True Payback Period
You're considering installing a solar energy system and its time to figure out how much it will cost vs. how much you will save. The time it takes to recover the costs of installing a solar energy system is typically referred to as the “Payback period.” The seemingly most straight forward way to do this is to simply calculate how much you are paying for electricity every month, then look at how much you will be saving every month after installing your system, and then divide your cost of installation.
For example, and I’m going to use vey round numbers to keep this simple; let’s say you are planning on installing a solar energy system with battery that is going to cost $30,000, and your monthly electric bill is $200. The great thing about this system is that it will totally eliminate your monthly electric bill (typically you will still need to pay $10-$20 for being connected to the grid and other taxes but we will leave those out to simplify our calculation). So, the first thing you want to do is subtract any and all incentives from your total installed cost. Federal tax credits, state tax credits, grants, programs, etc. These can save you between 30% - 80% of the total costs. We will assume you get 33% in total incentives, making your net cost of the system $20,000 ($30,000 total installed cost - 33% ($10,000) = $20,000)
Now if you look at your total net cost to install the system after subtracting all incentives, $20,000 in this case, then divide that by your monthly electric bill of $200 you will get 100 months or 8.3 years. Most people would look at this and think they are done, and although they are close, they are missing a few things that could have a drastic impact on your True Payback Period. What are they?
Does your electric bill go down some years, up some years, and stay flat others? Maybe, but historically the general trend has been up by about 5% each year (varies depending on which state you live in). This doesn’t change the numbers too much unless you calculate decades out so you could subtract 3 - 6 months or leave this out. But here is where the numbers get really interesting.
With your solar + battery system, you will no longer experience power outages. That means, no more lost work time, less stress, no food having to be thrown out because the fridge didn’t stay cool, you didn’t have to rent a hotel or go to a friend or relatives house because they had power. If you use medical equipment to help you sleep or for other things, having those items able to be backed up by a solar + battery system could be invaluable. How much are each of these items worth to you? Maybe you never experience power outages and these items are worthless. Maybe you have frequent outages and these items are worth thousands every year. You’ll need to assign your own figure to this question because it will be different for everyone. In some cases, you can actually EARN money by sharing power from your battery with the grid.
We are also now starting to better understand the value determined by home buyers when evaluating homes with solar + battery systems. Again, this will vary in each case, but values are being estimated on average to increase a home’s value by $10,000 - $20,000. If we use the lowest of this and say $10,000 then you have a built-in return of $10,000 when you sell the house which now reduces your True Payback Period to just 4 years. If you don’t ever plan on selling your home, maybe you will elect not to calculate this into your equation because you will not see its benefit. But will your heirs?
So in total :
$30,000 total system cost for solar + battery
- $10,000 (33% total incentives)
- $10,000 added home value to be recouped on sale of home
- $5,000 estimated savings by avoiding power outages
* (Annual electric bill increase not used to simplify calculation. Subtract 3 - 6 months if modeling numbers out in decades.)
Total net cost = $5,000 divided by $200 electric bill per month = 25 months or just over 2 years True Payback Period.
Other caveats you could include that would increase your True Payback Period are cleaning, maintenance, and component replacements. These values for most people will also be very low, as most systems now come with warranties for decades. Inverters are the most likely thing to go bad and have replacement costs fully installed of about $1,000 - $2,000 but even these will have warranties measured in decades.
Key to remember here is that everyone’s situation is unique based on where the panels are installed, what incentives are available to you, and how you value the additional benefits. Feel free to run your own simulations. And of course, we are always available to help provide quotes, knowledge of available incentives, and answer any other questions you may have.