The Solar Payback Period Explained

The solar payback period is an important calculation for most people in deciding to go solar at home. This is basically a math problem where you figure out how many years of savings on your electricity bill you’ll need before you’ve recouped your upfront costs of installing a residential rooftop solar array.

Sure, solar panels produce electricity and can lower your monthly energy bills, but is it really worth it if you haven’t saved the cost of the panels by the end of their lifespan? For some, maybe, because financial savings aren’t the only drivers for installing home solar. After all, the benefits of going solar include cleaner air for everyone, fewer carbon emissions, less reliance on the overburdened electric grid, and a lower overall environmental footprint.

If the payback period is important to you though, here’s how to estimate when you’ll have paid off your panels. AKA, your break-even point for a solar installation.

Calculating your solar payback period

Let’s start by looking at the cost for an average home solar array. According to figures from the National Renewable Energy Laboratory (NREL), the median cost of a residential PV system with a capacity of 2.5 to 10 kW in Arizona, California, Connecticut, Massachusetts, and New York was $3.90/W in 2021.

Let’s assume your residential rooftop array has a typical number of panels (16 to 18) and a capacity of 6 kW. This would just meet most households’ monthly electricity needs of around 900 kWh (893 kWh according to the EIA). Your estimated total for home solar installation, then, is as follows:

Cost of average home solar installation: $3.90 x 1,000 (to convert Watts to kW) x 6 = $23,400. 

We’ll run these figures again below for a bigger array. For now, though, we need to get an estimate of cost savings when you’re producing your own solar power at home. This means we need to know how much you currently spend on electricity. You can get this figure from your utility bill. Look for something that says cents per kilowatt-hour or, for example, $0.24/kWh.

For our purposes, let’s go with the average cost of electricity in the U.S. for 2021: 13.83 cents per kilowatt-hour. With that figure in hand, our average household’s monthly electricity bill would be:

• Monthly electric bill: 893 kWh x $0.1383 = $123.50 per month
• Annual electric bill: $123.50 x 12 = $1,482

Assuming your array meets all your electricity needs and there are no other costs or deductions, your payback period or break-even point would be:

Payback period: $23,400 / $1,482 = 15.789 years (about 15 years and 9 months)

Considering the life of most solar panels can be somewhere between 25 and 30 years, even this very conservative estimate would mean you break even with another decade or more of free electricity. Not bad!

Not so fast, though. The calculation gets more complicated, but with a great outcome if you’re keen to go solar. Why? Because we haven’t factored in any federal or state incentives.

How tax credits help reduce your solar payback period 

Right off the bat, the federal government cuts the cost of your home solar installation by 30% with its solar investment tax credit (ITC). Your state might also offer incentives, as might your city and utility provider, further reducing upfront costs. After that, you may be able to access annual incentives such as solar renewable energy certificates (SRECs) that give you a per kWh credit for the electricity your panels produce. 

So, here’s our calculation again, with some estimated cost savings:

• Estimated cost of solar installation: $3.90 x 1,000 x 6 = $23,400
• ITC = 30% of $23,400 = $7,020
• Estimated state and local rebates = $1,000

Total combined upfront costs = $15,380

• Annual cost of electricity: 893 kWh x $0.1383 x 12 = $1,482
• Estimated annual SRECs = $500

Total annual costs saved = $1,982

Payback period = $15,380/$1,982 = 7.76 years (7 years and 9 months)

Thanks to those solar tax credits and rebates, our example home solar installation will be paid back in around half the time!

This is just one example, though. If you live somewhere with generous solar rebates and a higher cost of electricity, this payback period could be even shorter. SREC prices also vary significantly from state to state. As of May 2022, for example, the price of SRECs in Ohio were just $5.75 versus $392 in Washington D.C. This means your payback period in D.C. could be the same or lower than in Ohio, even if the cost of installation is initially higher.

Let’s imagine a few other scenarios and how they would affect your payback period. 

Payback period for a bigger home solar array

First, let’s look at the payback period for a bigger array sized at 12 kW. These larger systems are actually slightly cheaper to install per Watt ($3.38/W according to the NREL). This time, let’s also assume a bigger family with higher average energy costs. Our numbers, then, are as follows:

• Estimated cost of solar installation: $3.38 x 1,000 x 12 = $40,560 
• ITC = 30% of $40,560 = $12,168
• Estimated state and local rebates = $1,500

Total combined upfront costs = $26,892

• Annual cost of electricity: 1,500 kWh x $0.1383 x 12 = $2,489.40
• Estimated annual SRECs = $1,000

Total annual costs saved = $3,489.40

Payback period = $26,892/$3,489.40 = 7.7 years (8 years and 8 months)

That’s right. Even with a rooftop solar system twice the size, the payback period is pretty much the same. In fact, many calculators put the average payback period for home solar at around 8-9 years. 

Here’s another real-world example, this time from Arizona – the sunniest state in the U.S.!

• Estimated cost of solar installation: $3.38 x 1,000 x 12 = $40,560 
• ITC = 30 of $40,560 = $12,168
• State income tax credit for year of installation: $1,000
• State Solar Equipment Sales Tax Exemption: 5.6% of $40,560 = $2,271.36
• Estimated state and local rebates = $1,500

Total combined upfront costs = $23,620.64

• Annual cost of electricity: 1,500 kWh x $0.1269 x 12 = $2284.20
• Estimated annual SRECs = $1,000

Total annual costs saved = $3,284.20

Payback period = $23,620.64/$3,284.20 = 7.19 years (7 years and 2 months)

Payback period where the cost of electricity is higher

If you’re considering solar because your electricity costs are sky-high, I’ve got great news for you. In almost all cases, your payback period will be much shorter. Here are the numbers, assuming an average installation and the same estimated tax credits and rebates as in our first example, but with electricity costs twice the national average (i.e., 27 cents per kWh):

• Estimated cost of solar installation: $3.90 x 1,000 x 6 = $23,400
• ITC = 30% of $23,400 = $7,020
• Estimated state and local rebates = $1,000

Total combined upfront costs = $15,380

• Annual cost of electricity: 893 kWh x $0.27 x 12 = $2,893.32
• Estimated annual SRECs = $500

Total annual costs saved = $3,393.32

Payback period = $15,380/$3,393.32 = 4.53 years (4 years and 9 months)

Heck, yeah. This is my kind of math. In this scenario, your panels have paid for themselves in cost savings in less than five years. After that, you have another 20-25 years of free electricity. In fact, depending on where you live and the availability of energy credits and net metering, you might even start making money from your home solar system.

Live in Honolulu, Hawaii? With the average cost of electricity at over 38 cents per kWh, a plentiful supply of sunshine, a generous 35% state tax credit (up to $5,000), and a property tax increase exemption for 25 years, your payback period could be very fast indeed:

• Estimated cost of solar installation: $3.90 x 1,000 x 6 = $23,400
• ITC = 30% of $23,400 = $7,020
• Estimated state and local rebates = $5,000 (plus a carryover tax credit of $3,190)

Total combined upfront costs = $8,190

• Annual cost of electricity: 893 kWh x $0.3815 x 12 = $4,088.15
• Estimated annual SRECs = $500
• Estimated annual property tax savings: $100

Total annual costs saved = $4,688.15

Payback period = $8,190/$4,688.15 = 1.75 years (1 years and 9 months)

That’s right. If you live in Honolulu, you could pay back the cost of installing home solar in less than two years.

Payback period where the cost of electricity is lower

What about if your cost of electricity is lower, though, and you use less of it too? Even then, your payback period is almost certainly going to be less than half the expected lifespan of your solar panels, meaning you do, eventually, save money after recouping your costs. Need some figures to make sense of it? Let’s run an example for a frugal family in North Dakota, the cheaper place for energy in the U.S. in 2021.

• Estimated cost of solar installation: $3.90 x 1,000 x 6 = $23,400
• ITC = 30% of $23,400 = $7,020
• Estimated state and local rebates = $1,000

Total combined upfront costs = $15,380

• Annual cost of electricity: 600 kWh x $0.0964 x 12 = $694.08
• Estimated annual SRECs = $500

Total annual costs saved = $1,194.08

Payback period = $15,380/$1,194.08 = 12.88 years (12 years and 11 months)

Even in North Dakota, a standard solar array could see a very energy-conscious individual recoup the cost of their solar array in less than half the lifespan of most panels. And with energy costs from fossil fuels rising year on year, that calculation starts to look even more favorable with time. North Dakota also offers a 5-year Renewable Energy Property Tax Exemption, helping to reduce the payback period even more.

The average cost of electricity in the U.S.

Want to run these figures for yourself? Conveniently, the U.S. Energy Information Administration keeps records of the cost of electricity in every state and territory of the U.S. This makes it fairly simple to work out the likely payback period for a solar array in any given place.

As you’ll see, costs per kilowatt-hour vary significantly, from 38.15 cents per kWh in Hawaii to just 9.64 cents per kWh in North Dakota.

Calculating your payback period

The examples above are just that, examples. For a more accurate idea of how much you could save by installing solar at home, get ready to do some math. 

First, figure out how much electricity you use each year. You might be able to get this figure online from your utility provider, or you can add up the kWh for each utility bill for the last 12 months. Don’t just take an average from your last statement as your monthly usage can vary dramatically between seasons.

Next, you’ll need to find out about any local and state financial incentives for residential solar. Add these to the 30% federal incentive (increased from 26% in August 2022). 

Finally, if you have quotes from local solar installers, great. Otherwise, use the averages above, accounting for any resizing of your solar array. To help, average costs per NREL are as follows for Arizona, California, Connecticut, Massachusetts, and New York:

• $3.90/W for systems from 2.5 kW to 10 kW
• $3.38/W for systems from 10 kW to 100 kW
• $2.36/W for systems from 100 kW to 500 kW
• $1.88/W for systems from 500 kW to 5 MW. 

Plug all these figures into the examples above and you’ll get your personal solar panel payback period!

Other things to consider when calculating your solar payback period

It’s no simple feat to calculate your solar payback period. And the truth is that these are all estimates. Your installation costs could end up higher, especially if your roof needs work or is non-standard. Folks who live somewhere remote might have much higher labor costs. Or, you may find that a few friends and neighbors are also considering going solar and you can take advantage of a bulk deal on panels and installation.

Pigeons and solar payback

Finally, pigeons. Yes, pigeons. Whether they’re trying to nest under your panels or they’re ruining output by pooping on your panels, pigeons and other wildlife can significantly alter your payback period. There are maintenance costs associated with a home solar array, and these will be higher in some places than others. For the most part, though, cleaning your panels a couple of times a year will help keep output in good shape. Most homeowners will want to hire someone for this job, but even the cost of a few hours of labor each year won’t cut into your payback period too much and will more than make up for itself in increased output if your panels were very dirty.

All in all, it’s a bit of a crapshoot to try to work out if solar is worth it based on hypotheticals 15 to 20 years down the road. The bottom line is: do you want to invest in a green future? If so, getting into solar now, with prices lower than ever and some tax incentives set to expire, means you start saving money sooner and you help us all tackle climate change.