How Long Does It Take For Solar Panels To Pay For Themselves?

Solar panels are expensive, but they can pay for themselves in a few years. Juan Silva/Getty Images

So, are you thinking of buying solar panels? Perhaps, like many Americans, you want to help protect the environment by providing your home with an alternative power source when the power grid goes out.

“Solar is what's next in terms of how we start powering our homes, how we come together as a community to meet the energy needs of our community,” said Jamie Hangi, president of ADT Solar.

But installing solar panels is also a major financial decision. Before you hire a crew to install solar panels on your roof, you need to find out when and if the panels will start paying for themselves by saving on utility bills.

Here's your guide to how long it will take to start saving money with solar panels.

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What is the payback period of solar panels?

Solar Payback is a fancy way of talking about how long it takes for money spent to exceed money saved (or earned) in energy costs.

It's a key number, usually a matter of several years, that tells you how long you'll have to wait to see a real return on your investment. Solar panel payback times can vary greatly and also largely depend on how you pay for the system.

"There are many factors that come into play for any particular household or family," said Becca Jones-Albertus, director of the US Department of Energy's Office of Solar Energy Technologies.

ADT Solar's Hanggi says the average payback period in the US is six to 12 years, with most homes hovering close to the latter. Like Jones-Albertus, he has emphasized that he is a moving target.

"People don't want to say, 'Okay, here's the comeback,' because the energy market has been so volatile," Hangi said.

Factors Affecting the Payback Period of Your Solar Collector

No two solar systems are identical, which means that no two solar return periods are the same. "It seems like an easy answer, but it's more complicated," Hangi said.

Estimating your possible due date will depend on many variables.

The total cost of the solar system.

The more you pay for your system, the longer it will take to recoup costs. Solar systems can cost anywhere from a few thousand dollars to tens of thousands, depending on where you live, your electricity needs, and the type of system you choose to install. Naturally, the higher the price, the longer the payback period.

Tax benefits and exemptions

Once you know the total cost of your solar system, you should also consider any state or federal rebates you may be eligible for. For example, a federal green energy home loan pays you 30%. Your state may also have additional incentives. These loans can reduce a significant portion of the amount you pay for solar panels by shortening the payment term.

Energy consumption in your home

Sometimes a rooftop solar system can cover all of your electricity needs, bringing your bills down to $0, and sometimes it only covers a portion. If you use a lot of electricity, going solar can lead to a small reduction in electricity costs, which means that the return on investment may take longer.

Power generation for your photovoltaic system

You've probably never given much thought to your roof, but it has a huge impact on the return on your solar investment. If you have room on the roof for more panels that are exposed to the sun all day, you will generate tons of electricity and pay for yourself faster. But if you live in a shady area and panel production is more intermittent, you won't see a return as quickly.

Cost of electricity and growth rate

This is a huge but sometimes overlooked factor in the solar return period. Basically, the higher the electricity rates where you live, the more profitable solar power can be for you. This is because when utility rates increase, you save more by relying on your solar panels instead of getting electricity from the grid.

How to calculate the payback period of solar energy

If you want to get a rough idea of the potential payback period for solar power, this is one way to do it. Remember, you should check with the experts (read: solar panel installers) to make sure you have the accurate numbers. But this can help you get an idea.

Start with the total cost of installing solar on your home. (Be sure to factor in interest and fees if you apply for a loan.)
Then subtract the value of any deductions, incentives or tax credits.
You now have the equity in your solar system after deductions.
Calculate the annual savings on your energy costs with solar panels. (Again, this is where your solar installer or utility provider can help.)
Divide the net cost of the system by the annual cost savings.
The number you get is the number of years it will take for your panels to "pay for themselves".

Here's another look at the formula. (Total Solar System Costs - Discounts) / Annual Energy Cost Savings = Payback Period in years.

In practice, it might look like this: Let's say the total cost of your home system is $25,000. You know you are eligible for a $10,000 incentive, so your net worth is now $15,000. You also know that the panels can save you about $1,500 a year in energy costs. So $15,000 divided by $1,500 is 10. That means your solar power has a payback period of 10 years.

Solar panels and electric car charging can be a useful combination. Simon Scafar/Getty Images

Why is it important to know the expiration date?

You already have your solar maturity. But how does that affect your decision?

"It depends on what drives the family to make the decision to [install] solar," Jones-Albertus said. Maybe you just want to help the environment and not worry about the costs. But "people are interested in both sustainability and the economy," he said.

If you are interested in the financial aspect, the payback period is an important number in your decision. Hangi says the payback period is about 10 years, pretty average, and it could end up being a solid investment.

But again, it depends on your goals and comfort level. For example, if you plan to move or sell your home in the near future, this changes the calculation. You may not be in your home to see the return on energy savings, but you can see the return in the form of a higher sales price for your home.

"This system on your roof really adds value to real estate," Jones-Albertus said.

There are some scenarios, Jones-Albertus and Henggi agree, in which installing solar probably doesn't make sense, regardless of the payback period. If you know your roof is about to be replaced, you'll definitely want to wait until it's finished before installing solar panels on it. And if you have a lot of trees looming over your house, a solar system is unlikely to make a significant profit. in this case, Jones-Albertus recommends considering community solar.

How to pay for solar panels?

There are many different ways to pay for solar panels, and they all affect the payback period for solar panels.

Cash. By simply saving on the purchase (for example, by using a high-yield savings account), you'll avoid paying interest on the loan and reduce the overall cost of solar panels. "In the long run, a cash-based system tends to be more profitable," Jones-Albertus said.
Solar loans. some banks offer loans specifically designed to finance solar installations. Contact your installer or lender to see what options are available.
A secured home loan or line of credit, also known as a HELOC. In general, using equity to finance home improvements can be a good idea, especially since solar panels will increase the value of your home.
Electricity rental or purchase contract. If you want to minimize your initial solar investment, you can rent the system from an installer. The developer will own the panels and sell you the electricity produced at a discount, which essentially negates the "payback period" concept altogether.