One of the biggest reasons for any homeowner to opt for solar panels is the savings from producing their own electricity. This begs the question, “How much money do solar panels save?”
Over the past 5 years, U.S. homeowners (and homeowners worldwide) have invested heavily in solar arrays. But why?
In short, solar panel projects provide benefits across three dimensions:
- Savings on electricity bills;
- Tax credits; and
- Environmental benefits.
In this article, we discuss how these elements come together to help you save through your solar panels.
How Do Solar Panels Save You Money?
Solar panels save you money in two ways:
- By producing power that you would have otherwise bought from a utility provider.
- Through the federal tax credit that you receive for investing in panels.
In 2020, the government extended the tax credit for solar panel investments.
- Systems installed in 2020-2022 will receive a 26% tax credit.
- Systems installed in 2023 will receive a 23% tax credit.
How Do You Calculate How Much Money Solar Panels Save?
The following steps will help you determine how much solar panels can save you:
- Determine your annual energy consumption
- Determine your solar system requirements
- Establish the cost of your solar system
- Establish cost after federal tax credit
- Determine your energy savings
- Calculate your payback and discounted payback period
Funding is also essential — not everyone has $15,000 + to spend. Therefore taking out a loan or leasing a system may be necessary.
Step 1: Determine Your Annual Energy Consumption
To begin with, you need to calculate how much energy you consume. To do this, refer to your annual utility bill.
Annual Energy Costs (USD) = Annual Energy (in kWh) x Average Electricity Retail Price (cents/kWh) / 100 (USD/cents)
Step 2: Determine Your Solar System Requirements
To determine your solar system requirements, you can either:
- Establish your consumption from Step 1
- Calculate your energy requirements based on your appliances (this article might help).
Now, your location comes into play — the sun shines across different areas at varying intensities (solar irradiance). We will use the peak sun hour (PSH) method to establish the solar panel requirements. Those living in the U.S. can find your location’s PSH here.
The following formula determines power output based on location and annual power consumption:
Rated System Power Output For Solar System (in kW) = Estimated Annual Energy (in kWh) / (PSH hours x 365 days)
Let’s apply this to an example:
- Estimated Annual Energy requirement (kWh) = 11,000 kWh (average U.S. household)
- PSH = 5.7 (Arizona)
- Rated System Power Output For Solar System = 5.2 kW
You can also use our Solar Calculator to size your solar panel system based on location and house construction. Knowing your solar requirements, you can move to the next step: finding its cost.
Step 3. Establish The Cost Of Your Solar System
The cost of your solar system depends on several factors, including:
- Solar Panels: panel price depends on brand (SunPower vs. Sunrun), type(monocrystalline vs. thin-film), and size (100, 200, 400, 500, etc.)
- Solar Inverter: Solar inverters convert D.C. into A.C., and their price varies depending on brand and size (5 kVA, 6 KVA, 10 KVA, etc.).
- Solar Batteries: these are optional, and prices can vary based on your needs. There are also different solar battery technologies.
- Installation, licensing, and engineering costs: include your systems license, labor, and engineering design fees.
- Electrical BOS and General overheads: This would include meter, communication device, subpanels, wiring, and all other nitty-gritty elements of a project.
Generally, a 5 kW system costs around $16,500 (NREL) without batteries, while a 12.5 kW system with a battery will cost approximately $30,000.
If you’re interested in learning more about 5 kW systems, click here.
Please note: These figures are estimations. Get in touch with your local service provider to get the exact quotes for your specific needs. If you are based in the U.S. you can claim your free solar savings consultation here.
Step 4. Establish Cost After Federal Tax Credit
To get to this figure, multiply your system’s cost by 26% or 22% based on the year of installation. Next, minus this amount from the total cost of the solar panel; this is the net cost of the panel.
Net cost of system = Total cost of system x (1 -federal tax credit (%))
A 5 kW system costs $16,500, so its price after deducting the 2022 tax credit will be $12,210. Now, carry out the same calculation for your system.
Step 5. Determine Your Energy Savings
This is crucial to determine whether your solar system will save you money.
We will assume that the electricity prices in the U.S. will increase by 4.3% (EIA.GOV).
Once you know your power consumption cost for the previous year, you can calculate it for the following years. Use the following formula:
Future Value = Present Value (1 + Price growth rate) ^ number of years
The average user’s annual energy consumption is 11,000 kWh at 24.1 cents/kWh. Therefore the present value is $2,651.
Since you will be installing a system that will produce the same output, you’ll be saving the following amounts in the coming years:
- Present price (year 0) = $2,651
- Money savings (year 1) = $2,765 [as 2,651 x (1 +4.3%) ^ 1]
- Money savings (year 2) = $2,884
- Money savings (year 3) = $3,008
- Money savings (year 4) = $3,137 and so on for 25 – 30+ years (solar system lifespan)
The total power production will add up to $120,000 with an initial investment of $16,500 and approximate savings of $4,000 on federal tax.
Now, carry out this calculation for your electricity bill.
Please note: this $16,500 could have been invested in other ways, like savings certificates with an average of 5.6% returns, which will be $160,251 by the 25th year.
Step 7. Calculate The Payback And Discounted Payback Period
Lastly, it is essential to know how much time it will take for you to recover your investments and start the savings from your solar system.
The payback period will calculate when you reach break-even, i.e. when you have finally recovered your investment.
The formula for this is:
Payback Period (years) = Investments / Annual Cash flow
Discounted payback also caters to the inflation aspect of the economy, and its formula is as follows:
Discounted Payback Periods (years) = Investments/Discounted Annual Cash Flow
For our 5 kW system — with a net investment of $12,000 at year zero — the payback period will be 4.8 years or 4 years and 8 months. Similarly, the discounted payback period will be 4.2 years or 4 and 2 months.
How Much Money Do Solar Panels Save In The U.S.?
To fully grasp how solar systems save money, we have provided a table below for a 6 kW solar system in different U.S. states.
Annual solar power is calculated using the Peaks Sun Hours method.
|Net Benefit ****|
** Annual power is calculated using the Peak Sun hour method
*** Solar panel costs for each state are seen from Solar Reviews
**** Net Benefit is energy price adjusted (4.3% price annual price increase) and solar panel investment deducted
What Factors Impact Solar Panel Savings?
Solar panel savings are impacted by the location and specifications of the solar array.
Are Solar Panels A Smart Investment?
Yes, solar panels are a wise investment, that is, if you have a house with ample space available and a budget to support the investment.
Many states have banks that provide cheap credit for solar investments. Additionally, there is a federal tax incentive for solar panel investments, making it an excellent time to invest in solar panels.
We also believe that — with time — power production from non-renewable resources will get more expensive, pushing the retail power tariff upwards. So, it would help if you started looking to invest in renewable energy systems like solar or wind.
We hope this article has helped you understand the financials behind the move toward solar.
In summary, if you have your own home, ample space, decent credit, or savings in the bank, you should consider investing in a solar system.
Sure, there are several important factors to consider, like the location of your house or alternative investment plans, but it is worth looking it over.