What is a good solar ROI?

Key takeaways

• The average solar ROI for a 5kW system is 95% after 20 years

• On average, a solar energy system pays for itself in 10 years in the U.S.

• Factors related to your home, your solar equipment, and government policies in your area affect your solar ROI.

Installing a new solar energy system for your home is a substantial expense, but it’s also an investment. With the potential for massive energy savings, a solar setup often pays for itself within a few years—or could even generate a return on your investment (ROI) in some cases. 

To help you decide whether solar is worth it, our experts created this guide to solar ROI. We go over how you can accurately estimate the ROI of a solar system at your home, the factors that determine solar ROI, and other important considerations.

How to calculate solar ROI accurately

In simple terms, calculating ROI involves comparing the cost of an investment to its gains. When it comes to solar energy, that means weighing the cost of a new system against the money you can save on energy. Our solar experts recommend following these five steps to get an accurate estimate of your solar ROI.

1. Determine the cost of a new solar system for your home

The first figure to nail down is the total cost of purchasing a residential solar system. This involves more than just the cost of the equipment itself. There are a few costs you’ll need to consider, including:

• Solar equipment costs: The largest expense is likely to be the solar energy system equipment, such as solar panels, an inverter, wiring, mounting hardware, meters, any infrastructure upgrades your home may need, and in some cases, a solar battery.

• Solar installation costs: Hiring professionals to install your new solar system is also a considerable expense. Labor costs vary significantly by location, so installation costs for your home will be dependent on your local economy.

• Financing costs: If you take out a loan to pay for your solar system, interest costs should be part of the solar ROI equation. Your loan provider should give you an amortization breakdown of your loan that tells you exactly how much you’ll have to pay in interest to finance your solar energy system.

For reference, the average cost of a 5kW solar system in the U.S. ranges from $13,958 to $21,082, according to our data. Depending on the size of your home, you may have different energy needs. The best way to get an accurate idea of the cost of a solar system is to get real estimates from a few providers in your area.

2. Account for maintenance costs

Home solar systems require little to no regular maintenance to keep them running efficiently. However, you may have to pay for things like cleaning and occasional repairs from time to time. Some companies provide a warranty with their products that covers repair services for several years.

Still, you should work some budget for maintenance into your calculations. Maintenance costs tend to range between $300 and $850 per year at most, based on our research.

3. Factor in tax credits and other incentives

If the estimates you got for a new solar energy system gave you pause, the good news is that you don’t have to pay the entire cost yourself. Tax credits and other incentives from federal, state, and local governments can cover a large portion of the cost.

The Residential Clean Energy Credit is a federal incentive available to everyone in the U.S. through the Internal Revenue Service (IRS). This credit covers 30% of the cost of a new solar system for installations through 2032.

Many state and local governments have their own incentives that you can combine with the Residential Clean Energy Credit to reduce your out-of-pocket cost. These include rebates from utility companies and local governments, net metering, and grants. 

Subtract the total credits and incentives from the total estimate you received for the final cost of a new solar system. This is the figure you’ll use to calculate your solar ROI.

4. Figure out the solar energy potential for your home

You’ll also need to estimate how much energy your solar system can generate. This depends primarily on two factors: the capacity of your solar system and sunlight availability at your home’s location.

The energy output of a solar system is dependent on the materials used in the equipment and the size and number of panels used. You can find the estimated energy output of a solar panel listed in its description and use contractor estimates or rough measurements to determine the number of panels you’ll use.

Sunlight availability varies dramatically by location. Regular weather patterns, average precipitation, and the number of daylight hours throughout the year affect how much sunlight can reach panels in your region. At the individual lot level, factors like tree cover and home orientation also play a role.

5. Estimate monthly energy savings

Once you’ve determined how much energy your system can produce, you can determine how much you can save on your monthly power bill and, as a result, your solar ROI. Here’s how to do it:

1. Determine average monthly energy usage.

2. Calculate a monthly average energy cost for your home.

3. Find the average per-kWh energy cost from your current provider.

4. Calculate a monthly average energy output for the system you wish to install.

5. If your monthly energy usage exceeds the capacity of the solar system you want, subtract your system’s capacity from your monthly average .

6. Multiply the difference in monthly energy needs and solar capacity by the average per-kWh cost.

7. Subtract the difference from your current monthly average energy cost. This is your estimated monthly energy savings.

6. Calculate solar ROI

Now that you’ve estimated your monthly energy savings, you can project how long it will take the system to pay for itself—known as the payback period—and your solar ROI. You can use the equations listed below to find your answers.

How long until a solar energy system pays for itself?

The following formula can give you an estimate of your solar payback period:

Payback period (months) = (total system cost + installation cost)/monthly savings

What is my potential solar ROI?

The formula below gives you a way to estimate your potential solar ROI. We’re using a 20-year lifetime for our estimate, which translates to 240 months.

20-year Solar ROI percentage = 

[ (monthly energy bill x 240) - total cost ] / total cost

Let’s take a simple example. Say you pay $200 per month for electricity and invest $18,000 total in a solar system that covers your whole bill. After 20 years, your energy bill would add up to $48,000.

Subtracting the total investment of $18,000 gives you a profit of $30,000 over 20 years. That’s an ROI of 166%.

Of course, in real life, your energy bill could rise 10% each year. This means the solar system saves you more money as time goes on. 

How to know if you can get a good solar ROI

There are some clues that a solar energy system may or may not be a worthwhile investment for your home.

For example, the higher the cost of energy in your area, the more you effectively save by generating your own energy. Sunlight availability is also a critical factor in determining solar ROI. Systems in areas that get lots of regular precipitation may not be able to generate enough energy to power a home, requiring homeowners to use supplemental energy from a provider. Areas in the extreme north of the U.S. may not get enough daylight in winter months for a system to power a home on its own.

The best resources for real information about solar ROI in your area are your solar-powered neighbors. You may have people on your street that have a solar system installed that you can talk to. Social media groups and local subreddits are also good places to ask people in your area about their costs and returns.

Understanding the payback period for solar panels

Earlier in the article, we provided an equation for estimating how long it will take for your solar energy system to pay for itself in the form of energy savings. This is what’s known as the payback period. Our data suggests that on average, the payback period for solar panels ranges from seven to 16 years, with a U.S. average of 10 years.

You may see an estimate for the payback period listed in the description for your equipment, or in the literature provided by contractors. Even if this information is accurate, it’s always good to check these estimates against your own calculations using the formula we provided above.

Key factors that affect ROI on solar panels

A solar energy system is a big purchase. That means it’s worth your time to consider all the things that could increase or decrease your solar ROI. In the following sections, we’ve listed some of the most impactful of these factors.

Factors that improve solar ROI

There are several factors that tend to lead to a strong solar ROI, including:

• Generous state and local clean energy incentives

• Sufficient sunlight availability throughout the year

• High energy costs from traditional providers in your area

• Energy-efficient practices at home

Factors that limit solar ROI

Other factors can limit the financial benefit of installing a solar system, including:

• Low sunlight availability at your home

• High interest rates on solar energy financing options

• Small or non-existent state and local incentives

• Limited space for solar panels

You might find solar isn't right for you if these factors apply to your situation.

How solar financing vs leasing affects ROI

If paying cash for your new solar energy system isn’t in your budget, you have two main options for getting one for your home: financing and leasing. Each method has its own advantages and disadvantages that affect solar ROI and make one a better fit for you over the other.

Financing a solar energy system

You can take out a loan to pay for your solar system. This could be a simple personal loan from a bank or credit union. You can also use your home’s equity to secure a home equity line of credit (HELOC) or withdraw from it with a cash-out refinance. 

Leasing a solar system

Another option is to lease your solar system from a provider. Homeowners pay a flat monthly fee to use the solar panels, but they remain the property of the provider. At the end of the lease agreement, the provider can take the equipment back.

Overall, we don’t think leasing is the best idea. Since you don’t own the panels, you can’t get state or local incentives. This can really eat into the benefits. Plus, you can’t technically calculate a return on your investment, since you’re just renting the panels. There’s no point at which you’ll be done paying for the system and start earning free energy.

Is my roof good for long-term returns?

Your roof is one of the most important factors in long-term solar ROI. There are a few ways in which your roof impacts the return you get on your solar investment, including:

• Age and condition: Replacing or repairing a roof that has solar panels installed can be an expensive job. Your roof should ideally be able to outlast the working life of your panels—typically about 25 to 30 years.

• Orientation: Ideally, solar panels should be positioned in a way that maximizes sun exposure. However, the directions your roof faces may make it impossible to get the most out of your panels.

• Materials: Some materials are more durable than others, making them more likely to support the weight of solar panels for their lifetime.

• Size: The size of your roof determines how many solar panels it can hold. That means it is a major limiting factor in how much solar energy your system can capture and, as a result, your solar ROI.

Bottom line: What is a good solar ROI?

A good solar ROI is a rate that meets or exceeds the U.S. average rate of 95% over 20 years. This means the panels pay for themselves and then return an additional 95% of their total cost in profit to you. Your rate of return on a solar power system is subject to a number of factors related to your system, your home, your location, and your finances.

However, even a solar ROI that falls below the national average can still be a good investment and have other benefits. As always, doing your research and getting multiple estimates to compare from expert installers can help you maximize what you spend on adding a solar panel energy system to your home. 

FAQ about solar ROI:

Below are a few frequently asked questions about solar ROI:

What is the average ROI for solar?

Our research shows that the average ROI for solar panel systems is around 95% over 20 years, so higher percentages are better.

What is the 20% rule for solar panels?

This rule says the total amperage from grid electricity and solar power should't exceed 120% of your main service panel's capacity rating. This is used to determine the back-fed breaker size.

Do solar panels have a good ROI?

As an investment in your home, solar panels have a good ROI. We found the average 5 kW system pays back about $16,000 over 20 years after paying for itself. In addition, having solar panels can increase its market value.

Does solar really pay for itself?

Solar energy really can pay for itself in many cases. Our research shows that in the U.S., solar panels have an average payback period of 10 years.