage. It’s now time to estimate how much income you’ll earn from your surplus.
Determine Your Annual Savings
You now deduct the income that you have earned from your electricity bill and average it out to give your total annual savings.
Calculating Your Solar Panel Payback Period Divide Your Net Set-up Costs By Your Annual Savings
Here’s a sample ROI calculation for a typical solar panel payback period. To work out your breakeven time you need the:
- Total Costs: Installation set up cost + total solar loan costs – minus Installation incentives. E.g.
- $18 000 installation costs
- Add $3000 loan costs
- Equals $21000
- Set up incentives received $10000
- Subtract incentive fee from installation and loan cost
- Total Costs = $11000
- Total Savings: You now take the estimate of the annual savings per year and divide that by the total costs. E.g.
- You have produced $2000 of electricity
- You use $1000 for your own needs
- You sell back to the electricity company through a SREC $1000
- Solar Panel Payback Period Equals:
- Total costs $11000
- Divided by the breakeven saving $2000 per annum
- Equals 5.5 years to breakeven
- Everything you generate after that pays for both your electricity and gives you an annual income
For help with this, check out our FREE solar savings calculator and compare energy brokers and solar panel engineers at the bottom of the page.