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  • Writer's pictureSarah Lozanova

Explaining The Solar Payback Period

Updated: May 18, 2022

Purchasing a solar system is one of the few home improvements that actually pays for itself over time due to the significant utility savings. For many potential customers, this is one of the primary reasons they invest in a home solar system. Being able to articulate the return on investment of the solar system clearly will help you close more sales.

Understanding how the solar payback period works will help your customers make an informed purchasing decision and help distinguish yourself as a solar energy expert. Earning customer trust is valuable for closing sales and creating a solid reputation as a solar energy installer.

However, it is critical to provide accurate information based on data. If you overestimate the utility savings, your customers will likely be disappointed. But having overly conservative estimates about savings make the system seem less appealing than it actually is. Let’s explore the concept of the payback period of a photovoltaic (PV) system.

What Is A Solar Payback Period?

The payback period is the amount of time it takes for solar system owners to recoup their solar investment and is usually expressed in years. The customer's financial savings from the system are factored in, such as net metering credits on utility bills, the federal solar tax credit, utility incentives, and solar renewable energy certificates (SRECs). The greater the savings and incentives, the shorter the payback period.

If a solar system has a shorter payback period, it has a higher return on investment. Conversely, systems with longer payback periods have lower returns. Often, solar companies put information about the payback period and return on investment in their proposals.

If your customers can claim the federal tax credit, this will help decrease the payback time. Likewise, customers with sunny properties and higher energy costs will have a shorter payback period.

When calculating the payback period, you will only input ongoing financial factors. So, for example, the calculations don’t consider the environmental benefits or the increase in home value.

What Is The Average Payback Period For Solar Panels?

The average residential solar power system payback is about 8.7 years, but it varies by location and property. So, the typical payback period is about 6 – 10 years.

Because the lifespan of a solar panel system is generally around 25 or more years, the system will produce “free” energy after the payback period because it has already paid for itself in the savings.

Factors That Impact Payback Period

There are many factors to consider when calculating the payback period of a solar energy system. We’ll review a few major factors here.

Solar System Cost After Incentives

This is the total upfront cost, including the solar panels, equipment, and installation costs, minus any incentives from the total cost, such as the federal tax credit, utility incentives, and state tax incentives. When calculating the payback period for commercial systems, there may be some tax incentives in addition to the investment tax credit (ITC), such as tax write-offs and possibly grant opportunities.

The cost of a roof-mounted solar system is usually a bit less than a ground-mount array. Using premium solar panels or installing battery storage will increase the cost. However, these additional costs can have some financial benefits also.

Usually, the cost per watt is a bit lower for bigger systems. Therefore, homes with greater electricity consumption that install a larger system will often have a slightly shorter payback period due to the economies of scale of a solar power system. And battery storage allows customers to have greater energy independence.

Annual Financial Benefits

You also need to factor in the utility bill savings and any SRECs (if available). This is influenced by the cost of electricity and how many kilowatt-hours of electricity the system will generate using historical weather data for the given location.

If the roof is partially shaded or the panels are not facing south, this will decrease the total solar system output. Also, the solar resource impacts the payback period. If you live in a sunnier climate, like San Diego, California, or El Paso, Texas, the system will have a shorter payback period than a cloudier one, like Seattle, Washington, if all other factors are equal.

Many solar installers anticipate that utility rates will increase over time due to rate hikes. As electricity rates increase, so do the solar savings. However, a solar system will also produce a bit less electricity over time as the solar panels degrade.

Having solar batteries impacts the payback period and typically makes it longer. Also, in areas with time-of-use rates for electricity, having batteries allows homeowners to use power from the battery when rates are highest and recharge if necessary when rates are lower. Although this isn’t usually factored in, preventing power outages with batteries can also save money, such as spoiled food in the refrigerator or greater productivity for people with home offices.

How To Calculate The Solar Panel Payback Period

There is a formula that solar industry professionals use for residential and commercial systems alike. The formula is:

Payback period in years = (Total solar system cost minus solar incentives and rebates) / annual cost savings

For example, if a solar system costs $16,000 after incentives and the homeowner saves $1,840 a year on average, the system pays for itself in the savings in 8.7 years.

$16,000/$1,840 = 8.7 years

Some solar design software will calculate the payback period for you after inputting all the required data. This can help simplify the process and promote consistency between proposals.

Solar Panel Payback Period FAQs

Because this is a pretty complex topic, let’s examine some common questions.

Does solar really pay for itself?

Solar systems pay for themselves through energy savings. Overall, households with solar panels generate enough electricity to power the entire house. This cuts down on the amount of electricity the house draws from the grid, therefore reducing energy bills.

In areas with net metering (also known as net energy billing), utility customers get credits on their bills for surplus solar electricity they supply to the grid. Plus, some solar electricity directly delivers power to household loads, bypassing the electric meter. Viewing solar monitoring data is the best way to determine the total energy savings.

If a solar system produces 100% of the power a home consumes throughout the year, the homeowner will pay only the transmission and distribution costs in areas with net metering. This is typically a flat fee that all electricity customers pay for service.

Will clients still have an electricity bill after switching to solar energy?

A solar energy system will dramatically lower monthly electric bills but not completely eliminate them. If the homeowner lives in an area with net metering and the solar panel system produces all the power the home consumes, then they will just pay a monthly flat fee for electrical service. If the solar panels generate, say 80% of the total electricity, the energy bills will theoretically be 20% of the power plus the monthly transmission and distribution charge.

Does adding battery storage impact the payback period of a solar system?

Yes, it does. Typically, adding a battery bank increases the payback period because many of the benefits aren’t calculated into the payback period formula, and batteries add significantly to the total system cost. Solar batteries are a good fit for customers looking to have backup power during grid outages and increase their energy independence.

Are electricity prices going up or staying the same?

Unfortunately, electricity rate hikes periodically increase electricity prices over time. Between 2010 and 2020, rates increased about 14% nationally. If natural gas prices go up, electricity rates are likely to follow. Thus, many solar installers assume electricity rates will increase by a certain percentage when making payback calculations.

Understanding The Solar Payback Period Is Key To Closing Sales

Many potential customers will ask how long it takes for the solar panels to pay for themselves in energy savings. Therefore, calculating and explaining the solar backpack concept is essential for solar companies to earn trust and educate potential customers.

Whether you calculate it using a formula or solar design software, it is essential to find an accurate method that works for your business. Some solar installation companies create spreadsheets with formulas, and then they input different variables, such as solar system cost after incentives and energy bill savings.

Another essential solar business skill is generating quality leads, so check out our blog article on this topic.

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