Getting a return on your solar energy investment
Homeowners looking to add solar panels to their property are likely motivated by environmental concerns. But they’re more often concerned about a different kind of green: money. They want to know: “How much does solar energy cost?”
Installing a solar system generally costs thousands of dollars. That makes for a sizeable upfront expense.
But by installing solar panels, homeowners can offset or at least reduce electrical bills from their utility. Depending on their situation, they can recoup their initial investment long before the solar system is decommissioned. That allows users to reap the benefits for years to come.
So it’s no wonder that nearly all of homeowners surveyed by the Pew Research Center back in 2019 said they were interested in solar in order to save money on utility bills. In the Duluth area and across the country, people are increasingly turning to solar power.
Going solar isn’t cheap, so people are rightfully curious about how long it will take to get a return on their investment. The answer to that question will depend on a slew of factors, including the availability of financial incentives and your system’s setup.
Another more unpredictable variable to consider is the future cost of electricity. Our return-on-investment calculations below will be based on current prices per kilowatt-hour (kWh), but it’s impossible to foresee the cost of electricity in 20 years. Solar panels can act as a hedge against future price increases.
But people may also decide to install solar panels for less tangible reasons that are harder to calculate in a simple ROI formula. How do you put a price on a cleaner energy future, and the benefits that come with it for people and the planet?
That’s a tough question to answer. So let’s start with some basic math to get a better understanding of solar power’s ROI.
Solar industry folks like to talk about a “payback period,” which refers to the time it’ll take to make enough money from your solar panels to cover the initial cost of installing them. Several websites have calculators that’ll give you an idea of how long it’ll take, including this one from EnergySage that just asks for your address and average electricity bill.
That may be helpful to get started on your solar journey, but it’s helpful to understand the factors that’ll affect your payback period.
But before we get too far, I should note that any estimates or averages I talk about in this blog are just that – ballpark figures. It may not reflect the price for your system given your situation. Also, I’m not a tax professional, so it may be a good idea to consult with one if you’re interested in tax credits that’ll I’ll mention later.
First, let’s talk about costs of installing solar panels.
Generally, it costs a few bucks per watt to install a solar system. According to figures from SolarReviews, the average cost per watt for a 7 kW system in Minnesota is $2.71 and $2.58 in Wisconsin. That figure will generally be lower for larger systems, since contractors can fetch a lower price when buying more components.
But how large of a system will you need? This is an important question, because it’ll affect the initial cost as well as how much money-making power you produce.
Sizing a system
You’ll need your electricity bill, or preferably, all of your statements from the past year to get a sense of how much power you use and what you pay for electricity.
To size your system and offset your bill, you can look at kWh used or how much you paid for electricity. Installers may examine how much you actually paid, since electricity may cost less during “off-peak” hours. That depends on how your utility bills you.
You may produce enough power to sell it back to the utility through net metering, typically during the summer months. But you might be using more than you generate during the winter, when there’s less sunlight to harness. We can size a system so that it balances out financially over the course of a year.
But the purposes of this blog, we’ll use kWh instead of dollars. According to the U.S. Energy Information Agency, the average Minnesota home uses 759 kWh per month, or about 9,100 kWh per year.
Using PVWatts from the National Renewable Energy Laboratory, we can generalize how much power our system will produce. The calculator considers system size, electrical rates, panel tilt and how much sun an area receives.
I did a quick check using the 55806 area code in Duluth, where I live. Using the default settings for the system setup, the system would need to be about 7 kW to offset the 759 kWh an average Minnesota home uses per month. The system would generate $999 in annual value, according to PVWatts.
Paying for power
Another caveat: your payback period will depend on how much you pay for electricity, which differs based on where you live and which utility supplies your home or business with power.
For instance, Allete, which owns Minnesota Power, reported an average retail price for residential customers of about 11 cents per kWh in 2019. That’s a couple of cents below the statewide average, according to the EIA. I used the 11 cent figure for the calculations above.
And the payback period will also depend at what rate your utility credits you for the electricity you produce. In my calculations, I assumed the utility would credit us at the same rate we pay for electricity.
And of course, you don’t have to build a system that would completely offset your electrical usage, and the experts at Wolf Track Energy can help you decide what makes sense for your property.
But let’s assume we’re building a 7 kW system that can produce 9,100 kWh per year. At $2.71 per watt, that comes to a price tag of almost $19,000.
So using some basic math, we can get an idea for how much a solar system is going to cost. But this is just the initial cost. Government and utilities offer incentives that will help make it even more feasible to go solar.
Solar power has become increasingly popular in recent years, and there’s little question that financial incentives have helped more people purchase panels.
Perhaps the most important such incentive is the federal income tax credit.
The Solar Investment Tax Credit, as the federal incentive is known as, allows homeowners and businesses to reduce their income taxes by 26 percent of the solar installation’s cost as long as construction begins before the end of 2022. The credit is reduced to 22 percent in 2023, and after that the residential credit disappears but the credit for commercial projects stays at 10 percent.
EnergySage says the average shopper on its marketplace saves almost $9,000 thanks to the tax credit. That makes it a lucrative incentive for prospective solar users.
Next, there’s a popular program that’s specific to Minnesota Power customers in the Duluth area.
The utility’s SolarSense program provides a rebate based on the size of your system. It’ll pay 56 cents per kWh, and it’s limited to $10,000 or 60 percent of installed costs, whichever is less.
There was about $350,000 budgeted for the SolarSense program this year, and the money was quickly allocated. The application process opens every year on March 1.
Minnesota Power does require you to have a certified installer to get a rebate. And luckily for you, Wolf Track Energy has plenty of experience with the SolarSense program.
Now that we’ve talked about financial incentives, let’s go back to our initial cost calculation.
Running the numbers
For a 9,100 kWh system, we could claim a SolarSense rebate of $5,100, bringing down the cost to $13,900. The federal tax credit would be applied after taking the rebate into account, so it would be 26 percent of $13,900, or about $3,600.
Finally, the cost of our solar system after incentives would be about $10,300. Using my PVWatts estimate that the system would provide $999 worth of electricity every year, it would take about a decade for it to pay for itself.
That may seem like a long time, but remember that solar panels generally last around 25-30 years. That means that we could be in the black for as long as two decades after covering the initial cost.
But there are also other factors to consider when making the jump to solar.
Hedging your bets
Though today’s solar panels can last for three decades, you may not stay in your house that long. That can add some uncertainty to the ROI calculations we just did.
But solar panels tend to increase a home’s value. According to the U.S. Department of Energy, researchers at the Lawrence Berkeley National Laboratory found that “on average, solar increased the value of a home by about $15,000.”
That amount will vary depending on electricity rates and the system’s size, according to the DOE, making it hard to predict how much panels will increase your home’s value.
Also not factored into our ROI calculation above were future increases in the price of electricity. According to the federally backed renewable energy marketplace EnergySage, the national average for electricity prices has been rising by about 2.2 percent per year.
“Utility rate inflation is an added incentive for solar: when you generate your own energy with a rooftop PV system, you’re locking in energy costs at a constant rate so that you no longer have to consider variable utility rates,” EnergySage says.
So far, we’ve talked about solar power’s return on investment purely in terms of dollars and cents. While those are important considerations, solar has other benefits worth considering.
Homeowners and businesses are increasingly turning to renewable forms of energy to combat climate change. While emissions from cars and other forms of transportation are responsible for the largest chunk of greenhouse gases, electricity is often generated by fossil fuels and is a major contributor of greenhouse gases, according to federal data.
So if you think of solar as a monetary investment that will pay off in the future, it can also pay dividends for the environment.
The U.S. Environmental Protection Agency has a calculator showing that the 759 kWh an average Minnesota home uses in a month is equivalent to the carbon dioxide emissions from 595 pounds of coal burned, or 60.5 gallons of gasoline consumed. Using the sun’s rays to meet those energy needs can help reduce that carbon footprint.
This is where calculating the benefits of fighting climate change gets hard. For example, researchers say warmers temperatures will reduce crop yields at the same time that food demand is growing. That’s obviously a scenario we want to avoid, but it’s one that’s hard to fit into a ROI calculator.
We like to think of solar as an investment. In terms of dollars and cents, a properly maintained system can pay for itself in no time. But solar also acts as a hedge against rising energy prices and it can replace greenhouse gas-emitting power sources, which helps the planet.
Hopefully this gave you a better idea of solar power’s return on investment. Give us a call if you’re interested in learning more.
Read more from Northland’s solar energy experts:
- Hiring a solar panel installer? Here are some tips
- How long do solar panels last? What consumers should know
- Rapid shutdown: How it makes solar systems safer
- Bifacial solar panels: Are two sides better than one?
- What solar panel is best? Monocrystalline vs. polycrystalline