Solar Payback Period: Calculation, Critical Factors & More

The average solar payback period in the USA is 10.5 years. However, the payback period varies depending on the users’ financial strength and other aspects. Referred to as the break-even point, the exact time of completing solar payback determines when you stop energy expenses and start saving more. On average, a homeowner can save $57000 in 25 years by embracing solar. With the rising inflation rate, the actual savings will look bigger than it is estimated.

The payback period depends on crucial factors such as system size, electricity costs, financial condition, and more. While the break-even point is 5 years for many people, it could be 15 years for others. However, it is evident that a smaller break-even point helps solar users save more than a longer break-even point. The earlier you pay off the dues, the more you will help to relieve your financial burden. Nevertheless, it also helps those who are planning to apply for personal loans soon.

Calculating the Solar Payback Period

Considering that every person has a unique financial strength, the solar payback period differs from one person to another. However, the calculation process is not complex and stays unchanged even though parameters vary from one person to another. The simple formula to calculate the payback time for solar installation is:

Total System Cost / Annual Savings = Solar Payback Period

While this seems to be pretty simple and straightforward, one should not forget to keep some crucial factors in mind. In the following section, you can have a quick glance at those factors.

1. Determining the Combined Cost

The major cost involved in solar installation is the cost of solar panels. Some popular types of solar panels in the USA are polycrystalline, monocrystalline, and thin-film. You need to check the price with a solar installer in your state. Besides the cost of the panels, you need to calculate the cost of installation.

Now, typically, the installation cost varies from one provider to another. Some providers may charge less depending on your negotiation skills. After combining the cost of panels and installation charges, you need to subtract upfront rebates and incentives. You must check the solar incentives in Illinois if you are living in this state and considering a solar upgrade.

2. Calculating the Annual Savings

Calculating the break-even point involves calculating the annual savings. Let’s assume that your monthly electricity bill is around $200. In these cases, you can save up to $2400 per year if solar energy covers 100% of your energy consumption needs.

Not to forget that you will also get an ongoing incentive from the state or federal government. Moreover, there is also an option to save money through net metering or net billing. Therefore, the combined savings for your household may become around $3000 per year. The money you save can be used to pay back your solar installation cost, reaching the break-even point within an average time of 10-12 years.

3. Divide Upfront Cost with Annual Savings

As discussed in the formula above, you need to divide the upfront solar installation cost by the annual savings. The result of this division will fetch you the solar payback period. Understanding the payback period will help you plan the payback accordingly. Moreover, having financial clarity in the planning process before making a high investment in solar is essential for a hassle-free financial future.

What Affects Your Solar Payback Period?

The break-even point of the solar payback may be affected due to a few factors. Although it may not be possible to ignore all the external factors, it is important to know them beforehand. Knowing them will make it easier for you to manage them.

1. Rise in Average Monthly Electricity Cost

At times, you may notice an exceptional rise in the monthly electricity expenses. This could happen due to a malfunctioning HVAC system. In some cases, a sudden change in weather conditions may lead to unplanned energy usage. Sometimes, ignoring servicing the HVAC equipment and other major power-consuming home appliances leads to a rise in the average electricity cost.

A high expense on the energy means a lesser saving for you in a particular month. Your yearly savings may be affected if you hit an exceptionally high energy consumption for a few consecutive months. Solar installers typically try to provide a solar installation that exactly matches a home’s overall energy requirement. However, the consumption may exceed at times, leading to the use of energy coming from the utility provider’s grid. As a result, the energy expense for the month may shoot up while reducing your monthly savings.

2. Value of Incentives

Your solar installation payback timeframe may get pushed beyond 10-11 years, depending on the solar incentives. While living in some states fetches a high incentive, other states offer low incentives. A varying incentive leads to reduced yearly savings. Some of the common solar incentives that may vary from one state to another are discussed below.

State Tax Credits: The states in the USA offer different ranges of credits on solar installations to homeowners. You get the state solar credit according to the state where you are living at present.
Cash Rebates: The upfront cost of your solar installation may be reduced due to the direct cash rebates offered by the states. Look for the cash rebates in your state, as it has a significant impact on your solar payback period.
Performance-Driven Incentives: The performance-driven incentive is another way of rewarding solar energy consumers. States run various programs to reward solar users, who are responsibly consuming power.
Net Metering: Net metering brings you credit in exchange for the excess solar energy that you send to the utility grid. Getting such credits depends on your monthly energy consumption. Moreover, net metering is abolished in Illinois. However, people living in this state can leverage net billing instead of net metering.

3. Mode of Paying for Solar

The solar payback period of a person also depends on his or her mode of paying for solar. In the following section, find a payback calculation for different modes of solar purchases.

Cash Purchase: If you choose solar installation by cash, the payback period calculation becomes straightforward. You just need to divide the total cost by the annual savings. This approach minimizes the break-even point and increases the lifetime savings.
Solar Loans: Solar loan is a viable option for many people since the overall investment is high. People using a loan to pay back for solar will find fewer savings due to the interest on the principal amount. Therefore, paying off using a loan could lead to a longer payback period.
Solar Lease: Instead of purchasing, a lease is also an option for people seeking solar installation. Lease does not fetch tax credits and incentives. Also, remember that leasing is a contract between two parties. Instead of a payback period, a solar lease typically has a lease period.

Conclusion

Investing in solar is a smart choice for most people nowadays. Besides a good impact on the environment, solar improves the financial stability of homeowners. After the solar payback period, energy consumption will become almost free. Therefore, you will find a significant reduction in monthly expenses, allowing you to invest in a better future.

Looking for more consultation before solar installation in Illinois? Smart Sky Solar is here – the leading solar installation contractor, specializing in both rooftop and ground-mounted solar installations. Contact us to inquire and assess your eligibility for solar incentives, rebates, loans, etc.