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Payback Period for Solar Panels

Payback Period for Solar Panels

Learn how long it will take to payoff your solar panel system.

Thad Warren
January 2023
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6 Minutes

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One of the most common reasons homeowners choose to invest in solar is for financial benefits. The idea of eliminating electric bills and increasing your home value sounds great. But, solar panels aren’t cheap. That’s why determining how long it will take for your solar panels to pay for themself, a.k.a payback period is an important factor to consider before going solar. 

Average payback period for solar panels

The average payback period for home solar panels in the U.S is about 8 years. 

Payback periods for solar panels vary greatly depending on several factors. The biggest factors that will dictate your payback period are:

  • Amount of electricity you use
  • Cost of your system
  • Solar incentives, rebates, and tax credit in your area
  • The amount of energy your system generates
  • The cost of electricity in your area

Average solar payback period by state:

State
Average Solar Payback Period
Alabama 10 years
Alaska 8 years
Arizona 8 years
Arkansas 14 years
California 6 years
Colorado 11.5 years
Connecticut 9 years
Delaware 12 years
Florida 11 years
Georgia 12.5 years
Hawaii 7 years
Idaho 12 years
Illinois 8 years
Indiana 12 years
Iowa 14 years
Kansas 10 years
Kentucky 11 years
Maine 11 years
Maryland 11 years
Massachusetts 5 Years
Michigan 11 years
Minnesota 10 years
Missouri 12 years
Montana 11 years
Nevada 10 years
New Hampshire 10 years
New Jersey 5 years
New Mexico 9.5 years
New York 10 years
North Carolina 12 years
Ohio 11.5 years
Oklahoma 13 years
Oregon 12 years
Pennsylvania 11 years
Rhode Island 1.5 years
South Carolina 9 years
Tennessee 12 years
Texas 13 years
Utah 10 years
Vermont 10 years
Virginia 11.5 years
Washington 14.5 years
West Virginia 12 years
Wisconsin 12 years

 

How to calculate your solar payback period

Step 1: Find the average electricity usage for your home

Finding your average electricity usage per month will determine the amount of electricity you will need to generate to offset your electric bill. If you use an average of 2,000 kWh per month, then you will need to generate an average of 2,000 kWh per month. 

In most deregulated states our solar calculator can pull your historical usage. If you are in a non-deregulated state you can find your average energy usage by looking at your electric bill or logging into your utility account. 

Step 2: Determine the production and gross cost of your solar system

Now that you know how much energy your system needs to produce, it’s time to plan out your system. This can get complicated fast. Knowing which types of solar panels you should use, how many panels you can fit on your roof, etc. requires knowledge of solar systems. Not to mention the climate and the average amount of sunshine in your area. If you are unsure, a local solar installer can help you plan your system. This will also give you the gross cost of the system before we subtract incentives.  

Step 3: Deduct solar incentives, rebates, and the federal solar tax credit

Solar incentives vary by state, city, and utility. Our database of incentives makes it easy to find which incentives are available for your home. Calculate the value of local incentives and then add in the federal solar tax credit of 26%. Now you have a total incentive deduction for your system.

Step 4: Calculate the cost of your system

So far we have calculated the cost of your solar panel system and the total value of tax credits, rebates, and the federal solar tax credit. To get the cost of your system simply subtract the value of your incentives from the total cost.

Gross cost - Incentives = Total cost

Step 5: Find your current electricity cost and forecast the future increases in electricity cost

Many states offer net metering. Net metering allows you to get a credit for each kWh of electricity you put into the grid. So if your system generates 10,000 kWh of electricity and your utility pays 10 cents per kWh you would have $1,000 in annual savings. The actual kWh rate you get paid will vary depending on your location, but it’s generally about the same rate you would pay for electricity.

Future electricity rates

Electricity rates vary because of market conditions and inflation. On average, electricity prices increase between 2-4% per year. It’s hard to predict the future price of electricity, but it’s important to keep in mind that the dollar value of bill credits you will receive will most likely increase over time as prices rise. 

State without net metering

Not all states offer net metering. In some states without statewide net metering policies, there are local utility net metering options or other ways to receive bill credits for the energy you put back into the grid. 

If there are no statewide or utility net metering policies in your area you will generally receive a small credit called an “avoided cost rate”. This is essentially the wholesale price for electricity and is usually much cheaper than the retail rate, but it can still go a long way toward paying for your solar panels over time. 

Step 6: Calculate your solar payback period

You know the three cost factors for your solar panel system: the Gross cost of your system, financial incentives, and annual savings. 

To determine your payback period follow this formula:

Gross cost - Incentives = Total cost

Total cost ÷ Annual savings = Payback period

Here’s an example.

Gross cost of $25,000 - Incentives of $6,500 = Total cost of $18,500

Total cost of $18,500 ÷ Annual savings of $2,000 = 9.25 years

Solar payback period calculator

If all this seems a little confusing, don’t worry you’re not alone. That’s why we build an intuitive solar calculator that will tell you your estimated payback period, system cost, and help you find local and federal incentives. Get started with our free solar calculator here