Several factors can increase or decrease your solar panel payback period, including your total system costs, solar incentives, and average electricity costs and usage. We’ll examine each factor and its impact on solar payback periods.
Total System Cost
Your total solar system cost depends on the following factors:
- Equipment costs: Your total system cost includes the panels, additional equipment, racking system for rooftop mounting, wiring, and any add-on accessories, such as electric vehicle (EV) chargers and solar batteries.
- Financing options: Cash payments require the most up-front investment but yield the best ROI. Solar loans allow less of an initial investment, but will increase your total cost due to interest rates over time. Both of these solar financing options qualify you for solar incentives, credits, and rebates, which help lower installation costs. Selecting a solar lease or power purchase agreement (PPA) means you won’t own your system and thus won’t have a payback period.
- Solar installation company: Pricing between solar installers varies based on the equipment and services offered, as well as local market pricing.
- System size: According to the U.S. Energy Information Administration (EIA), the average household consumed 10,884 kilowatt-hours (kWh) of electricity annually in 2022. This equates to about a 9-kilowatt solar system. A larger system increases installation costs and vice versa. You’ll need to ensure you buy a system large enough to adequately power your home, so choosing a smaller system to try to cut costs isn’t an option.
Solar Incentives and Tax Credits
Homeowners may benefit from solar discounts and ongoing financial benefits, depending on the availability of these incentives in their area.
Up-Front Credits and Debits
Take advantage of any solar incentives, rebates, and credits offered by the federal government or state. For example, the federal solar tax credit provides a tax credit equal to 30% of your installation costs on your owed federal taxes. Reducing your initial investment costs will improve your solar payback period and ROI.
Some states offer tax credits to reduce your state tax liability. They may also offer sales and property tax exemptions. Property tax exemptions allow you to benefit from solar panels’ added home value without added taxation. Check your utility company for additional solar rebates or credits.
Annual Financial Incentives
Depending on your area, you could benefit from solar renewable energy certificates (SRECs). You earn one SREC for every megawatt-hour (Mwh) or 1,000 kWh of solar electricity your solar system generates. You can sell these tradable certificates on local markets for cash back. However, pricing fluctuates based on supply and demand and varies by state. Prices will drop significantly if your local SREC market has a higher supply than demand.
Net-metering programs allow homeowners to sell extra energy to the grid system. These credits can be applied to future electric bills and may result in an end-of-year payout for unused credits. Net-metering payouts differ between programs and states but offer ongoing energy bill savings for homeowners.
Check the Database of State Incentives for Renewables and Efficiency (DSIRE) for all available financial incentives in your area.
Average Monthly Electricity Costs and Use
Your average electricity costs determine your long-term energy savings, which impacts your payback period. The higher the electricity rate, the better the solar savings and ROI. According to the EIA, the average cost of electricity was 15.47 cents per kWh in January 2023. Homeowners with electricity rates above this average will see better savings when they convert to solar energy. Homeowners in areas with lower electricity prices will see less savings and a longer payback period.