How Quickly Does Solar Pay for Itself?

Introduction

Solar panels are an increasingly accessible and cost-effective way for people to use renewable energy sources for their home electricity needs. Solar panels capture the energy from sunlight and convert it into direct current (DC) electricity. This DC electricity is then converted into alternating current (AC) and fed into a home or business’s power grid. Solar energy is clean and renewable, making it a popular choice for those who want to reduce their environmental impact. Additionally, solar energy has the potential to save homeowners money in the long run through reduced or eliminated utility bills and often pays for itself in nine to twelve years.

Overview of How Quickly Solar Panels Pay for Themselves

Solar panels generally pay for themselves within nine to twelve years. This is because the cost of installing the solar panel system is usually lower than the amount an average home would save in electric bills over the same period of time.
For example, according to the Solar Energy Industries Association (SEIA), the average residential solar panel system in the U.S. cost around $18,000 in 2020. This cost will vary based on the size of the system, the average cost of electricity in the area and the amount of sunlight the area receives. According to the same report from the SEIA, the average solar system offers a lifetime savings of more than $44,000.

Savings from Lower or Eliminated Utility Bills

Solar panels lower or eliminate the cost of electric utility bills. The amount of money saved will depend on the size of the solar panel system, the amount of sunlight the system receives, the local cost of electricity, and other factors.

One factor to consider is that utility rates can increase over time. This means that the amount of money saved by using solar energy instead of traditional electricity sources goes up as well. For example, a home with a solar system installed in 2020 may have saved $44,000 over its lifetime, but the same system installed in 2021 may have saved $48,000 over the same time period due to a rise in utility rates.

Net Metering

In some states, homes with solar energy systems are eligible for a process called net metering. This is when a utility company pays homeowners for electricity generated by their solar energy system that is sent into the utility grid. In some cases, utilities will pay the same rate as they charge customers for electricity they receive from the utility grid. In other cases, utilities may pay a lower rate.

Calculating the Break Even Point

The break even point for a solar energy system is the point at which it would no longer be beneficial to use solar energy and instead switch back to a traditional electricity source. The break even point can be calculated by dividing the total cost of the solar energy system by the total savings over time.

For example, if a solar panel system costs $20,000 and provides a total savings of $44,000 over its lifetime, the break even point would be achieved within 4.5 years (20,000 divided by 44,000). In this case, it would be more financially beneficial to keep the system running for more than 4.5 years. After 4.5 years, the customer would have already earned back their initial investment and would start benefitting from further savings as the system continues to generate electricity.

The Effect of Solar Incentives

Solar incentives, such as tax credits, can greatly reduce the time it takes to pay for solar panels. Tax credits and other incentives vary by state and are usually calculated based on the total cost of the system and the amount of electricity generated by the solar panel system.

For example, in some states, homeowners are eligible for a one-time tax credit equal to 25% of the cost of the solar energy system. This means that a $20,000 solar energy system would qualify for a $5,000 tax credit, reducing the total cost to $15,000. In this case, the break even point would be reduced to 3.4 years (15,000 divided by 44,000).

Example

Joe and his family live in a suburban area of a large city that receives a lot of sunlight per year. The average cost of electricity in the area is $0.14 per kilowatt-hour and the average home consumes about 10,000 kilowatt-hours of electricity per year. Joe and his family decide to invest in a solar panel system with an initial cost of $20,000.

After installing the system, Joe’s family is able to reduce their electric utility bill by $900 per year, which is the equivalent of 10,000 kilowatt-hours of electricity at $0.09 per kilowatt-hour (the price of net metered electricity in the area). In addition to the savings on their utility bill, Joe’s family is also eligible for a one-time 25% tax credit, reducing their total cost to $15,000.

Joe’s family is able to pay off their solar energy system in 3.4 years (15,000 divided by 44,000). In total, Joe and his family are able to save $25,800 on their utility bills over the lifetime of the system, in addition to the money saved from the one-time tax credit.

Conclusion

In conclusion, solar energy is becoming increasingly accessible and cost effective for homes and businesses, and is a powerful way to reduce consumption of traditional electricity sources. Solar panels can typically pay for themselves in nine to twelve years, but the time frame may be reduced through the use of available solar incentives and net metering programs. Examples such as Joe and his family demonstrate how solar energy can save money and reduce utility bills significantly in just a few years.