Installing solar panels has many advantages. You can reduce your energy consumption, increase the value of your home by an average of $ 1
That said, solar energy can also be expensive. Residential solar systems cost an average of $ 20,000, including the panels, other related hardware, labor, and more, although that number can fluctuate dramatically depending on your location and the number of panels you install. So how long does it take to break even on that initial investment? Here we show you how to estimate the payback period of solar panels.
What is the payback period?
A payback period is the amount of time it takes you to recoup your initial investment. Solar panels can help you save enough money on your utility bill over time to offset upfront costs. How much you save per month depends on the size of your solar system, your home’s energy consumption, and other factors.
How do you determine the payback period for solar panels?
Calculating the payback period is unique to your circumstances because of the variability of the upfront costs, as well as the difference in energy costs based on your location. But here are some guidelines to help you estimate when to break even.
Step 1: Determine your costs in advance
First you need to estimate how much your initial investment will be. In addition to the system costs, you should include possible installation costs and other fees as part of setting up your service. View cost estimates in your area and go from there.
Step 2: Subtract tax incentives
Homeowners can do a one-off26% discount on the purchase price of a solar system. If the initial investment in solar panels in your area typically costs around $ 20,000, the tax credit would run you $ 5,200 next time.
In addition, some utility companies offer incentives and discounts for installing solar power. Contact your local energy supplier to see if they offer incentives.
Step 3: How Much Is Your Typical Electricity Bill?
This estimate assumes that you get all of your energy from solar energy. While some can get 100% of their electricity from solar energy, or even sell some excess energy back to the grid, others will still have an electricity bill to supplement use. This varies greatly from house to house depending on how many solar panels are installed, normal energy consumption and more. Here are more tools for calculating your home’s potential savings.
Now you know how much energy you are saving, log into your electricity company account and calculate an average of your latest electricity bills. If possible, go back at least six months to account for seasonal temperature changes and other cost fluctuations. Let’s assume you get 100% of your usage from the panels and currently pay an average of $ 125 per month in electricity bill, or $ 1,500 per year. Now you have the information you need to estimate the payback period for solar panels.
Step 4: Estimate your payback time
First, multiply the cost of your solar panel by 0.26, which is the tax credit you receive for installing your system. If you initially spend $ 20,000 on it, your tax credit will be $ 5,200. That will reduce your initial investment to $ 14,800.
Now let’s consider energy savings. Divide your initial investment by the $ 1,500 you would normally pay to the electric utility per year; that’s how long it takes for your savings to equal the amount you spend. Using the example above, divide your initial investment of $ 14,800 by $ 1,500 and the result is a payback period of just under 10 years.
That may seem long on the surface, but solar panels can easily last 25 years.
You can speed up your payback time even more by selling renewable energy certificates or RECs. These are measured in megawatt hours of electricity that comes from a renewable source. Electricity companies have to buy some of their electricity from renewable sources, which means you can save even more money by selling some of the energy generated by your solar panels.
Things to Consider
Some factors can extend your payback period. Before installing solar panels, you should inspect the condition of your roof. Panels can last for 25 years, so if your roof is not in top condition you may need to make improvements before installing solar panels. If this applies to you, make sure to include these costs in your initial investment.
In general, solar energy can be an expensive affair, especially given the upfront costs. However, the long-term efficiencies they provide can more than offset the initial investment, leading to savings for years to come.
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