How solar payback is calculated

“Payback” is the most common way to judge home solar: how many years until the electricity the panels make has saved you as much as the system cost to install. It is a simple idea, but the answer depends on half a dozen inputs, and small changes in some of them move the result by years. This guide walks through the calculation one step at a time, the same way our calculator does it, with a worked example you can check by hand.

One note before we start. Payback here means simple payback: the up-front price compared with the money you stop paying your utility. It does not include loan interest, and it does not discount future dollars. Those matter, and we cover them at the end, but simple payback is the clearest starting point and the one most quotes and comparisons use.

The five inputs

Every solar payback estimate rests on five numbers:

1. How much electricity you use, in kilowatt-hours (kWh) per month or per year. Your utility bill shows this.
2. What you pay for each kWh, in cents. This is the part of your bill that goes up and down with use.
3. How much sun your roof gets, expressed as the yearly output of one kilowatt (kW) of panels at your location. This is called specific yield, in kWh per kW per year.
4. The installed price, usually quoted as a total or as dollars per watt.
5. How things change over time: panels slowly lose output, and electricity prices usually change from year to year.

For the worked example we will use figures from public sources: the US average household use of about 899 kWh a month and the US average residential price of 18.19¢ per kWh, both from the Energy Information Administration, and the PVWatts yield for Dallas, TX of 1,525 kWh per kW per year. For the price we will use $3.00 per watt. That is a round number chosen to make the arithmetic easy to follow, not a market average: use the figure on your own quote. Sources and the dates we checked them are on the methodology page.

Step 1: size the system

If you already have a quote, the system size is on it. If not, a sensible starting point is a system that makes about as much electricity in its first year as your home uses in a year. Divide annual use by specific yield:

system size (kW) = monthly use × 12 ÷ specific yield

In the example, 899 kWh × 12 = 10,788 kWh a year. Divided by 1,525 kWh per kW, that gives a system of 7.07 kW. A sunnier city needs fewer kilowatts to cover the same use, which is one reason payback is shorter in the Southwest.

Sizing a system to cover all of your use is not always the best choice. Any output above what your home can use earns nothing in our calculator (more on that below), so an oversized system adds cost without adding savings.

Step 2: work out the installed cost

Quotes usually give a price per watt. A kilowatt is 1,000 watts, so:

installed cost = system size (kW) × 1,000 × price per watt

For the example: 7.07 × 1,000 × $3.00 = $21,218. If your quote only gives a total, divide it by the system size in watts to get the price per watt, so you can compare quotes for different sizes on equal terms.

We use the price exactly as written on the quote. Our calculator does not assume a national average installed price for the US, because we have not yet been able to verify one against a primary source. Until you enter your own price, it shows output and savings but not payback.

Step 3: value the first year

First-year output is the system size times the specific yield. In the example, that is 10,788 kWh, the same as the household’s annual use, because that is how we sized it.

Next comes the question that matters most: what is each of those kWh worth? Our calculator values solar output only when it replaces electricity you would otherwise buy. That is capped at your annual use:

energy used at home = min(output × share used directly, annual use)

first-year savings = energy used at home × price per kWh

With all of the output used at home, the example saves 10,788 kWh × 18.19¢ = $1,962 in the first year.

Two details are easy to get wrong here. First, use the price you pay per kWh for energy and delivery, not your total bill divided by kWh. Most bills include a fixed monthly customer charge that you still pay with solar, so folding it into the price per kWh overstates savings. Second, electricity sent to the grid is valued at zero in our calculator. Many utilities do pay for or offset exported power, under rules that vary widely and change over time. Leaving it out keeps the estimate conservative: if your utility pays for exports, your payback will be shorter than the estimate.

Step 4: carry it forward year by year

If every year were the same, payback would just be cost divided by first-year savings. In the example that would be $21,218 ÷ $1,962 = 10.8 years. But two things change each year, in opposite directions.

Panels lose a little output. The calculator starts at 0.5% a year, the median of nearly 2,000 reported rates in a review by the National Renewable Energy Laboratory. Output in year y is:

output(y) = first-year output × (1 − degradation)^(y − 1)

Electricity prices change. The calculator starts with a 3% yearly rise. This is a scenario, not a forecast, and you should try other values. The price in year y is:

price(y) = today’s price × (1 + yearly change)^(y − 1)

Each year’s savings are that year’s output (capped at your use) times that year’s price. Because prices rise faster than output falls in the default scenario, yearly savings grow over time. The table shows how the example plays out:

Step 5: find the crossover

Payback is the point where the running total of savings reaches the installed cost. In the example, the running total first passes $21,218 during year 10. To give a more precise figure, the calculator assumes that year’s savings arrive evenly through the year and works out how far into it the crossover falls. That gives 9.7 years.

Over the full 25 years, the example saves $66,899, which is $45,681 more than it cost: a return of 215% on the original price. We stop at 25 years because it is a common length for panel performance warranties and a reasonable planning horizon, not because panels stop working then.

What moves the answer most

Payback is a ratio of cost to savings, so anything that changes either side matters. In practice, three inputs do most of the work: the installed price, your location’s sunshine and your electricity price. The table below keeps everything else from the example fixed and varies the price per watt and the city. The prices per watt are round illustrations, not market data.

The pattern is consistent: in these examples every 50 cents per watt adds at least 1.2 years to payback, and at $3.00 per watt the same household pays back 2.6 years sooner in Phoenix, AZ than in New York, NY. That is why comparing quotes on price per watt is worth the effort, and why national averages say little about your own roof.

The yearly price change you assume matters too, though less than people often expect over the payback period:

Price growth makes a bigger difference to 25-year savings than to payback, because its effect compounds and is largest in later years. Be wary of any estimate that only looks good under steep price rises.

What simple payback leaves out

Simple payback is a good first filter, but it ignores several real costs and benefits:

• Financing. If you borrow, interest adds to the cost and pushes payback out. Compare the total of loan payments, not the cash price, against savings.
• Maintenance and replacements. Panels have no moving parts, but inverters often carry shorter warranties than panels and may need replacing during the system’s life. Removing and reinstalling panels for a roof replacement also costs money. Ask your installer what each warranty covers and for how long.
• The time value of money. A dollar saved in year 20 is worth less to you than a dollar today, because today’s dollar could be earning a return elsewhere. Analysts handle this by discounting future savings. Our calculator does not, so its 25-year totals look bigger than a discounted analysis would.
• Payments for exported power. As noted above, these are valued at zero. Depending on your utility, they could shorten payback noticeably.
• Changes in your use. An electric vehicle or a heat pump can raise your use a lot, which increases how much solar output your home can absorb.

How to use this with a real quote

1. Gather 12 months of bills and average the kWh used per month.
2. Find your price per kWh for energy and delivery, leaving out fixed monthly charges.
3. Pick the nearest listed city, or run PVWatts for your address with a 1 kW system and enter the annual output.
4. Enter the system size and total price from your quote.
5. Try a few scenarios: 0% and 5% price change, and a slightly higher degradation rate. If payback is still acceptable in the less favorable cases, the decision is robust.

If you are comparing quotes for different system sizes, run each one. A smaller system that covers most of your use can pay back faster than a larger one, even at a slightly higher price per watt.