Home Solar Finance How Long do Solar Panels Take to Pay for Themselves?

How Long do Solar Panels Take to Pay for Themselves?

by Know it All Solar Nerds

The good news is that solar panels definitely pay for themselves. The question of how long it will take is not straightforward, unfortunately. The payback depends on many variables such as electricity prices, incentives, equipment quality, sunlight and the cost of installing solar. As we will see, those are all determined moat significantly by your location.

The cost of solar PV

Solar costs depend on the size, i.e. how many kilowatts (kW) your system measures. A 5kW system costs $6,500 national average or $1.30 per kW. There are significant differences throughout the country, however. While in Darwin, a 5 kW system will cost you more like $11,000, it will only cost you $5,000 in Sydney. So be aware of the local differences concerning cost and ask for multiple quotes before going ahead.

Savings from running rooftop solar

Instead of paying the utility, you will produce your very own energy. The savings are based on how much energy you produce, for one thing. That again depends on the size of your solar PV system and a bunch of external factors, more on those further below. On the other side of the equation are the electricity costs. You may already have a good idea of what they are; consulting your electricity bills will help you understand how much you pay per year, month or daily.

Our sample 5 kW system located in Sydney should be able to produce around 7,000 kWh annually if there are no major obstructions to the sunlight. The average electricity price in NSW is 23 cents per kWh. Your annual savings would be in the area of $1,600 based on this scenario. Unfortunately, your savings in real life will be much lower. Full example to follow.

The payback concept

The payback period signifies the amount of time needed to win back the full initial investment by accumulating the savings. You will be enjoying free energy for all the years after your break-even point. 

Looking at the national average of $6,500, how many years of savings will it take to gain that amount back? If the savings were $1,600, it would take us roughly 4 years. This astonishingly low number will not be possible in most locations. 

Factors influencing the payback period

Many factors change the dynamics of the payback. Most notably, the price for electricity and the feed-in tariff pricing. The latter is usually significantly lower than the price you pay for drawing power from the grid, making it most attractive to use as much as possible of your solar energy.

Electricity price

Electricity prices are a complicated beast. There are huge differences between states, regions and municipalities, but they can also fluctuate by time of use. Your electricity bill is the best source of how much electricity you consume and at which rate. Try to determine how much you spend on a daily or yearly basis.

Net metering and feed-in tariffs

Analysing your network bill will not tell you how much money you can save. To further complicate matters, the utilities in most locations offer you so-called feed-in tariffs (FiT). Those contracts define how much money you will be credited for each kWh that you feed into the grid. The rate will, in some cases, depend on the time of day the electricity is exported. Fixed monthly fees may also apply. Local solar installers can help you with the payback calculation. They often use tools that take into account all the pricing information and net metering dynamics, leading to more accurate numbers.

Government Incentives

There are various incentives available, most notably the federal government’s STC (Small-scale Technology Certificates). Most residential solar installations qualify for this program, which can help reduce your initial investment. For example, our 5 kW solar system was $6,500 before incentives. Including the STC, the average price drops to approx. $5,200.

Energy generation based on sunlight hours

The energy generation of solar arrays depends on how much sunlight they are exposed to. How much sunlight do you have at your location on average?

The National Renewable Energy Lab (NREL) has a tool that allows you to find the so-called peak sun hours relevant for you: https://www.nrel.gov/gis/solar-resource-maps.html. 

The magic number for Sydney is 4.5 hours of perfect sunlight on an average day; 5 for Brisbane, Melbourne sits at 4.1. This is an excellent indicator of the potential energy production of solar in a specific location. If you are looking for an estimate based on a particular system size at your site, try this calculator: https://pvwatts.nrel.gov/.

Loss factors

There are a few things that can limit energy production. On the one hand, the best location for panels is on the north-facing side of your roof. If you don’t have enough space on that side, be aware that panels on the east and west will produce about 15% less energy. The most influential factor is shading by nearby trees or buildings. Depending on how prevalent such shading is, your system’s production will be adversely affected. Energy losses of 20% are not uncommon. Maximise roof space on the north and try to avoid areas with shading.

Equipment quality

While the quality of the equipment regularly influences the cost of your system, it will also have a positive effect on the production side. More often than not, though, it will not impact your break-even. If anything, higher-end equipment will take longer to pay back. However, it tends to last much longer, providing you with the upside of longer-lasting savings, resulting in a better long-term return on investment. More often than not, it is worthwhile to opt for higher-quality panels and inverters.

Sample calculation

Let’s go back to our Sydney home with a 5kW system at the cost of $4,800 after incentives and assume your daily usage is 20kWh. Your solar energy production will be about 19kWh per day. Without a battery, energy will be exported to the grid unless consumed right away. This means most of the 20kWh you will be using from the grid, say 15kWh, and 5kWh will be used directly from your solar production.

Consumption before solar: 20kWh x 23c/kWh = $4.60 per day

Consumption with solar: 15kWh used from the grid, at 23c/kWh = $3.45 per day

5kWh used solar, no cost

Savings: $4.60 – $3.45 = $1.15

Credits Feed-in-Tariff: 19kWh – 5 kWh exported at FiT of 5c/kWh = $.95 per day

Total savings: $1.15 + $.95 = $2.10 per day, $766.50 per year

Payback: $4,800 / $766.50 = 6.26 years

How financing can help

While financing will not lower your overall cost, it can help spread the financial burden. Instead of paying a high lump sum upfront, financing enables you to pay down the system’s price over the course of several years. Some financing providers will align the payments with your current expenses for electricity, turning it into a net-zero cost for the term of the financing. In place of paying your electricity bill, you now pay the same amount in financing costs. After a number of years, the system will be paid off and produce free energy.

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