For many, the appeal of installing a rooftop solar panel system is reducing energy bills and saving money.
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However, upfront installation costs, incentives, tax credits and other considerations can make the decision to go solar feel pretty complicated. The math that shows how much money solar panels can save you takes some time to uncover.
Gilbert Michaud, a professor of environmental policy at Loyola University Chicago, said it's worth looking into available options for solar right now. "It makes a lot of sense financially because costs have gone down so much and the incentives are really strong," Michaud said.
Can solar panels save you money?
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Residential solar is very much a custom-fit product, however. To determine how much you can save, it's important to be sure you consider all the factors influencing your unique situation.
Long-term solar savings
For most people, installing solar is an investment in the medium- to long-term future. A payback period is the amount of time it takes to earn back your initial investment through monthly energy savings. How much you save per month depends on the size of your solar system, your home's energy consumption and other factors. Typically, excess solar energy produced by a residential system is credited against the amount used, but it's rare to actually receive cash payments for solar power.
Still, paying little or nothing to your local utility adds up to lots of savings over years or decades. "Most systems pay themselves off in about 10 years. Then you have decades of free electricity after that," Michaud explained. He notes that some younger homeowners who move around more frequently might shy away from solar due to the perceived long commitment.
However, he points out that the investment can often be recouped from the increase in home value that comes with a new installation. The payback period will be unique to your circumstances because of the difference in both upfront solar costs and energy costs based on your location. But here are some guidelines to help you estimate when you'll break even.
How to estimate your solar savings
There's a simple basic formula to determine how long it'll take for your solar savings to pay off the cost of installing the system. Start with the upfront cost of installation, then subtract all tax credits, rebates, grants and other incentives you received. This determines your net system cost. Next, estimate how much you'll save on your annual electricity bills with the system.
Divide the net system cost by the annual bill savings and this gives you your solar payback period in years.
Here it's broken down in a bit more detail:
Find out your upfront costs
With a purchase as big as rooftop solar panels, you should get multiple quotes, make sure your solar installer answers all your questions, and find the offer that best fits your needs.
Subtract tax credits (and other incentives)
While tax credits and incentives vary state to state and utility to utility, the 30% federal solar tax credit applies to everyone. Find out how much you can expect your solar costs to be reduced, and subtract.
Check your monthly electric bill savings
You could assume you'll get all your power from solar, but while some homes will be able to zero out their electric bill, others will still have to pay for some electricity usage or standard fees. Some utilities charge fees just for staying connected to the grid. Savings will vary widely from home to home, depending on how many solar panels are installed, normal energy consumption and more.
Look at your electric bill — at least six months worth to account for seasonal temperature changes and other fluctuations in cost — and estimate your monthly savings from solar. If you cover 100% of your bill with solar energy and net metering and you currently pay an average of $125 per month in electricity bills, you could save $1,500 per year ($125 x 12 months).
Calculate your payback period
Once you've figured out your yearly savings, you can calculate your payback period by dividing the net cost of your system by your yearly savings. A system that costs $15,000 and saves you $1,500 each year, will pay for itself in 10 years.
Here's the equation written out:
(Solar installation costs − tax credits and other incentives) / (Annual savings) = Payback period in years
Calculate your solar savings
After your payback period, during which time you're really just recouping your expenses, everything else is savings. Residential solar panels are warrantied for 25 years typically, but their useful life can be much longer. Fifteen years of savings at $1,500 each year is a whopping $22,500.
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These calculations are a bit too neat for the real world. Even the most efficient solar panels become less productive over their lifespan, so you may not get quite as much energy from them in year 25 as in year one (a typical guarantee is between 85% and 92% of its original production).
On the other hand, electricity rates have historically increased fairly steadily. (They've gone up about 2.5% from December to December , according to the Bureau of Labor Statistics.) This means, in later years, you could be saving even more than you would with solar today.
Average solar panel installation costs
Like many things, the price of having solar panels installed on your residence has been affected in recent years by inflation and supply chain constraints. According to a report from Wood Mackenzie (PDF), residential solar cost $3.28 per watt to install in the first quarter of , up from $3.07 during the same period in . (Though the report suggests that the price may have started falling again.)
According to SaveOnEnergy, the average cost of a residential solar system as of June was $31,558 before incentives and rebates, based on a typical solar system size of 8.6 kilowatts. The cost estimate is based on a data set from the Lawrence Berkeley National Laboratory that puts the average solar panel system cost at $3.67 per watt.
Here's a look at the average cost of a solar panel system for most states, according to FindEnergy.com.
The cost of individual solar installations can vary, however. (Even large scale estimates can vary from source to source, as you see above.) Homeowners can opt for systems of different sizes, with more complexity and extra components, like solar batteries and EV chargers, that bump up the overall cost. Other considerations, like local market conditions and the difficulty of installing solar panels on a certain roof or property, can also affect the final price. And prices can vary from one solar company to the next.
Tax breaks and incentives
Right now, thanks to the Inflation Reduction Act, the US government will credit taxpayers 30% of the cost of an installed solar system the following year. There are also myriad other incentives and tax breaks offered by states, local governments and individual utilities to further bring down the overall amount paid out of pocket.
Beyond such reductions in the upfront cost of installation, using your solar panels over the years can also shrink your energy bill and help pay back your investment through net metering. This is the most popular way utilities compensate homeowners who allow the energy their solar system produces to be fed onto the grid for other consumers to use.
Factors that influence savings
In recent years, net metering policies have begun to shift in some jurisdictions, like the high-profile case in California, and this has sometimes meant a reduction in the overall potential savings from solar. For example, some utilities are moving toward more-complex formulas that govern how much homeowners are paid for releasing energy onto the grid.
It's important to do your homework to understand your local utility's net metering policies and any potential changes being considered. You should also get to know any time of use rates that are in place that may influence how much the utility charges for energy consumption and pays for energy production during peak and off-peak hours.
In some cases, solar panels paired with a solar battery can save you more with time of use rates than solar panels alone. Adding an electric vehicle charger is an extra expense, like a battery, but it could increase your savings over time.
The climate and the amount of peak sun hours your location receives can also be a key factor in how much you'll save over time. A state like New Mexico with up to six peak sun hours per day will obviously allow you to generate more electricity, and possibly save more, than more northern states that receive 25% to 50% less peak sun.
Since solar panels can last 25 years, you need a sturdy roof. If your roof isn't in top shape, you might have to replace it before installing solar panels. Though you'll eventually need to replace your roof whether you put solar panels on it or not, having to do so early is an extra expense that might eat into your savings.
Frequently asked questions
According to the U.S Department of the Interior, the amount of sunlight that strikes the earth’s surface in an hour and a half is enough to handle the entire world’s energy consumption for a full year. Solar panels allow you to harness the sun’s energy and convert it into electricity to power your home or other buildings in your community.
Today, about 60% of the energy generated by U.S. power plants comes from fossil fuels like coal and natural gas. Not only can fossil fuels eventually run out as limited resource but burning them is also a major contributor to climate change. That’s why more people are turning to renewable forms of energy—and the International Energy Agency projects that solar power will overtake the capacity of coal power by .
Once they’re installed, solar panels can help cut costs on energy bills, given they allow you to access free energy from the sun. Research shows that homeowners can save an average of $1,530 annually by installing a solar system. The exact amount you save depends on the cost of electricity in your local area.
For instance, if you regularly pay 15 cents per kilowatt hour for electricity — and your solar panels generate 1,000 kilowatt hours per month – you should save $150 on your monthly power bill.
The cost of installing solar panels to power your home will depend on the size of your home and your local market. For a 2,000-square-foot home, solar panels will typically cost between $15,000 and $22,500.
If you spend $15,000 to install solar panels and you save about $1,530 per year on electricity costs, you will earn back your investment in about nine and a half years.
However, you may earn back your investment quicker if your local power company offers a net metering program. With net metering, you can send excess solar energy to the local grid in exchange for power bill credits. On average, homeowners can save $50 or more per month with net metering.
Also, since solar panels are such an efficient method of lowering greenhouse gases, the U.S. government and other entities are willing to help homeowners fund the cost— allowing you to earn back your investment much quicker. For example, if you install solar panels between and , you may qualify for a tax credit of up to 30% of the cost of the solar panels. The federal government also provides solar panel grants for qualifying homeowners.
Some employers offer incentives for employees who install solar panels at their homes. Forbright Bank, for example, provides a $2,000 reimbursement for its employees who install home solar projects. A homeowner who spends $15,000 on a solar energy system and receives a 30% tax credit as well as a $1,000 reimbursement from their employer, their total investment is reduced to $9,500. If they save $1,530 per year on electricity costs, they will earn back their investment in about six years. If they save $50 a month on net metering, they could earn back their investment in just over four years.
Solar panels can be a valuable way to support sustainability and lower energy bills over time, helping you save more money to meet your other financial goals. Whether you’re saving money on your bills from existing solar panels or saving up for a future solar panel installation, consider a high-yield savings account like Forbright Bank Growth Savings to capture your savings and work with a bank that’s committed to supporting sustainability-oriented projects.
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