For many homeowners, the biggest question isn’t whether solar works — that’s been proven for years — but whether it’s an investment that truly pays off… How long will it take to break even? How do those savings play out? And in the end, how much more will you actually gain from solar? In this article, I’ve explained what solar ROI really means, what numbers you can expect, and how to calculate your solar payback period and ROI so you can better understand your investment.
What is Solar Payback Period?
When people talk about solar ROI, they often refer to the payback period as well. Both are related, but they’re not quite the same.
Payback period is the time it takes for your solar system’s energy savings to cover its initial cost. Think of it as the financial “breakeven point”.
For example, if your solar installation costs $18,000 and you save $1,800 per year on electricity, your payback period would be 10 years (18,000÷1,800). After that, every dollar you save is basically profit.
On average, homeowners in the U.S. experience a solar payback period of 8 to 12 years.
That may sound like a while, but consider this: Solar panels are designed to last 25 years, and many units still produce over 80% efficiency well beyond that.
That means your system could keep generating energy for another 10 to 15 years after you’ve already paid it off — 10 to 15 years of essentially “free” energy and pure savings.
The payback period won’t be the same for everyone, though. It depends on factors like your system’s size, electricity rates, sun hours in your area, and available incentives or rebates.
We’ll have some sample calculations later on.
What is Solar ROI?
Return on Investment or ROI measures the overall profitability of your solar system. It shows you how much you’ll gain over the system’s entire lifespan.
That said, the payback period, which only tells you when you break even, is really only half the picture.
In the U.S., a typical solar panel system delivers an ROI of around 10% per year.
If we compare it with other common investments most homeowners make, solar is often just as good — or even better — in terms of returns, which is impressive:
| Investment Type | Average Annual ROI |
| Solar Panels | ~10% |
| Stock Market (based on the S&P 500) | ~10% |
| Real Estate | ~9% |
| High Yield Savings Accounts | ~4% |
Of course, ROI varies just like the payback period does. Let’s break down some calculations shortly to see how these numbers can change.
How to Calculate Payback Period and Solar ROI
Calculating Solar Payback Period
Calculating your solar payback period follows this simple formula:
Payback Period = (Total Solar Cost – Incentives) / Annual Savings
Let’s say we have these numbers to work with:
- Total Solar System Cost: $20,000
- Federal Tax Credit (30%): -$6,000
- Annual Energy Savings: $2,000
Payback Period = ($20,000 – $6,000) / $2,000 = 7 years
After 7 years, your system will have paid for itself. From there, you’ll continue to enjoy reduced (or eliminated) electricity bills for the remaining lifespan of your solar panels.
Calculating Solar ROI
Basic ROI can be determined using this formula:
ROI (%) = (Net Profit / Total Investment) x 100
Your net profit is the total savings you generate minus the cost of the system. Let’s take these sample numbers to be true for your case:
- Total System Cost: $18,000
- Federal Tax Credit (30%): -$5,400
- Net System Cost: $12,600
- Annual Energy Savings: $1,800
- System Lifespan: 25 years
Based on those figures, your total savings would be $45,000 ($1,800 x 25 years). And your net profit would then be $32,400 ($45,000 – $12,600).
Plugging those numbers into our formula earlier, your ROI would be:
ROI (%) = ($32,400 / $12,600) x 100 = 257%
In this scenario, your solar system pays for itself in just 7 years (using our payback period formula in the last section). And over its lifetime, you gain over 2.5 times your initial investment in savings.
If we were to break down the ROI into an annual return, we can get a clearer picture of what this means year by year. In our earlier example, the total ROI was 257% over 25 years. To determine the average annual return, we can apply this formula: Annual Return (%) = Total ROI / System Lifespan So… Annual Return (%) = 257% / 25 years = 10.28% per year
And remember earlier when I said most systems still operate beyond the 25-year mark? Any additional years of solar production — even 2 to 5 years more — can significantly improve your returns by extending your savings period.
I should note that this basic ROI calculation is more of a yardstick approach to estimating your returns quickly. That’s because it doesn’t take into account time-sensitive factors like inflation, fluctuating energy prices, or changes in utility rates.
A more accurate measure that reflects those details would be metrics like Net Present Value (NPV) and Internal Rate of Return (IRR).
We won’t be diving into the calculations since they can get quite nuanced and complex. But if you’re really curious, your best bet is to talk directly with a certified solar installer or energy consultant.
Factors That Affect Solar ROI
From our payback period and ROI formula earlier, you can see how savings play a major role. But unlike our sample calculations, we can’t just toss in a number, plug it into the formula, and call it a day.
If you want a better estimate of your payback period and ROI, it’s worth taking some time to consider these factors carefully:
Electricity Rates
The more expensive your utility rates are, the more you’ll save with solar.
For example, if you pay $0.15 per kWh and your solar system offsets 10,000 kWh per year, you’ll save $1,500 annually. But if your utility rate rises to $0.20 per kWh, that same system would now save you $2,000 per year — without any changes to your solar setup.
And remember, electricity rates have been rising steadily over the years — typically by around 2-3% annually. This means that whatever you save today will likely grow even bigger over time.
When we tie everything back, rising electricity rates mean your payback period will likely be shorter, and your ROI even higher.
Energy Consumption
Building on the prior discussion, the more energy your household uses, the more opportunity you have to offset expensive grid electricity — the higher your potential savings will be.
Of course, this doesn’t always mean better returns, because here’s another point to think about…
Initial Installation Costs
Higher costs can lengthen the payback period simply because the more you spend upfront, the longer it takes for your cumulative savings to match that investment.
But here’s the other side of the coin: If you opt for a more expensive system, that usually means:
- You have a larger setup designed to generate more energy.
- You have a system consisting of premium panels, high-efficiency inverters, and overall better-quality solar system components that improve production
So, chances are, in the end, spending more upfront could still mean walking away with even bigger returns.
Sunlight Exposure
The more sunlight your system gets, the more energy it produces — and the more you save. Naturally, sunlight varies depending on where you live in the U.S.
For us in Utah, as well as those in California, Arizona, and New Mexico, we’re lucky to have one of the highest sun peak hours — about 5 to 7 hours. And that generally means faster payback periods and higher returns.
It’s also worth noting that these sun peak hours already account for cloudy days throughout the year. So while there may be some low-yield days here and there, those dips are balanced out by sunnier periods that push energy production higher.
Local Incentives and Rebates
Incentives like the Federal Tax Credit immediately reduce your upfront costs by 30%, which directly improves your payback period and ROI. When claiming this credit, homeowners will need to fill out Form 5695 as part of their federal tax return to report their solar investment and claim the deduction.
On top of that, it’s worth checking if your state or area offers additional programs that can further cut costs.
For example, in Utah, aside from the solar tax credit, there’s the Wattsmart Battery Program where homeowners with battery storage can receive cash incentives and ongoing bill credits, adding another layer of savings.
Find Out How Much Solar Can Save You
Solar is right up there with some of the best investments you can make, with reasonable payback periods and a strong ROI.
That said, the numbers can vary from home to home. If you’re curious about how much you could save, feel free to reach out to our team at Avail Solar. We’re always committed to helping homeowners understand exactly what they’re getting before they make a decision.
Or, if you’re looking for practical advice and expert insights, head over to the Avail Solar blog. It’s free and packed with helpful information to guide you every step of the way.