Back to: How to Calculate Average Returns on Solar Panels
Now that you understand the key factors in solar panel investments, let’s dive into how to calculate your payback period and annual savings. This will help you determine how long it takes to recover your initial investment and how much you’ll save over time.
Determine Annual Savings
You can estimate annual savings using:
Annual Savings = Solar Energy Produced (kWh)×times = Electricity Rate ($/kWh)
👉 Example:
If your system generates 6,000 kWh per year and electricity costs $0.15 per kWh, your annual savings would be:
6,000×0.15=$900 per year
Payback Period Calculation
The payback period tells you how long it takes to recover your investment:
Payback Period=Upfront Cost−Incentives & Rebates : Annual Savings
👉 Example:
If your system costs $10,500 (after incentives) and your annual savings are $900, the payback period is:
10,500 : 900=11.7 years
✅ Payback Period = ~12 years
This means that in 12 years, your solar system will have saved you enough money to cover its cost. After that, all future savings are pure profit!
What Affects the Payback Period?
Your payback period can be shorter or longer depending on a few factors:
Cost of Your Solar Panels
- A cheaper system will have a shorter payback period.
- A more expensive system might take longer to pay off, but it may last longer or be more efficient.
Available Incentives & Rebates
- More incentives = lower upfront cost = faster payback.
- Always check for federal, state, and local solar programs to maximize savings.
Electricity Rates in Your Area
- If electricity is expensive in your area, your savings will be higher, meaning you pay off your system faster.
- If rates go up (which they usually do), you’ll save even more over time.
Solar Panel Performance
- If your panels generate more energy, you’ll save more money.
- Poor panel placement, shading, or inefficient systems increase payback time.
Step 4: When Do You Start Making Money?
When Do You Start Making Money?
Once your payback period ends, your solar panels will continue generating free electricity for the rest of their lifespan, which is usually 25-30 years.
🔹 Example:
- Payback period: 12 years
- Solar panel lifespan: 25 years
- 13+ years of pure savings!
If you’re saving $900 per year, that’s an extra $11,700 in profit after your system has paid for itself!
