How to Calculate the Return on Investment for Solar Panels

Many people are now considering purchasing solar panels or a photovoltaic system to help reduce their energy costs at home.

Return of Investment on Solar PanelReturn of Investment on Solar Panel
A question that I hear often is, "When will I break even on my purchase?" or "What is my return on investment?" It's actually quite easy to calculate the return on investment for a solar panel purchase, assuming that you have some key information.

The first thing that you'll need to know is how much the system that you are considering purchasing is going to cost you. Let's pretend that you will be purchasing a system that costs $2,000 installed. In this case, you will break even when you save $2,000.

Reduce Cost by Tax Credit Amount

The federal government allows homeowners to take tax credits on the purchase of solar panels, so you'll want to reduce your total cost by the tax credit that you receive, assuming you can take advantage of it. Currently, for solar panels, homeowners are allowed to take a tax credit of 30% of the purchase price up to $2,000. In this example, the system cost $2,000, 30% of $2,000 is $600, leaving $1,400 as the new "cost" of the system. Now, you need to save $1,400 on your electric bill before you will break even.

How much Energy Will your Solar Panel Collect?

The next thing that you need to know is how much energy your solar panels will collect. You don't want to know what it can collect, because that will probably not be the same amount as what it actually will collect, based on the location of your home, placement of the panels, etc. Make sure that you ask the distributor of the panels that you are buying specific questions about this because having an accurate number is key to your calculations. Let's say for calculation purposes, that, for your $2,000 you purchased a 1 kW panel that will collect 5 kWh per day. The number that you are interested in right now is how much energy your system will give you each day.

What do you pay per kWh?

Next, you'll have to know how much you pay per kWh. This number will be on your electric bill. In Hawaii, I pay about $0.45/kWh. The average around the nation is much lower. For this example, let's pretend that you pay $0.10 per kWh.

Now that you have all the information you need, you are ready to calculate how long you'll need to own your solar panels to break even. If you pay $0.10 per kWh and you collect 5 kWh of electricity a day, you are saving $0.50 a day - or approximately $15 a month. To figure out how long it will take to break even, use the following formula: Total Cost of System after Tax Incentives Divided by Total Savings per month, or $1400/15. The result is that it will take 93.3 months to break even on your purchase. Divide this by 12 (to see how many years it will take) and you will see that it will take you 7.7 years to break even on your purchase. Any energy that you produce after this is really a return on your investment!

Things You Will Need

  • Calculator
  • Electric Bill
  • Information about Solar Panels you are considering

Tip

  • Your break even point may vary greatly based on where you live and how much you pay for electricity. If you live where you get a lot of sun and have high electricity costs, you will see a break even much sooner than a location that doesn't get as much sun and has low electricity costs.