How to calculate ROI for a solar system
Installing solar panels for your home or business is an excellent way to reduce the size of your carbon footprint, but if you get it right it can be a smart financial move too.
If you’re looking to reduce energy costs or open up a new stream of revenue, it’s important to know how to calculate solar panel return on investment. Those figures will give you the ammunition you need to justify your decision, understand the effect on your finances, and make sure you’re getting the most value from your solar panels.
What is ROI?
ROI stands for “return on investment.” It’s essentially a measure of how the cost of something compares to the income it generates (or, in some cases, the savings that it creates). ROI is always expressed as a percentage of the initial cost of the investment.
So what is the ROI of a solar system ? Knowing how to calculate return on investment for your solar system will show you whether the money you initially spent on equipment and installation (the investment) is balanced out by the money you save on energy or the money you make selling extra energy back to the grid.
Because solar panels are often installed with cost savings and income in mind, it’s a good idea to calculate a rough estimate of solar panel ROI before you begin installing. After installation, calculating the ROI can help you understand whether your solar panels are delivering the financial benefits you expected.
Are solar panels worth investing in?
So, what is the ROI on solar panels? Solar panels can be expensive, so it’s important that they deliver excellent results.
Most people pay for solar panels for one of two reasons:
- They want to reduce their carbon footprint and generate electricity in a more sustainable way, or
- They want to save money and reduce their reliance on electricity from the grid
As long as your home or business is correctly set up for solar panels and will get a reasonable amount of sunlight in the course of the day, solar systems can usually deliver these benefits.
If you’re not sure if solar panels will work for you or deliver the ROI you’re looking for, the best thing to do is get in touch with an installer to calculate how much usable energy you can generate in a day, where panels should be installed, and how much installation will cost you.
What is a solar payback period?
A solar payback period is the length of time it takes for you to balance out the cost of installing your solar panels. In other words, if it costs $3,000 to install your solar system, then your solar payback period is the length of time it takes you to either save $3,000 in electricity bills, make $3,000 by selling energy back to the grid, or both.
How to calculate ROI and solar payback period
We calculate ROI and the solar payback period in slightly different ways.
ROI is calculated for the total lifetime of your solar panels, meaning it measures how much money your panels make or save you from the moment they’re installed until the moment they stop working. Since it’s hard to know exactly when solar panels will lose effectiveness, a solar installation’s “lifetime” is usually deemed the same length as its warranty.
On the other hand, the solar payback period is calculated by understanding the cost of a solar panel and the value it generates per year. You’ll use that number to figure out how many years it will take you to balance out the cost of purchase, installation, and maintenance.
Calculating the ROI of your solar system
Before you can calculate the ROI of your solar system, you’ll need to find out a few different pieces of information:
- The total cost of your installation over its lifetime – To find this, add the one-off cost of equipment and installation to the projected cost of maintaining your solar panels and inverters for the rest of their lifetime (solar systems don’t need much maintenance apart from occasional cleaning and repairs, but it’s worth factoring in some money for maintenance costs).
- The total benefit of your installation over its lifetime – Calculate this by finding out how much you pay or paid for electricity each year without solar panels (so you can calculate how much you saved or will save on energy bills). If you’re calculating ROI after the solar system has been installed, you might want to add to this any money you made from selling power back to the grid.
Once you have all this information, calculate the net benefit of your solar system by subtracting the total cost from the total benefit.
To calculate your ROI percentage, use this formula:
(Of course, if you want to skip the calculations and just get to the ROI, you can always use a solar ROI calculator to get a rough estimate of the value of your system.)
Calculating the solar payback period
Start your solar payback period calculation the same way you started your ROI calculation – by calculating cost vs. benefit.
First, calculate the total cost of equipment and installation for your solar system. We’ll call this your cost.
Next, calculate how much you spend on electricity bills per year to understand how much money your solar system saves you each year – your annual saving.
From there, the calculation is quite simple:
The number this equation gives you is the number of years it will take you to “break even” on your solar system investment.
Examples of payback period calculations and ROI calculations
Let’s add some numbers into our equations and see what these calculations look like in action.
An example ROI calculation
Let’s look at an example of a solar system that cost $4,000 to install.
Before solar panels were installed, the property owner’s electricity bills came to $1,000 per year.
In this example, we’ll say that your solar panels are under a 25-year warranty. We’ll also say that your solar system uses Hoymiles microinverters, which are also under a 25-year warranty. So altogether the warranty of the solar system is 25 years.
Let’s assume that, in this scenario, the solar installation can provide all of the electricity the homeowner needs so the owner will be saving 25 years’ worth of electricity bills.
In reality your solar installation might not be able to produce 100% of the electricity you need, and the amount of electricity produced by a solar system will naturally decline over time as your panels degrade. But we’ll use the 25 years figure here for simplicity’s sake, while you’re still learning how the equations work.
This means that, overall, the solar system saved the property owners $25,000.
To calculate net benefit, we’ll subtract the total cost from the total benefit.
Now, to calculate the ROI, we divide the net benefit by the total cost:
And then turn this number into a percentage by multiplying it by 100%.
So in this case, the ROI of this solar system is 525%.
Of course, the actual ROI of your solar system can be affected by a whole range of other factors, from the amount of sunlight in your region to the arrangement of your solar panels.
An example solar payback period calculation
Let’s use the same solar system that we used for the last example and calculate the solar payback period.
The cost of the solar system – both the equipment and the installation - was $4,000.
The property owner’s electricity bills came to $1,000 per year.
So, to find the solar payback period:
This means it will take the property owner four years to make back the money they spent on the solar system.
Factors that affect solar ROI
If you use the equations we’ve shown here, you’ll be able to get a good idea of the baseline ROI you can get from your solar system – the return you’re likely to see if you just install your solar panels and don’t really think about them again.
But there are actually lots of ways that you can improve the ROI of your solar system.
Take advantage of tax credits and government schemes
More and more governments around the world are offering incentives and support for solar system installations – for both individuals and businesses.
We’ve already mentioned the tax credits available in the US, but other countries offer everything from favorable tariffs on solar energy to schemes where the government will directly purchase excess power generated by solar systems.
Install your solar system in a way that maximizes power generation
The more efficiently your solar panels are installed and arranged, the more energy you’ll be able to generate.
This means that, in addition to cutting out your electricity bill, you may be able to sell the electricity that you don’t use back to the grid, creating a new source of income.
To maximize efficiency, you should carefully think about:
- Which way your panels should face – If you’re in the Northern Hemisphere they should face south, and if you’re in the Southern Hemisphere they should face north.
- The tilt of your solar panels – Find an angle that will catch the most sunlight for the longest period of time.
- Where to place your panels – Will they catch the most light from the roof, or on the ground? Are there any trees, buildings, or walls that might block the light?
Choose an expert installer
An accredited, experienced contractor will be able to help you pick the best solar panels for you, install them in a way that maximizes efficiency, and come up with ideas to help you get more ROI from your solar system.
Spend some time looking at reviews from other customers and ask them lots of questions before committing to an installation, so you can find a contractor you can trust.
Choose a microinverter that converts energy efficiently
Microinverters are one of the most essential components of a solar system. They turn the raw direct current (DC) energy collected by your solar panels into alternating current (AC) energy that can be safely used in your home or office.
If you want to maximize the ROI of your solar system, you should look for microinverters that convert energy as efficiently as possible and are built to avoid too much energy wastage. That means you should look for a microinverter that has:
- High CEC and MPPT ratings
- An extended warranty, so that you can get it fixed or replaced if it becomes less efficient
- Solid technical support, so you can get advice on how to install and maintain your microinverter in the most efficient way
- Built-in monitoring to help you keep an eye on how your microinverter is functioning and spot any potential issues
Is solar power worth the investment?
Installing a solar system can be an excellent way to save money – or, in some cases, even open up new sources of income.
The key is the right equipment, the right planning, and the right support. Take the time to calculate the payback period of your solar system in advance, and get expert advice on how to maximize your ROI, and you’ll be sure to reap the rewards.