Time to Break Even on Solar Panels

Over the past few decades, solar energy technology has made significant progress, with solar panels becoming increasingly common across neighborhoods. It’s likely that you’ve seen at least one home in your area fully equipped with these panels.

Perhaps a solar company representative has approached you about installing solar panels on your roof. (These representatives are nearly as prevalent as the technology itself.) If you’re unsure about how solar energy works or how it might impact your finances, it’s understandable to feel reluctant to consider this option.

Rest assured, you are not alone in having questions. Many potential adopters of solar energy are primarily concerned about the initial investment and the timeline for recouping that investment.

Understanding solar panel costs

Let’s delve into what it really costs to invest in solar panels. While the journey toward environmental sustainability is commendable, it does come at a price—despite the sun providing its energy for free for millennia.

To assess the average cost of solar panels, New England’s EnergySage, a solar marketing enterprise, suggests looking at the price per watt, a metric that remains relatively uniform nationally.

This year, homeowners typically pay between $2.87 and $3.85 per watt for installation, with the average total cost of solar panels before any tax credits hovering around $16,800. After accounting for such credits, costs are reduced to between $10,000 and $13,500, based on a common 5kW system installed in the U.S. EnergySage notes that these figures are approximately 9 percent lower than last year, but it is wise to compare offers from other homeowners in your locality before making a decision.

Now that we have an idea of the financial outlay involved, let’s address an equally important question: how long until you see a return on your investment? (See also: 10 Ways Anyone Can Go Solar and Save on Energy)

Projected break-even timeline

Sarah Hancock, who oversees solar content at BestCompany.com, which reviews businesses across various sectors, explains that the break-even timeline relies on three key factors.

1. Current utility rates

Hancock notes that the higher your local electricity rates are, the more potential savings you’ll earn from solar energy, leading to a faster break-even point.

For instance, she illustrates that a Californian homeowner, faced with an electricity rate of around 17 cents per kilowatt-hour, will reach their break-even point sooner than someone in Washington, where rates are only 9 cents per kilowatt-hour, as their monthly savings will be greater.

2. Available incentives

Incentives can vary significantly by state, comprising various rebates, tax credits, and performance payments. A greater number of incentives can accelerate your break-even timeline.

As Andy Schell, marketing manager at Paradise Energy Solutions, explains, “One noteworthy incentive is the 30 percent federal tax credit, which allows solar owners to recover 30 percent of their system cost. If you can’t claim the full credit in the first year, you can carry forward the remaining amount for up to 20 years.” Additionally, specific grants and depreciation schedules are accessible for eligible businesses and farms.

You can explore available solar incentives in your state through this helpful resource.

3. Payment method

As Hancock indicates, you can buy the panels outright, finance them through a loan, enter a lease agreement, or utilize a power purchase agreement (PPA), which is a financial deal allowing a developer to plan and install a solar energy system. Such agreements typically last between 10 to 25 years.

However, studies indicate that upgrading your home through a PPA or lease might not significantly boost its value compared to outright purchases or loans. This is primarily because with an outright purchase, new owners do not have to worry about ongoing electricity costs, while a PPA means that the new owners will still incur electricity charges, albeit reduced. These agreements can often be easily transferred or bought out if needed.

The quickest break-even method can differ based on your state’s unique combination of electricity prices and available incentives. For residents in areas with high electricity costs and generous incentives, loans may provide a faster return, while outright purchases may be more beneficial in states with lower rates and fewer incentives.

“On the whole,” Hancock concludes, “most solar adopters will break even within 15 to 25 years.”

Comparing leasing and outright purchases for solar systems

Julio Daniel Hernandez from EnLight.Energy advises homeowners to consider their tax liability when deciding the best course of action. “If your current tax liability is sufficiently high,” he says, “it’s advisable to exploit the available loans and tax credits. For those with lower tax liabilities, a PPA or lease arrangement may be more appropriate, as it offers access to all the solar energy you generate at a lower rate than your utility provider, often resulting in around 20% savings, without any upfront costs.”

Hernandez’s take on break-even assessments is notably more optimistic. “With a PPA or lease, your break-even point is zero, as there are no initial costs involved, and you begin saving immediately, akin to engaging with a third-party electricity provider in a deregulated market,” he explains. “In contrast, if you purchase a system, your break-even timeline could be around eight years or less, contingent on local incentives.”

Evolution of incentives and pricing

Individuals who adopted solar power a decade ago benefitted from advantageous incentives, but the landscape has changed with the growing popularity of solar technology. As with all technological advancements, initial costs tend to decline over time.

“While there are fewer incentives now compared to ten years ago due to solar’s rising popularity,” Hancock reveals, “the good news is that installation costs for solar panels have decreased by over 60% in the last decade. So, although incentive programs are not as widely available, solar energy remains more affordable for consumers than ever.”

Evaluating the investment potential

Generally, investing in solar energy proves favorable for most states, offering substantial returns over the span of 20 to 30 years.

For example, a Californian homeowner buying a solar system outright might anticipate returns of $30,000 to $40,000 over 25 years, while a Washington resident could foresee a return of around $10,000 under similar conditions, as highlighted by Hancock. Though the financial return may differ, both parties still benefit from their investment in solar power.

Hernandez adds, “Upgrading to solar energy has the potential to enhance your home’s value by over $15,000. While this increment partly depends on system size, research indicates that simply installing solar panels incurs most of the value increase, with only marginal upticks associated with the system’s extent.”

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