How to Calculate the Solar Payback Period

How To Calculate The Solar Payback Period

Installing solar panels is one of the few home improvement projects that actually pays for itself over time with energy bill savings. In fact, one of the main reasons people go solar is to lower their monthly expenses. 

When calculating the solar payback period for your system, it is critical to use accurate data and estimates based on realistic assumptions. For example, it is essential to project future energy costs when determining the payback period. 

However, some solar professionals can have very high estimates for future utility rate hikes. But, this can lead to dissatisfied customers down the road if the PV system doesn’t save as much money as expected. At Smart Solar Energy, we prefer to use conservative estimates and potentially over-deliver on long-term energy bill savings.

Paying a bill

What is solar system payback?

This is the amount of time it takes for your solar panel system to pay for itself in savings, thus recouping your investment. Typically, the payback period is expressed in years. These calculations include numerous factors, such as the price of electricity, the cost of the solar power system, and available solar incentives. The more you save with your system with net metering, the shorter the solar payback period.

The shorter the period, the greater the return on investment. Alternatively, systems with long payback periods have a lower return on investment. 

When calculating the solar payback period, we only input ongoing financial variables. Therefore, these calculations don’t consider the increase in home value or the environmental benefits.

What is a typical payback period for solar panels in Oregon or Washington?

In Oregon, the typical payback period is about 11 to 12 years. In Washington, it is a bit longer, but it also depends on the exact location and utility rates. Oregon tends to have slightly higher electricity rates than Washington and has a solar rebate for Portland General Electric (PGE) and Pacific Power customers through the Energy Trust of Oregon. Qualified customers can save up to $1,200 on the cost of their solar array.

However, the typical lifespan of a solar power system is about 25 to 30 years. That means your system will produce free energy for many years while reducing greenhouse gas emissions.

Solar Under Clouds 2

What variables impact the solar payback period?

If we installed identical solar energy systems in Salem, Oregon, and Vancouver, Washington, the systems wouldn’t have identical payback periods even though they are nearby. One reason is that certain utility companies have an incentive program allowing homeowners to save up to $1,200 on their solar system, in addition to the federal tax credit.

Let’s explore the factors that influence the payback period. 

Solar PV System Cost

This is the total cost of your system, including the solar panels, inverter, permits, and labor. Next, if you can take advantage of any solar incentives, you subtract that out of the cost. For example, many Oregon and Washington families take advantage of the federal solar tax credit, which can reduce the total cost by 26% for systems installed in 2022. 

Usually, the cost of a rooftop solar array is a bit lower than ground or pole-mounted solar systems. Also, using premium solar panels or adding a solar battery bank increases the total cost. However, these additional expenses can also save money in ways that aren’t included in the payback period calculations. For example, having batteries might prevent food from spoiling during a power outage or keep your sump pump running during a severe storm.

Also, the cost per watt for a bigger solar system is usually a bit lower than for a smaller solar system. This is because there are economies of scale. That means that homes with higher electricity use that have room for a large system will usually have a slightly shorter payback period than a home with more modest electricity use and a smaller array.

Solar Installation

Solar Energy Incentives

There is a federal solar tax credit available for residential solar systems in Oregon and Washington. The tax credit is a dollar for dollar reduction in taxes owed to the federal government in income taxes. To qualify, you must own your solar panels and not lease the system. Also, the system must be located on a primary or secondary residence.

Although most Smart Solar Energy customers are able to take advantage of this excellent opportunity, some customers don’t have an adequate tax liability. Therefore, we recommend speaking with a tax expert to ensure you can utilize the solar tax credit. Plus, PGE, EWEB, Umatilla Electric Cooperative, and Pacific Power customers in Oregon are eligible for additional solar incentives.

Utility Bill Savings

A critical component of payback calculations is how much money you will save from your solar energy system. This involves estimating the annual solar energy production and the power bill savings. These factors are influenced by the Oregon or Washington climate and the cost of electricity in your area. Thus, we use historical weather data to make these estimates. 

Keep in mind that these estimates are very reliable over time but not always month to month. For example, Portland broke records for the rainiest April in 2022. Therefore, solar systems were probably generating less solar electricity than usual, but historical weather data is very accurate over the long term. Also, if your roof is shaded during certain times of the day, this will reduce your energy output. 

If you install solar batteries and live in an area of Oregon or Washington with time-of-use rates, this will also increase your savings. We can design the system so that your home uses power from solar panels or the battery when utility rates are highest. Then, you can recharge if necessary when rates are lowest, increasing your utility bill savings. 

How do I calculate the solar system payback for my home?

When Smart Solar Energy conducts a solar audit, we include information about the payback period of your solar system. However, let’s explore how solar energy industry professionals calculate this.

The formula for solar system payback period:

Payback period (in years) = Total solar system cost after incentives / annual cost savings

Let’s say your solar system costs $18,972 and is eligible for a $4,932 tax credit and an $800 Oregon incentive. Then, your total system cost to you is $13,240. 

Then, your estimated power bill savings over 12 years are about $13,240. That means your solar panels pay for themselves through utility bill savings in 12 years, and your solar system is still under warranty for another 13 years! But, if you sell your home before that, you’ve increased your property value!

Tesla Power Wall 2

How does adding solar batteries impact the payback period?

Typically, adding batteries to your solar system increases the payback period. This is because batteries increase the total system cost, and most of the cost-saving benefits of the solar system are not calculated into the payback period. 

For example, if you have a home office and can work during power outages because of your batteries, this isn’t included in the payback formula. Likewise, the luxury of having the lights on during a public safety power shutoff isn’t either.

Solar Technician

Should I include maintenance costs when calculating the solar system pay back period?

No, maintenance costs are not included in the payback period calculation because it isn’t an ongoing financial factor. However, Smart Solar Energy offers a 25-year warranty on the entire system, including labor. So, you know your system will produce clean energy for many years with no repair bills.

Also, your solar system should be covered by your homeowner’s insurance policy if the unexpected occurs. We recommend reviewing your solar policy to ensure the system is covered, but they usually are because it is a long-term home improvement.

Oregon

How do the Oregon state rebates work?

There are state rebates available for going solar in Oregon, with $1,200 for PGE and $900 for Pacific Power customers. 

In addition, there are larger solar rebates available for income-qualified households through the Solar Within Reach program. The income guidelines vary by household size. For PGE customers, the rebate is $1.40/watt, with a maximum incentive per home of $8,400 per home. For Pacific Power customers, the incentive is $0.70/watt with a cap of $4,200. 

Under the Solar Within Reach program, if a qualified PGE homeowner installs a 5-kilowatt solar array, they could qualify for a $7,000 Oregon solar rebate. If a Pacific Power customer installs a 5-kilowatt system, the rebate is $3,500.

Unfortunately, only utility customers of PGE and Pacific Power qualify for both of the Oregon solar rebate programs described above. In addition, you must use an approved Energy Trust solar contractor, like Smart Solar Energy, to be eligible. You will not be eligible for these rebates if you install your solar panels yourself instead of using an approved solar company. 

Due to record demand for the solar rebate program, Energy Trust has set a preliminary budget for the solar rebate program at $12 million for 2022 for residential and commercial installations. Of this, some of the money is designated for equity-based solar incentives. In addition, Energy Trust plans to roll out new solar incentive programs in 2022 for low-income residents and underserved communities. 

Home with solar

How do the federal solar tax credits work?

The federal tax credit, also known as the investment tax credit (ITC), is a dollar-for-dollar reduction in federal income taxes. So, a $4,500 tax credit can reduce the amount you owe the IRS by $4,500. Therefore, Smart Solar Energy customers that can utilize the tax credit have a shorter payback period and higher return on investment. 

If you install your solar panels in 2022, the value of the tax credit is 26% of the total system cost. However, if you go solar in 2023, the tax credit is 22% of the total cost. So, there is a financial advantage of acting quickly to install your solar energy system.

To take advantage of the federal solar tax credit, you must file IRS Form 5695 with your federal tax return. If your solar panels were installed in 2022, you include them in the 2022 taxes. This tax credit is a one-time opportunity per project, but you could install systems on both a primary and secondary home and claim tax credits for both projects. 

The tax credit will reduce your federal tax liability and has no impact on your Oregon state taxes. Also, if you do not have any federal tax liability, you will not be able to take advantage of the tax credit. Therefore, we recommend speaking with a tax expert to ensure you can take advantage of this money-saving opportunity.

Want to learn more about how solar energy can reduce your power bills? 

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