Suburban home with solar panels
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A Solar Future

Navigating the Costs and Benefits of Solar Panel Installation for Your Home

Daren Wang
November 1, 2023

As consumers, we’ve come to accept our electricity bills as an unpleasant fact of life, like getting older or tax withholding from our paychecks. But for many in recent years, the monthly arrival of a power bill has felt more like an insult. The monthly cost continues increasing even as outages and blackouts become more frequent.

At the same time, the rising popularity of home solar energy systems has finally given homeowners a real and practical opportunity to own their own power generation. Using the sun's abundant energy to power our air conditioning, televisions, and EVs is appealing, but solar panels are a significant investment. Do they make sense for you?

Cost of Solar Panels for Homes

On average, installing solar panels for a residential property can range from $15,000 to $25,000, as per the latest data from the Center for Sustainable Energy. Those are big numbers.

When talking about going solar, many people talk about the “payback period.” That’s how long it will take before the money saved will offset the upfront cost. After that, the electricity generated on your rooftop is cost-free. But how long does it take you to get there? On average, a payback period ranges from six to ten years in the U.S. Your mileage will vary depending on several factors. Let's take a look.

How much do you spend on electricity now?

A sound solar energy system should significantly reduce your monthly electricity bill. The higher your utility bill, the more likely you'll benefit from the switch. However, you should remember that electricity rates and consumption can be volatile. Fluctuations in electricity prices or changes in energy consumption could impact your savings.

Electricity rates can vary by location, with the national average hovering around 15 cents per kilowatt-hour, according to 2022 data from the U.S. Energy Information Administration. The more you pay per kilowatt-hour, the greater the benefits solar will offer and the shorter your payback period will be.

One positive about going solar is your electricity expense varies much less. If you're generating most of your electricity, then the rate your electric company charges matters less.

Evaluate Your Sunlight Exposure

The amount of sunlight your location receives affects your solar panel's energy production and, consequently, your potential savings. States like Arizona and California, which benefit from lots of bright sunshine, often yield greater benefits from solar panels than cloudier states.

But it's not just where your home is—how it sits on the land matters, too. If you have a large expanse of roof facing south, you'll be in better shape for solar than if your home is oriented east-west. And the amount of shade you have makes a big difference. You can estimate the effectiveness of panels on your property using solar panel cost and savings calculators available from sources like Solar Reviews.

If you need more panels because of lots of shade or a bad roof angle, it will take a more extended payback period before your savings cover the upfront cost.

Estimate and Compare the Cost of Solar Panels for Homes

The primary expenses associated with solar panels are the installation costs and the panels' purchase. Long-term savings can often offset the initial investment, as most solar systems require minimal maintenance and are designed to last for two decades or more with consistent electricity production.

When calculating the overall cost, consider your regular energy consumption, as indicated on your monthly utility bill, and determine the system size needed to generate the required electricity. The Solar Reviews calculator is an excellent tool for estimating how many panels you’ll need.

Installation costs for an average residential 5-kW system typically range from $3 to $5 per watt, resulting in the $15,000 to $25,000 price range, before factoring in any tax credits or incentives. Obtaining quotes from three to five contractors and consulting resources like EnergySage to find reputable providers is advisable.

Take Advantage of Government Incentives

In 2022, a federal law was passed to incentivize consumers to adopt clean energy solutions, including rooftop solar. The Residential Clean Energy Credit allows taxpayers to recover 30% of the solar installation cost as a federal tax credit. For example, a $15,000 solar setup would yield a $4,500 credit toward your income tax obligation. If you don’t have enough income tax liability in the current year to offset the credit, it can be carried forward to future years.

State-specific incentives, such as cash back offers, property tax exemptions, waived fees, and expedited permitting, may also apply.

Check out Your Utility’s Net Metering Policy

If you're like most people, you will use the most energy while getting ready for work in the morning or in the evening when preparing dinner. But solar panels produce the most energy in the hours around noontime when the sun is high. Usually, a solar energy system will produce much more power than the home uses during those hours.

Most local utilities will give you credit on your electricity bill for the energy you send back into the grid—that’s called net metering. But the rate they pay for your solar energy varies a lot by location and time. Will it be high enough to offset the cost of the electricity you use when the sun is down? In many states, the rate a utility pays is meager during the hours when the sun is intense and high during peak demand hours in the evening. The net metering rate is one of the most significant factors in how long your payoff period will be.

Should you Add a Battery?

More and more, homeowners are adding batteries to their home energy systems to use their own solar energy during those peak times or even send it back to the grid when the rate is high. However, a solar battery can be expensive to a system, often adding $15,000 to the total bill. However, it can pay for itself quickly if it allows you to control when you use grid energy.

The other advantage of a solar battery is that it can keep your home powered when the grid goes down. If you're in a place subject to many outages, that's a big deal.

So, how does all this come together for a typical home?

It depends. As we’ve pointed out, there are a lot of variables. But let’s look at a model home of 2,000 square feet in California.

The website EnergySage has a lot of great tools to calculate what to expect.

A father holds his daughter as they look at their home, which has solar panels

They estimate that annual electricity usage for a home that size will come in around 9500 kWh annually. If your roof has average access to sunlight and you install solar panels with a typical output of 400 watts, you’ll need 16 panels. That amounts to about 280 square feet of space.

How much is that big of a system going to cost? It’s easiest to calculate that based on the average cost of a watt of capacity. That sounds complicated, but it’s really not. In this example, we have 16 panels of 400 watts of capacity or 6400 watts. California's average cost per watt of capacity is $2.86, so you should expect to pay around $18,304 for a solar energy system. The federal solar tax credit for that installation would come in at $5,491, so your net cost would be $12,812. The cost per watt varies a lot across different states, so make sure you check the EnergySage, page for your location.

The decision to install solar panels should consider factors such as your location, electricity costs, and potential government incentives. If you reside in an area with high energy rates, favorable solar conditions, and good incentives, solar panels can be a worthwhile investment for both the environment and your finances. However, it's important to note that while solar panels can significantly reduce your power bills, they may not eliminate them entirely. Shop around for the best deals, explore financing options like solar loans, or consider leasing as an alternative to ownership. Adopting solar power is one of the many ways to reduce energy costs and contribute to a more sustainable future.

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