How Much Money Can Solar Panels Save Homeowners? (2023)

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How Much Money Can Solar Panels Save Homeowners? (2023)
How much do solar panels cost?

According to our research and analysis of national price data, the average cost of residential solar power generation is $2.85 per watt, or $2,850 per kilowatt. The following table shows the estimated costs for a 5kW to 10kW solar panel system at a net cost after deducting the federal solar tax of 30%.

Many cities and states implement solar incentives that go beyond the federal solar tax credit. For example, many states offer sales tax exemptions for solar installations. In this case, the cost of your solar system may be lower than we estimate.

We surveyed 2,000 homeowners who installed 8 kW solar power systems to find out typical prices from major solar companies. The following table summarizes the results.

*Tesla pricing information was obtained using the company's online solar power quote tool. In SunPower's case, we received the information from a sales representative. The price ranges of all other companies are based on our survey data. Prices shown reflect total prices before 30% federal tax and other incentives.

Which solar tax credits can you take advantage of?

There are various solar incentives and benefits you can take advantage of to reduce your panel costs. In the United States, solar panel systems qualify for a 30% federal tax credit, officially called the Investment Tax Credit (ITC). Depending on your location, you may qualify for additional solar tax credits or incentives from the state government.

Federal Solar Energy Tax Credit

The federal solar credit gives you 30% of the cost of your solar project as a tax deduction for the year you install the panels. In other words, the ITC provides a $300 tax credit for every $1,000 spent on solar panels, battery systems and other renewable energy technologies. So, if you spend $30,000 on a 10kW solar power system, the federal tax credit is equivalent to a $9,000 tax credit.

Remember that ITC is a tax deduction and not a refund or reimbursement. If your tax burden in one year is not enough to get relief, you can carry over the unused difference to the next year. If you pay for your panels through a solar lease agreement, or PPA, you cannot claim the federal tax credit.

Thanks to the depreciation law, the solar tax deduction increases from 26% to 30% in 2022. The law extends the benefit, which was scheduled to expire in 2024, through 2034.

State and local incentives

Depending on your location, you may qualify for additional Sunrise incentives, which can be combined with federal tax credits for even greater savings. Many state governments have introduced local tax incentives for solar energy installations, such as:

  • Sales tax exemption: By purchasing a solar system, you are exempt from local sales tax.
  • Property Tax Exemption: If installing solar panels increases the value of your home, you are exempt from paying higher property taxes. For example, if you renovate a $300,000 home with a $25,000 solar system, property taxes would be calculated at $300,000 (not $325,000).
  • State Tax Credits: Some states offer local tax credits for solar energy systems that are similar to the federal tax credit. After solar power, you can deduct some of the project costs from your local taxes.

Some states offer tax-free solar incentives. For example, a state may offer a cash rebate that lowers upfront costs, or a net metering policy that allows you to sell utility bill credits to your local utility.

State Incentives for Renewable Energy and Efficiency (DSIRE) is a useful resource that allows you to filter incentive programs by state and technology. DSIRE covers not only solar energy, but also other renewable energy and energy efficiency projects. You can also ask your solar installer to help you find and apply for available incentive programs.

How much do solar panels save?

Your energy savings with solar panels depend on three main factors.

  • Local solar energy: In sunny states like California, Arizona, or Florida, solar panels produce more electricity, so residents can meet their energy needs with smaller panels. The panels can still produce enough electricity to power your home in cloudy states like Washington or New York, but you can invest in a backup battery that you can rely on even in less-than-ideal conditions.
  • Local Electricity Rates: Electricity rates in your area determine how much you can save by using solar energy. For example, if you pay 15 cents per kWh for energy use and your panels produce 1,000 kWh per month, you can save $150 on your electric bill.
  • Net Metering: Net metering programs allow you to export the additional solar energy produced by your panels to the grid to receive a credit on your electric bill. Without net metering, unused solar energy will be wasted unless you store it in your home batteries.

You can use the World Bank's Global Solar Atlas to estimate the annual energy production of your solar panels. Once you know this value, you can estimate your savings based on local electricity rates. Here's a short example:

  1. Open Global Sun Atlas and find your location. You can click on an actual location or enter your address to see local solar power resources.
  2. Atlas shows the table. Look for a value called “Specific Photovoltaic Output” or “PVOUT”.
  3. If the PVOUT value is 1,500 kWh/kWp, then the annual production for 1 kW of installed solar energy is 1,500 kWh. Multiply the PVOUT value by the solar system's kilowatt output. In this example, the 5 kW system produces 7,500 kW per year.
  4. Find the average cost of electricity in your state using the US Energy Information Administration (EIA) database . Then multiply that number by the total from Step 3. So, if someone paid 20 cents per hour, producing 7,500 kilowatt-hours of solar energy would save up to $1,500 per year.

The efficiency of solar panels decreases over time, meaning their output decreases slightly each year. However, the annual degradation rate of high-quality solar panels is less than 0.5% . But with electricity prices rising – the EIA reports a 9% increase between December 2021 and December 2022 – you can save energy even if your panels are slightly more efficient than last year. For example, a solar-powered home system that saves $1,500 on electricity costs could save more than $40,000 over 30 years.

How long does the payback period for solar panels take?

According to our solar power cost study, you will pay $17,100 for a 6kW solar home system. You can also claim a federal tax credit of 30% of the total cost of the solar project, resulting in an incentive of $5,130. After deducting tax credits, the net cost of the 6 kW solar system in our example is $11,970.

In regions with ideal solar radiation, a 6 kW solar system can produce 8,000 to 10,000 kWh per year. With an electricity rate of 16 cents per kilowatt, the estimated annual electricity bill savings is $1,280 to $1,600. Assuming an initial cost of $11,970 after incentives, the payback period is between 7.5 and 9.4 years.

However, if you live in a state with local solar incentives, you may be able to get a shorter payback period. In areas with high electricity prices, the payback period may be shorter because each kilowatt-hour of electricity produced by solar panels represents a greater savings on your electricity bill.

How to calculate home time

You can use the PVWatts calculator developed by the National Renewable Energy Laboratory (NREL) to estimate the energy savings from solar panels in your area. Enter your location and basic information about your solar system and the calculator estimates electricity production in kilowatt-hours per year. To estimate your dollar savings, multiply this value by the price you currently pay for electricity.

Our solar panel price guide lists typical installation prices by state. You can divide these costs by the estimated electricity savings to calculate the payback period.

Finally

Solar home systems may require high installation costs, but the long-term savings are much greater, especially if you install high-quality solar panels. Even in sunny areas, solar power systems offer a good return on investment for homeowners looking to offset high electricity costs.

When evaluating the savings potential of solar panels, the prices of solar power and local electricity are the same. Example:

  • For homeowners who typically pay 16 cents per kilowatt for electricity, a 10,000 kWh solar power system saves $1,600 per year.
  • However, a system of the same size producing 8,000 kilowatt-hours per year could save $1,600 if electricity rates were increased due to fewer solar panels, say 20 cents per kWh.

In addition to potential savings, you should also consider local solar incentive programs such as the Federal Solar Tax Credit. These incentives reduce your costs, shorten the panel's payback period, and increase your savings over time.

In addition to cost savings, solar panels also reduce your home's carbon footprint by producing environmentally friendly energy and reducing your dependence on the electrical grid. This is extraordinary considering that America still generates 60% of its electricity from fossil fuels .

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