Solar Panels ROI: Calculating Your Average Returns

One of the biggest considerations homeowners have when switching to solar power is their return on investment (ROI). Solar panels can carry significant upfront costs, but they pay for themselves over time by saving you money on electricity bills and increasing the value of your home. 

If you’re wondering how to calculate your solar ROI, and how long it might take you to pay back your initial investment, you’re in the right place. In this guide, we’ll look at how solar panels can save you money, factors that affect your solar ROI, and how to calculate your solar ROI.

Key takeaways: 

• Solar panels pay for themselves by reducing your electricity bills, increasing the value of your home, and earning you money through various incentives.
• Your solar ROI depends on your initial investment, yearly energy bills, efficiency of your solar panels, and eligibility for financial incentives. 
• The average solar ROI in the U.S. is 10% and the average payback period for solar systems ranges between 9 to 14 years. 

How do solar panels save you money?

Besides reducing your carbon footprint, one of the main attractions of investing in solar panels is that they can save you money. These savings add up to help you break even on your initial solar investment - and potentially earn even more money on top of that.

Below, we look at how solar panels save you money. 

Reduced energy bills

Solar panels cut down your electricity costs by making you less reliant on the grid. Depending on the number of solar panels you have, your energy usage, and whether or not you have a solar battery, you may drastically cut down your electricity bills. 

Solar incentives

Taxpayers who invest in solar panels qualify for financial incentives such as the Federal Tax Credit for Solar Photovoltaics. This may allow you to deduct 30% of the total cost of your solar power system from your federal taxes. Depending on where you live, you may also be eligible for state tax credits. In Arizona, for example, you can receive a tax credit of 25% of your installation costs up to a maximum of $1,000, in addition to the federal solar tax credit. 

These financial incentives help you save on your solar panel investment, making them more affordable and accelerating the payback period. As always, you should consult with your tax advisor for your tax matters.  

Renewable Energy Net Billing

Depending on where you live, you might also be able to save money with net billing. This is when you sell excess energy you don’t use back to the grid. Your utility company may then compensate you for the excess electricity you provide. The policies around net billing vary from state to state. To see how net billing works in your region, view the table on this page. 

Increased property value

Another way solar panels can save you money (or earn you money) is by increasing the value of your property. According to a study by Zillow, solar energy systems can increase a home’s value by an average of 4.1%. Another study by the U.S. Department of Energy’s Lawrence Berkeley National Laboratory also found that homebuyers were willing to pay an extra $15,000 or more for a home that has a solar power system.

What factors affect solar ROI?

Now you know the various ways that solar panels can pay for themselves, let’s look at a few factors that can affect the total ROI of your solar energy system. These include installation costs, inspection fees, maintenance and repair, as well as sun exposure, panel orientation, and the state where you live. 

Cost of installation

The total cost of installation serves as the basis for calculating your solar ROI. This depends on several factors, including the type of solar panels you purchase, the model you choose, and financial incentives you qualify for after purchase. 

Inspection fees and permits

Depending on where you live and the size/type of your solar system, you may have to acquire certain permits before installing solar panels. These might include electrical permits, structural or building permits, or dedicated solar photovoltaic (PV) panel permits. The purpose of these permits is to ensure your solar panel system meets specific electrical and building codes. 

These permits affect your solar ROI as they can add a few hundred dollars to the cost of your investment. 

Maintenance and repair

Solar panels are generally low maintenance, however it is recommended they get cleaned regularly to keep them running efficiently (and therefore maximizing your cost savings). If you opt to clean it yourself, please follow manufacturer and provider instructions. They often require you to first turn off the system, use water without any chemicals, and with no abrasive materials to scratch the surface. Otherwise, you might want to hire a professional with a typical cost of about $150 -$250 per year. Most solar panels last between 25 to 30 years and, when regularly maintained and properly cared for, the need for repairs is rare. 

Sun exposure & panel orientation

An important factor in calculating your solar ROI is the efficiency of your solar panels. When properly placed and oriented, your solar panels should be exposed to unobstructed sunlight to generate the maximum amount of energy. The more power you can generate, the more you can save on your monthly electric bill and net metering.

Solar panels generate the most electricity in temperatures ranging between 59 and 96 degrees Fahrenheit. They’re also most efficient when fitted on a south-facing roof (in the northern hemisphere) at a 30 to 45 degree angle. Finally, solar panels shouldn’t get any shade for any part of the day in order to operate at peak efficiency.

Overall, your solar panels’ orientation and the amount of sun exposure they receive can impact your solar ROI by affecting efficiency. 

Fun fact: In Arizona, the best production months of the year happen to be April and May when the sun exposure is high and yet the temperatures are not too hot. The production starts to decline slightly into the summer months and further into the winter months.

Where you live

Your solar ROI can also vary depending on where you live. There are two reasons for this. Firstly, some states get more sun, allowing their solar panels to generate more electricity on more days of the year. The more power you generate, the less reliant you are on the grid and the more you can save on utility bills. Being able to generate excess power can also earn you utility credits from net billing programs. All else being the same, homeowners in sunnier states can expect to see a higher solar ROI than those in more cloudy regions. 

Your location can also affect your eligibility for state-specific financial incentives and tax credits. For example, Arizona offers a 25% tax credit off the total system cost up to $1,000. Qualifying for these incentives can accelerate your payback period and increase your solar ROI. 

How to calculate your solar ROI

Below, we provide a step-by-step walkthrough on how to calculate your solar panel ROI, including an example. 

1. Add up the total costs of your solar panel system

Start by adding up all the costs involved with purchasing and installing your solar system. This includes the solar equipment, labor, permits, inspections, and any other taxes or fees that may have been involved. 

For this example, we’ll say the total cost was $25,000 before any government tax incentives. 

2. Subtract tax credits and financial incentives

Most people qualify for the 30% federal solar tax credit. Depending on your state, you may also qualify for other tax incentives and credits. In this case, we’ll say you live in Arizona and qualify for the full $1,000 tax credit in addition.

We’ll start by subtracting the 30% federal solar tax credit from your initial $25,000 investment. That allows you to subtract $7,500 from your upfront costs, leaving you with a $17,500 initial investment. 

Next, we’ll subtract the $1,000 Arizona solar tax credit to reduce your solar investment to $16,500. 

3. Estimate how much you pay on energy bills

Now we want to estimate how much you usually pay on energy bills. To do this, you can look at your utility bills from the previous year. 

For this example, we’ll use the $137 per month average household electricity bill according to the U.S. Energy Information Administration. That adds up to $1,644 per year. 

4. Calculate your solar payback period

Next, we want to find out how long it will take to recoup your initial solar energy investment before you start making a profit. This is known as the ‘payback period’. To do this, we’ll divide your initial investment by how much you pay on energy bills each year. 

For this example, we’ll take the initial investment of $16,500 and divide it by the annual electricity bills of $1,644 per year. This leaves you with a payback period of around 10 years, meaning it will take ten years before you start seeing a profit. 

5. Calculate your lifetime savings

The next step before calculating your solar ROI is to calculate your lifetime savings. We’ll do this by subtracting your solar payback period from the expected lifespan of a solar panel, which is 25 years. We’ll then multiply the result by your annual energy cost. 

So 25 minus your solar payback period of 10 equals 15. Your annual energy cost of $1,644 times 15 equals $24,660. This is roughly how much money you’ll save over the lifetime of your solar panels. 

6. Calculate your solar ROI

The final step is to calculate your solar ROI. This is measured as a percentage. To find your solar ROI, start by subtracting your initial investment from your lifetime savings. 

As per our example, if your lifetime savings are $24,660 then subtract your initial investment of $16,500 to get $8,160. 

Next, we’ll divide this number by your initial investment and multiply the result by 100 to get our percentage. 

So we’ll divide $8,160 by $16,500 and multiply it by 100. This gives us a solar ROI of 49.5%. 

What is the average ROI for solar panels?

The average solar ROI in the U.S. is around 10%. In other words, you’ll make an average $100 profit for every $1,000 spent on a solar power system. The higher your solar ROI, the better an investment solar panels are for your home. 

As with all investments, many variables are involved when calculating your solar ROI. Some homeowners see more return on their investment and others see less. To get a more accurate solar ROI calculation, speak to a professional solar provider who can properly analyze your energy usage and give you a more targeted quote. 

What is the average solar payback period?

The solar panel payback period is the length of time it takes for you to break even on your solar panels and start seeing a profit. It’s calculated by dividing your initial solar energy investment by your annual energy savings.

Most U.S. households have a solar payback period of nine to fourteen years. Considering that most solar panels last around 25 years, that gives you around 11 to 16 years to earn a profit.

Solar ROI summary: Calculating your average returns

Solar energy is an investment that not only does good for the environment but also pays for itself. Your particular solar ROI will depend on numerous factors including upfront costs, eligibility for financial incentives, and energy usage. That said, with time, you can expect to start earning a profit by saving on monthly electricity bills. 

The best way to learn how much solar can save your family, now and into the future, is to consult with a professional solar power company. At Sun Valley Solar Solutions, we start every project by evaluating your unique home and energy needs. We then design a customized solar system and provide you with an initial ROI calculation. To book in your free, no-obligation solar panel quote, fill in the form on this page or give us a call on 480-576-5693.