After all, most home solar systems come with a pretty big price tag. You want to be sure that it’s an investment that will pay off, not just for the environment, but also for your wallet.
Figuring out whether solar panels will save you money in the long run (i.e. over the 25 year average lifespan of the panels) comes down to location, location, location. It’s not just about how much solar energy you can produce (but this is of course an important factor!), but it’s also about how much you pay for retail electricity from your local utility and which financial incentives are available where you live. The term that is often used is grid parity, and it refers to the point at which the price of solar electricity is the same or cheaper than electricity from your utility.
It’s not too difficult to figure out what you pay for electricity; the most accurate way is to look at your utility bills and take the total you paid for a year of electricity and divide that by the total number of kilowatt-hours (kWh) that you consumed (most bills summarize your annual consumption, but you may need to dig out your bills for the past 12 months). Now you have a number for what you pay for electricity. For comparison, the average utility rate in the United States from May 2015 to May 2016 was 12.64 cents/kWh. Depending on where you live, you may be paying more or less.
The next step is to figure out how much the electricity from solar panels will cost. This is a little more complicated as you need to determine how much electricity you can generate in a year, multiply that by 25 years on average, and divide that by the cost of the panels (including the cost of financing them, if you need a loan for example). We call this the “levelized cost" of solar electricity. There are a number of calculators out there that can help you with this, including our calculator Sunmetrix Discover.
Let’s take an example of a homeowner purchasing a 5 kW solar system (an average-sized system), for a home in Chicago, Illinois. Luckily, this homeowner has a south-facing roof with no, or minimal, shading, so she can produce on average about 6,530 kWh/year. This translates into 163,250 kWh over 25 years. (We always recommend that a solar professional visit your home to assess your roof and shading levels to determine the potential for solar panels, as each situation is unique.)
If we assume the solar panels cost $4 per watt (which is about the average cost in the U.S., although the price varies from place to place), then the system would cost about $20,000, minus the 30% federal tax credit of $6,000, or $14,000. To be conservative, it’s good to assume some costs for operation and maintenance over the lifetime of the panels; let’s assume about 10 percent of the purchasing cost before tax credits (0.10 * 20,000), or in this case, about $2,000 for a 5 kW system.
For simplicity, we will assume that the panels are being paid for outright, but if that’s not the case, you would want to include the cost of financing the panels (which you can do using our Buy or Lease Calculator). Moreover, each state and municipality is different when it comes to financial incentives for solar energy; for simplicity, we only included the federal tax credit of 30%. All in all, we are assuming a total cost of $16,000.
To determine the levelized cost of solar electricity, we divide $16,000 by 163,250 kWh (the amount of electricity we can produce over 25 years) and we get about $0.10/kWh or 10 cents/kWh. Since in Illinois, the average cost of retail electricity from the utility was about 12.6 cents/kWh (from May 2015 – May 2016), we can see that over the lifetime of the panels, this homeowner would save money by switching to solar energy. If the utility rate is different where you live, the results may be somewhat different.
It’s important to add one final word about recent changes in regulatory policies in certain states which greatly impact the profitability of solar energy. Where in some states the utility compensates homeowners who produce excess electricity at the retail rate (what you pay when you buy it), there has been a move towards only compensating solar producers for their excess electricity at the wholesale rate (which is much less than what you have to pay when you buy it). This is relevant if you are producing more solar electricity during the day and are not using it at that time (because you’re at work for example), and then consuming more electricity from the utility in the evening during peak periods when electricity may be more expensive.
It’s important to speak with solar professionals who will help you design your home solar system so that it meets your particular needs, and to speak with customer service at your utility so that you know what to expect when it comes to earning credits for your excess electricity, and what you have to pay when you need to make up the difference by purchasing extra electricity from your utility.
In conclusion, the cost of solar energy has fallen considerably over the past decade, and electricity prices continue to rise in most places, so it only makes sense that more and more homeowners are considering solar panels for their homes. It pays to do your homework with some preliminary research online and by speaking with solar professionals in your area, so that you can be sure that your solar panels are an investment that will pay off in the long run.
About the Author: Simone Garneau is the co-founder of Sunmetrix, an online consumer education website for residential solar energy, helping homeowners with the important question are solar panels worth it? In addition to the 200+ articles about solar energy, Sunmetrix offers homeowners three main resources: a Consumer Report for solar energy, Discover to preview solar energy for your home, and GO, the only solar energy test drive experience.