How to Calculate Rooftop Solar Panels Payback Period – A Comprehensive Guide

Last updated: 7th of January, 2023

When rooftop solar panels were first introduced to the world, they were largely just another neat toy for the reach but not practical for the masses due to their massive upfront costs. However, in the last decade solar cell costs and solar panel installations have both experienced significant price drops, while efficiency of these solar panels in converting solar light into usable (or sellable!) electricity has only increased.

Combined, more affordable and efficient rooftop solar systems have made solar power more reachable for those without endless capital, particularly with the government-backed financial incentives that new owners of rooftop solar systems can utilize. Does this mean you should get a rooftop solar system?

Because one of the main benefits of owning rooftop solar is the savings you’ll experience on your monthly power bills, you can easily calculate how long it will be before the savings from the solar panels have paid for themselves, otherwise known as the payback period.

With the following five easy steps, determine what the payback period would be on a rooftop solar system for your household.

Determine the total cost of the solar system you want to install

First things first, you’ll need to determine what the total upfront cost would be to install your rooftop solar system. The costs that go into a solar system aren’t just the solar panels themselves, but also the design required by a certified solar installation team, the installation equipment (i.e., the mounting beams that will hold the solar panels in place), the electrical equipment used to monitor the solar panels and connect them to your local grid, and the labor of the team used to install the solar system.

The exact total solar system installation cost depends on a myriad of factors, such as where in the United States you are, total size of the system installed, whether the system is paid for upfront or financed, the specific company, and more.

The average rooftop solar installation in the United States in 2020 will cost about $13,142 [1].

A number of online tools exist to help you estimate what a solar rooftop installation would cost for your specific case based on all of the potential variations. A valuable tool to determine what a solar system suited to your needs would cost in your area is the solar power calculator.

While at first blush it appears to be just a marketing tool to open the door for solar installers to call you, the tool was developed to help prospective solar power investors enter customized information and make better-informed decisions [3].

For the most accurate estimate, though, you should directly contact a solar installer in your area.

As an example for demonstrative purposes, though, we’ll assume the total cost of the solar system is $20,000.

Find out the value of all up-front financial incentives

One of the greatest tools at the disposal of a potential owner of solar rooftop, though, are the variety of government incentives for installing solar panels on your rooftop.

The expansion of solar power in the residential sectors comes with a host of public good (such as less strain on local power plants and reduced carbon dioxide emission from the electric power sector) that the government offers financial incentives to those households that install them.  

To start, the federal government offers all households who install rooftop solar system a 30 percent investment tax credit (ITC). This ITC, which has no cap in its value, allows consumers to deduct 30 percent of the cost of installing their solar system from their federal taxes.

On top of that, many states offer additional rebates, incentives, or tax credits on top of the federal ITC. To see if your state offers an additional financial incentive, check Database of State Incentives for Renewables and Efficiency.

Let’s assume, for our example, the only up-front financial incentive for rooftop installations at a given location is the 30 percent ITC. As such, the upfront cost of $20,000 would be reduced by 30 percent or a $6,000 incentive.

Calculate your annual electricity costs

The speed at which your rooftop solar installation pays for itself depends intrinsically on how much electricity you used per year.

For larger houses that tend to use more power every month (because of the extra lighting, extra space to heat, etc.), the opportunity to reduce your electricity bill is even greater as a starting point.

What is important for this calculation, though, is to consult your monthly electricity bill and determine what your average annual electricity costs are.

As an example, the Energy Information Administration indicates that the average U.S. residential utility customer uses 10,764 kilowatt-hours (kWh) per year for a total cost of $1,351.08.

Estimate the yearly energy production from the solar system

The opportunity for savings from installing your own rooftop solar systems comes from how much energy the solar panels produce, reducing the need for a residential customer to purchase that amount of power from their utility company.

Much like everything else, the yearly energy production from a solar system varies based on a variety of factors, including region of the country, expected level of sun and other weather-related factors, size of the system, optimal placement of the system, proper maintenance of the panels, and more.

Estimating the annual production from your solar system is a difficult task to get with accuracy without consulting directly with companies who can install solar panels for you. But there are again a number of online tools available to give you a good idea of what to expect.

Continuing our example, if you say you live in California with 725 square feet of roof facing south, then your rooftop can hold up to 30 solar panels rated at 250 watts (W) and, assuming four hours of direct sun per day, that would equal 30 panels x 250 W x 4 hours per day x 365 days per year = 10,950 kWh.

Finally, estimate your payback period by following the next steps:

The last remaining steps to calculate the payback period of a potential solar rooftop installation are now just simple arithmetic.

Remember that payback period is simply how long it will take for the energy savings derived from your solar panels to equal the cost you had to pay for the cost you incurred to install them.

Taking all of the factors we estimated in earlier steps, that simply means we need to do the following arithmetic to determine solar payback time:

Cost to install = (total cost of the solar system – value of upfront financial incentives)

Average cost of electricity = total annual cost of electricity / total annual electricity used

Payback period = cost to install / yearly savings

So for our example given along the way:

Cost to install = $20,000 – $6,000 = $14,000

Average cost of electricity – $1,351.08 / 10,764 kWh = $0.1255/kWh

Yearly savings = $0.1255/kWh * 10,950 kWh = $1,374.43

Residential solar system payback period = $14,000 / $1,374.43 = 10.2 years.

A payback period of 10.2 years is actually above the average across the United States. According to a report from the National Renewable Energy Laboratory (NREL), the average payback period in the United States is between 6 and 8 years [2].

However, with solar rooftop having a typical expected lifetime exceeding 25 years, such low payback periods mean that solar installations are a great investment because they will typically be providing their owners with pure savings for a majority of the lifetime of the equipment.