How to Calculate the Payback for a Solar Energy System

How long will it take your solar energy system to reach the break-even point?

Some people think that the payback period for photovoltaic panels is well over a decade, but it’s not. Though the return on a solar power investment can vary, most installations start earning a profit in just a few years.

solar energy system

But you don’t have to take our word for it. With a little simple math, you can calculate your own solar payback period.

Determine the Total Solar Energy System Cost

First, you need to figure out your photovoltaic system cost.

Add up the price for your solar energy installation — include the photovoltaic panels, inverters, mounting components, wiring costs, labor expenses, financing charges and permit fees. Let’s say your total is $16,000.

Next, add up what you’ll get back from financial incentives for switching to solar energy. Federal, state and local tax credits, rebates and grants can bring thousands in savings. For an easy example, let’s say your incentives total $7,000.

Now, subtract the solar incentives from the total price:

$16,000 – $7,000 = $9,000

So the actual cost for your PV system would be $9,000.

Figure Out Your Yearly Electricity Savings

Before installing your solar energy system, how much did you spend on electricity each year?

Total the amounts of your electricity bills for the last 12 months to get your yearly total. Most homeowners pay just over $114 per month, according to the U.S. Energy Information Administration. So for our example, we’ll use the national average — that’s a total of $1,368 for the year.

Of course, your actual energy savings will depend upon the percentage of your home’s electricity your solar array provides. For instance, if yours is sized to cover 80 percent of your energy consumption, your savings will be 80 percent of your yearly total. Using our example:

$1,368 (yearly energy costs) × 0.80 (generation capacity) = $1,094.40

To determine your annual savings, plug your own numbers for energy costs and generation capacity into the equation.

Calculate the Solar Energy System Payback Period

The last step in figuring when your PV system will begin to pay off in profits involves a bit more math.

Take your total photovoltaic installation cost and divide by your annual energy savings to calculate the number of years for solar payback. Using our example:

$9,000 ÷ $1,368 = 6.58 years 

Or for a system sized to provide 80 percent of the home energy consumption:

$9,000 ÷ $1094.40 = 8.22 years

Keep in mind, however, that everyone has a different set of data. Several factors — including the solar radiation in your location and the exact energy output from your photovoltaic panels — can affect your PV payback period.

The best way to find out the return you can expect on a photovoltaic investment is to consult with a local expert. Intermountain Wind & Solar, the region’s leading photovoltaic professionals, offers free consultations to home and business owners throughout Utah, Idaho, Nevada, Colorado and Wyoming.

For answers to all your questions about installing a solar energy system, contact us today.