What Is the Average Solar Panel Payback Period? (2023 Guide)

Converting to solar power is a big investment, and most homeowners want to know how long it will take to recoup their money. This time frame, known as the solar panel payback period, averages between six and 10 years for most residential solar installations.

Payback periods vary based on several factors, such as your selected financing option and available solar incentives. We at the This Old House Reviews Team detail these factors and offer guidance on how top solar companies calculate their panels’ break-even point.

The average solar panel payback period is between six and 10 years. High-quality residential solar panels last 25 years or longer, and the Department of Energy (DOE) says some can last 35 years or longer. This means homeowners can enjoy 15–29 years of energy savings after recovering their initial solar investment.

Calculating your solar payback period can be complicated, but you can start with this simple formula: 

• System costs (minus financial incentives) divided by annual electricity savings = solar panel payback period

For example, if you spend $18,000 on a solar panel system and save $2,100 on electricity bills annually, your estimated solar payback period is 8.5 years ($18,000 / $2,100 = 8.57 rounded up). After recouping your up-front costs, you’ll have 16.4 years of “free” clean energy through the length of your panels’ warranty. 

Although the average payback period is up to 10 years, several factors can extend this time frame. For example, investing in a larger solar system or choosing a long-term loan with interest will raise your overall costs, lowering your return on investment (ROI). On the other hand, opting for high-efficiency solar panels will increase your energy savings, decreasing your payback time and raising your ROI. 

Most professional solar companies include your estimated payback period when you receive a quote. Along with the cost of your system, you’ll see the impact your system size, local rebates and incentives, and financing options have on your ROI. Request quotes from at least three solar installers and compare their estimates to get the best payback period.

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.

Your solar system’s energy production impacts your long-term savings. While most homeowners believe solar systems will cover 100% of their energy needs, this is often untrue. Some systems are designed to offset your energy costs, reducing your dependence on utility companies but not eliminating it. You can invest in a larger system to go off-grid, but you’ll need a sizable system and multiple solar batteries, which will significantly increase your total cost. 

Top-performing solar systems often produce more energy than needed. If you don’t have a net-metering program in your area, consider investing in solar battery storage instead. Batteries store extra energy for later use when solar panels are inoperable or during a power outage. If your utility company uses time-of-use (TOU) rates, you can tap into stored energy to offset periods of higher electricity rates. 

Keep in mind that solar panels degrade over time. According to the National Renewable Energy Laboratory (NREL), the average solar panel degradation rate is 0.5% per year. For example, 20-year-old panels will drop to 90% of their original output over time. This affects both power output and efficiency. Although your panels will continue to perform, their peak performance level eventually diminishes. 

Depending on the type of solar panels you choose, you could have 25-year-old panels with an efficiency rate of 80% but still generate enough energy to meet and exceed your solar payback period. Higher-quality solar panels have better power production and efficiency, so their gradual decline will be less impactful. Choosing cheap solar panels will lower production rates over time, reducing energy savings. 

Finally, your local climate impacts your system’s performance and potential energy savings. An area with abundant sunlight year-round is ideal for solar panels, maximizing energy production. Areas prone to inclement weather or cloudy days will still benefit from solar energy, but total energy savings will be lower. 

Your solar provider will offer a more accurate solar payback period with your quote. Here’s a breakdown of the steps used to estimate your payback period so you have an idea of what to expect.

1. Determine your overall system costs: This estimate will include the up-front costs for your system and any accessories and add-ons, such as solar batteries.
2. Subtract additional solar incentive savings: Consider the federal solar tax credit, local tax credits, and rebates that reduce your up-front cost. Ongoing benefits such as net-metering and SRECS vary based on program length and market pricing, so it’s best to stick to up-front discounts for this calculation.
3. Factor in any added costs from your financing option: Up-front cash payments don’t include any additional expenses. With a solar loan, you should consider the loan length and associated interest rates to determine the total system cost.
4. Estimate your average electricity use and costs per year: Homeowners in areas with higher electricity rates will get better savings from converting to solar energy. Most systems offset but don’t totally eliminate utility costs, helping to reduce your grid dependency. You may still need to make payments for grid-tied electricity, but your bill will be much lower. Additionally, utility rates often increase each year. Consider these increases in your calculations based on past statements or check with your utility company for estimated price hikes.
5. Apply the formula to determine your payback period: Divide your system cost (with financial incentives subtracted) by your annual electricity savings. The result is your solar investment’s estimated payback period or break-even point.

Determining your solar payback period provides a clear picture of the amount of time it will take to recoup your investment costs. Several factors contribute to this calculation, such as system costs, current electricity rates, and financial incentives. Additional considerations such as local climate, panel degradation, and ongoing financial incentives may also affect the time frame. 

Solar installers will provide detailed quotes that include your estimated payback period. We recommend requesting quotes from at least three companies to compare system costs, financial terms, and payback periods to find the best option. Use our tool below to get started.

To share feedback or ask a question about this article, send a note to our Reviews Team at reviews@thisoldhousereviews.com.