There’s more to installing a solar power system than reducing your carbon footprint and conserving the environment. Adopting solar energy promises diminished reliance on the mains electricity grid, translating into more savings. However, it’s worth noting that these systems have a high upfront cost. Therefore, it’s crucial to consider the expected solar payback period before installation.
Several factors affect the expected solar payback period, including installation costs, electricity rates, tax incentives, system performance, etc.
What is a Solar Payback Period?
The solar payback period is the time it takes to recoup the money invested in acquiring a solar energy system through savings. Depending on various factors, most people recoup their investment five to ten years after installation. Considering solar panels last up to 25 years, this is a short payback period.
How to Calculate Solar Payback Period
The best way to compute your ROI is by dividing the project’s total cost by the aggregated annual savings on your electricity bills. That’s a good starting point, but it doesn’t cover everything. For example, it would be best to consider tax credits and other financial incentives.
Below are tips on how to calculate your solar panel payback period with these simple steps.
Combined Costs
The first step involves determining the system’s total costs. This includes the price of the equipment plus installation costs minus the financial incentives available to you. For instance, if the total cost of purchasing and installing your system is $30,000, you can get $6,000 as a tax credit, assuming the prevailing rate is 20%. Therefore, the combined costs for your solar energy systems will be:
Total Cost ($30,000) – Financial Incentives ($6,000) = Combined Costs ($24,000).
Annual Savings
To calculate your annual savings, you must know your average monthly electricity consumption. In this case, there are two scenarios – your solar energy system might cover your power needs entirely or partially.
Scenario 1: Your Solar Panel Covers 100% of Your Power Needs
Assuming your monthly electricity bill is $400, your annual savings will be:
Monthly bill ($400) x 12 = Annual Savings ($4,800).
Scenario 2: Your Solar Panels Cover 60% of Your Power Needs
Assuming your monthly electricity bill is $400, your annual savings will be:
Monthly bill ($400) x 60% x 12 = Annual savings ($2,880).
Payback Period
To determine your payback period, divide the combined costs by your annual savings.
Scenario 1: Combined costs ($24,000) ÷ Annual savings ($4,800) = 5 years.
Scenario 2: Combined costs ($24,000) ÷ Annual savings ($2,880) = 813 years.
Factors Affecting Solar Payback Period
Here are the factors that affect your solar payback period.
Installation Cost
When you purchase solar panels, you can install them yourself or hire a professional. Taking a DIY approach saves you money, lowering the combined costs of acquiring the system. But, as a result, it shortens the payback period.
Tax Incentives
Some governments offer tax incentives to encourage citizens to adopt solar energy. Of course, the higher the rates, the faster you recoup your investment.
Maintenance Cost
Solar modules have no moving parts and require little maintenance. However, other equipment in the system, such as inverters and batteries, are prone to damage. Therefore, ensure you include the cost of repairing and replacing these components when calculating your solar payback period.
Sun Exposure
Your system produces maximum electricity when exposed to full sunlight. Generally, those who live in regions that experience sunny conditions throughout the year recoup their investment faster. Nevertheless, solar is still profitable to those living in cold climatic areas.
Placement
The placement of your solar panels affects their productivity. If it’s wrong, your system will be inefficient, regardless of the amount of sunlight in your location.
Ideally, it would be best if you tilted the solar panels to an angle that matches your location’s latitude. In most cases, the roof’s natural slope is close to the latitude, ensuring you don’t need extra adjustments. It also helps to point the panels towards the equator.
Panel Degradation
Solar panels lose efficiency as they age. The estimated degradation rate for most solar modules ranges between 0.5% and 1% yearly. Fortunately, most manufacturers cover this degradation in the warranty. A typical agreement guarantees customers of 80% panel output after 25 years. This means that a 200W solar panel in 2022 will produce160W in 2047 – if not, you can always ask for a replacement.
It would help to consider panel degradation when calculating your solar payback period. This is because your panels lose their output the more you use them.
Electricity Costs
Electricity costs are ever increasing. The primary reason for the increase is the rising demand for energy resources. As the global population increases, more people need electricity, whose primary sources are finite, like fossil fuels. This drives up the cost. The other cause is inflation – over the past few years, electricity costs have increased by up to 6% yearly in some regions. This could worsen due to uncertainties in the global economy.
Although it isn’t easy to predict future electricity costs, solar guarantees financial security by exempting you from paying electricity bills throughout the system’s lifetime, you will only need little cash for occasional repairs and replacements.
Wrapping Up: Should You Purchase Solar Panels?
Purchasing solar panels is a worthwhile investment. Despite having a steep upfront cost, it relieves the burden of monthly bills. You can then recover your money within a few years after installation. Moreover, solar panels offer a reliable energy source if you live in remote areas.
The average payback period varies depending on several factors. For example, DIY systems pay for themselves faster than those installed by contractors. Also, large, autonomous systems have shorter payback than small, grid-tied systems. Nevertheless, all approaches are profitable because solar panels last for at least 20 years.
The high cost of purchasing solar panels and related equipment like batteries and inverters shouldn’t discourage you. Many financial institutions are offering low-interest loans to encourage the adoption of green energy sources like solar. Once you apply, you can repay the loan using the money you’d otherwise have used to settle electricity bills. As a result, it’ll only take a few years to become independent from the electricity supply company.
