All-electric homes that rely on electric sources of heat such as heat pumps have the ability to essentially eliminate reliance on fossil fuels by opting for a residential solar panel system. While this can significantly reduce the carbon footprint of a home and allow homes to attain carbon zero status, the economic cost of solar panel installation is still considered to be prohibitively expensive by many homeowners, which is one of the reasons why, even in the State of California, only 9 percent of detached single-family homes have some solar panel system installed. Understanding the economics of solar panels, like the internal rate of return and payback periods for various-sized PV systems, can help homeowners make an educated decision for their household energy needs that will be good for the environment and good for their budgets.

In recent years, the global output from solar PV energy has increased by around 50 percent each year. This rapid growth, combined with government subsidies and increasing competition in the solar panel market, has lower the cost of installed solar energy per watt. Today, Energy Sage estimates that the average price per watt for solar panels ranges from $2.58 to $3.38. In addition, the average cost for a completely installed residential solar PV system ranges from $10,836 to $14,196 after solar tax credits are applied and have an average size of 5 kilowatts (kW).

Before You Start

Before investing in solar panels, it is important to recognize that homeowners can first significantly reduce their energy needs through sustainable home design and construction methods. Rise recently featured a beautiful, off-grid home in Canada that is completely powered by a 750-watt solar power system, which is more than five times smaller than the average-sized PV system. Reducing the size of your home, opting for efficient heating systems such as heat pumps or even a wood-burning stove, investing in high-performance insulation and a tight building envelope, and adopting behavioral strategies that radically reduce your overall energy needs can all help to reduce your energy demand, opt for a smaller solar system, and thus save you money.

The Analysis

To figure out the economics, you need to know your costs and your savings. For example, let's imagine an average 2,000 square foot home with optimum roof orientation to utilize the sun's energy. Without low carbon retrofit to improve the home's energy efficiency, a 5 kW grid-tied solar PV system should be enough to provide at least 90% of the home energy needs. At the average price of $3.00 per installed watt, this system would cost around $15,000 for the solar panels, inverters, charge controller, wiring, and installation. After the 30 percent tax credit (explained below), the total cost would come out to around $10,500. 

The average electricity bill in the United States is about $111 per month. People spend an average of $644 on natural gas for heating during the winter, for a total annual expense of $1,976. A full-sized 5 kW solar system should allow homeowners to drastically reduce their reliance on natural gas for heating through the use of a heat pump, wood stove, or other alternative heating strategies. If the 5 kW solar system would provide 90 percent of the heating and electricity needs, homeowners could expect to save around $1,778 per year for a total payback period of just under 6 years. That’s the payback: by dividing the cost by the annual savings, you get to how many years of savings it takes to pay yourself back the initial investment. Taking those same costs and savings over a ten-year period provides you with an internal rate of return (IRR) of 14 percent, assuming electricity rates would increase by 3 percent every year. 

Because most solar panel systems have a performance guarantee for 25 years (along with an equipment warranty that will typically guarantee 10-12 years without failure), the long-term savings on a solar PV system can quickly add up. A homeowner saving an average of $1,778 on their heating and electricity bill each year can expect to save over $33,000 over that 25 year period even after paying off the original investment. 

Tax Incentives and Net Metering Policies 

In the United States, solar systems are increasingly priced competitive with other forms of energy, and they still receive government subsidies. One of the most important policies that have driven the growth in installed solar energy capacity has been the Residential Renewable Tax credit, which allows for a 30 percent tax credit for solar systems on residential and commercial properties. This widely successful renewable energy policy helped fuel the U.S. Solar Industry growth by more than 10,000 percent since it was implemented in 2006. While this solar tax credit was set to expire in 2018, the deadline was extended by the Bipartisan Budget Act of 2018. Both residential and commercial solar projects can still benefit from the full 30 percent tax credit if their solar panel system is installed before December 31st of this year. It then decreases to 26 percent in 2020, 22 percent in 2021, 10 percent for commercial, and 0 percent for residential by 2022.

Many states incorporate progressive net metering laws—a billing mechanism that credits solar energy system owners for the electricity they add to the grid. In some cases, the utility company will even pay you if you produce more energy than what you consume, thus reducing the payback period. 

Final Considerations 

Even if you don’t have the savings to install a solar panel system, there are both financing and leasing options for solar panel systems today. Community solar programs can offer a more affordable alternative for people who rent or don’t have a property conducive to a solar PV system.

It is important to recognize that a rooftop solar PV system can increase the total value of your home. A study by the real estate website Zillow found that solar panels can raise a home’s value by 4.1 percent across the U.S., which amounts to a boost in value of $9,274 on a $226,300 home. So do the economics of solar make sense for you? Do the quick analysis for your own home, and let us know!