How to calculate your solar payback period

Key takeaways

• The average payback period of a solar panel system in the U.S. is 10 years.

• Solar energy system costs, solar availability, and utility rates vary by location, meaning average payback periods vary by location too.

• Factors such as local tax incentives, net metering policies, and maintenance costs should also be a part of your payback period calculations.

The solar payback period is one of the key metrics to help homeowners decide if investing in a solar energy system will be worth it. Marketing materials and product descriptions for solar panel equipment may cite a payback figure, too, so it’s important to know what it means.

However, you can—and should—check those figures against your own calculations. In this article, we tell you how to do just that, as well as provide some detailed information about the finances of solar energy.

What is a solar payback period?

A solar payback period is the amount of time it takes for a solar energy system to pay for itself with energy savings. This is an important figure when considering the return on investment (ROI) of solar panels and the other financial implications of purchasing and installing them.

What is the average solar payback period?

The average solar payback period in the U.S. is 10 years, not including the 30% federal tax credit, and typically ranges from seven to 16 years, according to our data. Payback periods vary widely between locations due to differences in local economic factors, sunlight availability, and other factors.

How to calculate your payback period

You can estimate your payback period by comparing energy savings from using solar panels to the cost of a solar energy system with a relatively simple equation. First, you’ll need to gather the following information:

• The total cost of the solar panel system you want, including installation, hardware, permits, financing, and other related expenses.

• Tax credits and other incentives from federal, state, and local governments

• Your average monthly energy bill.

Solar panel payback period formula

Once you have that information in front of you, use the formula below to determine how long it will take for your solar panel system to pay for itself.

Solar payback period in months = (Total system cost + installation cost)/monthly savings

Other considerations

The formula above is simplified to help illustrate the principles of calculating your payback period. But other factors could come into play.

For example, your solar system may not fully cover your energy needs. That means you’d have to supplement your solar energy with energy you purchase from a provider. This would decrease your average monthly energy savings and extend the payback period.

Impact of solar financing on your payback period

Financing can play a major role in the length of your payback period. With the cost of an average solar system in the U.S. at $17,823, many homeowners need a loan to pay for their solar system. Loans from banks, credit unions, and other financial institutions come with interest that adds to the cost of the solar panel system being financed.

The annual percentage rates (APRs) of loans vary significantly based on the type of loan and the borrower’s financial profile. Because these loans are financing such a large purchase, they can generate hundreds or thousands of dollars in interest.

If you need to borrow money to finance your solar energy project, be sure to factor in interest costs and financing fees into the total cost. This will help ensure you get an accurate payback period estimate.

How net metering affects your solar payback

Net metering is a system in which homes that generate more solar energy than they use can sell excess energy back to the grid. Homeowners are compensated at similar or identical rates to what consumers pay for electricity from the grid. 

This means that net metering could dramatically shorten your solar payback period. However, not all solar systems can generate enough energy for homes to have an excess. Plus, regulations about how much energy people can return to the grid and how much they can be paid for it vary from state to state. Make sure to look up your state’s regulations and average rates in your area before including net metering in your calculations.

Accounting for panel degradation over time

Solar panels become less efficient over time—but only slightly. The average rate of solar panel degradation is 0.5% per year, according to research from the National Renewable Energy Laboratory (NREL). Panels may degrade faster in some cases, such as when they’re located in hotter climates.

This is a small but not insignificant factor to consider. Your panels won’t generate as much energy after four years as they did when they were new. That means you won’t get as much energy out of them, slightly reducing your savings or income from net metering.

That said, energy costs tend to rise over time. This can offset the panel degradation and help you save more money in a few years compared to today.

Consider maintenance and insurance costs

While they don’t require significant upkeep, solar energy systems do need repairs and maintenance from time to time. You should clean your panels a couple of times a year to clear away dust and debris. Factor in a few hundred dollars per year for this if you hire a service.

When it comes to insurance, the good news is that most homeowners' insurance policies cover your solar panels, meaning you don’t need to buy a separate policy or add-on. The bad news is that your premium may go up when you add a solar energy system to your home. Your insurance agent can give you an estimate of what your new premiums may be after you install panels.

Best states for solar incentives and faster returns

Due to differences in labor costs, sunlight availability, financial incentives, and other factors, the solar payback period in some states is substantially shorter than in others. The state with the shortest average payback period is Arizona, where solar energy systems typically pay for themselves in about seven years, according to our data. That’s nearly a decade shorter than the average of 16 years in New Mexico, the state with the longest average payback period.

You can use the average period in your state to get a sense of what your payback period might be. However, keep in mind that there are many individual factors that contribute to how long or short your payback period will actually be.

Bottom line on calculating your solar payback

Estimating the payback period for your solar panel system is an important part of your energy system research. The average payback period for the U.S. is 10 years, but it varies significantly from one state to another. Many individual factors, such as the size of your roof, your location, and your energy usage, also factor into the equation. Still, calculating your solar payback can give you a good indication of whether a solar energy system is a good investment for your home in the financial sense. And if you calculate a 15- or 20-year payback period, solar might not be the best idea.

FAQ about solar payback

Below are a few frequently asked questions about solar payback:

What is a good payback for solar?

A good solar payback period is one of less than 10 years. The cost of your system, its energy capacity, your location, local regulations, incentive programs, and other factors all affect the length of the payback period.

How long does it take for solar to pay for itself?

The average solar payback period is 10 years, according to research from FindEnergy.com. Depending on where you live, the capacity of your system, your energy usage, and other factors, it may take more or less time for your solar energy system to pay for itself.

How do you calculate solar payback?

To calculate solar payback, divide the total cost of your solar panel system (including installation and incentives) by your projected monthly energy savings. This will reveal the estimated number of months it will take for your solar power system to pay for itself.