Before we get too deep into the trenches here, I will readily admit that there is no one size fits all answer for “Will solar panels save me money”? The best way to find out if a photovoltaic system can work for your property is to have some installers come out and do quotes. But here are some quick guidelines:

• Do you have trees shading your house that you can’t or don’t want to remove?
• Do you lack one continuous south-facing roof (or conversely, does your roof resemble something from McMansion Hell?)
• Is the slope of your roof very steep?
• Do you not earn enough to take advantage of the 30% solar panel tax credit?

If you answered yes to any of these, solar panels may not work for your house – however we still encourage you to get some quotes from installers. Even if your roof isn’t ideal for solar panels, a ground-mounted array may be an option for you.

The following is a fictional example, but the numbers are pretty much identical to the system that was recently installed at our house.

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When talking about energy efficient home improvements – whether it be solar panels, attic insulation, energy efficient appliances, or LED lightbulbs (before they became quite affordable recently) – the first question people ask is “How long until this pays for itself?”

The real question when it comes to solar panels depends on how you view monthly expenses and how you pay for your system. If you do pay for it outright in cash, the question should be simple “How many years does it take for the system to generate the amount of power equal to the price for which I paid for it?” If you took out a loan on your system, the question could also be “How long until the cost of the future utility bill + the solar loan payment every month is equal to what my utility bill would be without the solar panels?”

For both examples, let’s set the following constants:

1. Purchasing a 6.3 kW (kilowatt, a measure of power) system that is projected to generate 6564 kWh (kilowatt hour, a unit of energy) per year.
2. For this system, we will pay $19,530 before the tax credit for it – that’s roughly $3.10 per watt installed.
3. Let’s assume that your current utility rate is $0.13 per kWh and that utility rates go up by 3% every year.
4. Let’s also say that the system’s output will decrease by a rate of 0.5% per year.
5. Finally let’s assume that we use 10,000 kWh per year – that seems to be the average that a lot of studies point to these days. Coincidentally that’s pretty close to our annual usage – we charge two electric vehicles but are fairly frugal with our energy consumption otherwise.

Buying the System Up Front

So let’s roll with the first scenario of purchasing a system outright. For this example we want to see how long it takes us to reach the true purchase price of the system. We find the true purchase price by subtracting the 30% tax credit from the purchase price of the system – that gives us $13,671.

Year	Solar Generation	Utility Rate per kWh	Normal Utility Bill*	Accumulated Money Generated
1	6564	$0.130	$853	$853
2	6531	$0.134	$875	$1,728
3	6498	$0.138	$896	$2,624
4	6466	$0.142	$919	$3,543
5	6434	$0.146	$941	$4,484
6	6402	$0.151	$965	$5,449
7	6370	$0.155	$989	$6,438
8	6338	$0.160	$1,013	$7,451
9	6306	$0.165	$1,038	$8,489
10	6274	$0.170	$1,064	$9,553
11	6243	$0.175	$1,091	$10,644
12	6212	$0.180	$1,118	$11,762
13	6181	$0.185	$1,146	$12,908
14	6150	$0.191	$1,174	$14,082
15	6119	$0.197	$1,203	$15,285
16	6088	$0.203	$1,233	$16,518
17	6058	$0.209	$1,264	$17,782
18	6028	$0.215	$1,295	$19,077
19	5998	$0.221	$1,327	$20,404
20	5968	$0.228	$1,360	$21,764

* This is only counting the “per kWh” or “usage-based” charges. There are other parts of an electric bill – static customer charge, small % based surcharges, state taxes, etc.  But usage-based charges are the meat and potatoes of any electric bill.

As you can see, the amount that we can generate per year goes down every year, if only by a small amount. However, at the same time, the amount that the utility company is charging for that same kilowatt hour is going up, by a much larger margin. This means that as the years go by, the kWh that the system generates are becoming worth more, as it would cost money (almost 16% more) for us to get that same kWh five years from now.

I have been told often by my better half that I make spreadsheets that are indecipherable to anyone but me – so let me explain my table. The fourth column – “Normal Bill” represents the amount we would pay for the amount of kWh that the solar panels generate in a given year, if we bought the energy from the utility company, at that given year’s projected rate. You will notice that nowhere in this example do we mention the amount of kWh that we use per year. That is because the way in which the energy is spent is not important – just how quickly or slowly our system generates it’s true purchase price equivalent in kWh.

The “Accumulated Money” column simply tallies all of the years – previous to current – for any given year, allowing us to see how much “money” (savings really) that our system has generated. We can see that the number in that column wouldn’t hit the true purchase price until somewhere between years 13 and 14.

So to sum up, purchasing the 6.3 kW system outright wouldn’t pay for itself until 13 or 14 years. But after 20 years, it would have generated an extra $8,093 of energy.

Taking Out a Loan for the System

In our next example we take out a “solar loan” to pay for the system. Many solar panel system installers now will either provide the financing vehicle themselves or work with banks that specialize in loans for photovoltaic systems. Most times the way it works is that, they finance the loan at 70% of the purchase price, and you have 18 months from installation to pay them the 30% credit that you get from the government.

This is why it is very important that you have enough tax burden to effectively use the tax credit – most lenders don’t care if you were actually able to claim the 30%, they factor it in to their loan agreements regardless.

This whole setup leads to some very small loan payments overall – we pay about $93 per month over a 20 year term. Now we have plans to pay that off beforehand (and you will see why below), but for the sake of this exercise, let’s assume that we don’t pay it off.

Year	Utility kWh	Reduced Bill*	Normal Bill*	Total Bill	Savings
1	3436	$447	$1,300	$1,563	-$263
2	3469	$464	$1,339	$1,580	-$241
3	3502	$483	$1,379	$1,599	-$220
4	3534	$502	$1,421	$1,618	-$197
5	3566	$522	$1,463	$1,638	-$175
6	3598	$542	$1,507	$1,658	-$151
7	3630	$563	$1,552	$1,679	-$127
8	3662	$585	$1,599	$1,701	-$102
9	3694	$608	$1,647	$1,724	-$77
10	3726	$632	$1,696	$1,748	-$52
11	3757	$656	$1,747	$1,772	-$25
12	3788	$682	$1,800	$1,798	$2
13	3819	$708	$1,853	$1,824	$29
14	3850	$735	$1,909	$1,851	$58
15	3881	$763	$1,966	$1,879	$87
16	3912	$792	$2,025	$1,908	$117
17	3942	$822	$2,086	$1,938	$148
18	3972	$853	$2,149	$1,969	$180
19	4002	$886	$2,213	$2,002	$211
20	4032	$919	$2,280	$2,035	$245

* Again, this is only counting the “per kWh” or “usage-based” charges. There are other parts of an electric bill – static customer charge, small % based surcharges, state taxes, etc.  But usage-based charges are the meat and potatoes of any electric bill.

As with the other example, the solar output and utilities rates decline and grow respectively as they did before. This example is based on a yearly usage of 10,000 kWh and a yearly total loan payments of $1,116 ($93 per month). Beyond that, let’s tackle each column as needed, list style –

• The “Utility kWh” is the amount of power that we would need to draw from the utility in a given year to make up for the difference that the system did not generate.
• The “Reduced Bill” is what the kWh needed from the grid would cost us, at that year’s projected rates.
• The “Normal Bill” is what it would cost us to generate all 10,000 kWh for the year, at that year’s rates, without the system.
• “Total Bill” is what the solar loan payments + the utility kWh charges would cost us to get the 10,000 that we need to generate for the year, with the system.
• “Savings” = Normal Utility Bill – “Total Bill” or the possible yearly savings by switching to solar for the given year.

Though not the same as the original example, the “break even” point occurs when the “Savings” gets above 0. In this case, this happens right at year 12. The downsides of this approach is that, if you don’t pay down the loan, the total costs of the interest over 20 years is upwards of $8,500, making the true purchase price of this system actually $13,671 + $8,500 = $22,171!!!

Since this is the same system as in the first example it is still going to generate $21,764 of energy over 20 years, and unfortunately in this case, that falls just short of paying for the full price of the system if financed over a 20 year period. So really judging the “break even” point by monthly payments is sort of silly, and not the kind of approach anyone concerned with reducing debt should look into.

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All information thus far is leading to the following conclusion – the best approach would be to buy a system outright if you have the means to do so. Otherwise, take out a loan in the interim and then pay it off as you are able. Of course that’s only if a solar panel system will work for your house.

Other Options – Lease & PPA

Some solar installers offer two other alternatives to homeowners that don’t want to own a system – solar leases and solar PPAs (Power Purchase Agreement). In both instances they install the system on your property but they retain ownership of it.

The main difference between the two is the form of payment – with a solar lease it’s a flat rate per month, not pegged to power generation. With a solar PPA the number is based on a per kWh electricity rate (from what I have seen $0.03 more than your local utility rate, but YYMV). In both instances, they increase the lease payment or electricity rate by around 3% every year.

My take on both of these options is a hard pass. Since they are charging higher rates and increasing them yearly at about the same rate as the utility companies – you aren’t really saving any money here. You also do not get to claim the federal or any state tax credits either. Finally, a very important point is that a lease or PPA could complicate any eventual sale of your home – the buyers may have to take over the payments themselves or you may have to buy out the agreement – it will vary based on the agreement.

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Another Consideration

I do have to mention that the “savings” and “returns” pale in comparison to actually taking the money and investing in low-fee index funds such as VTSAX that track the total stock market..

• Example 1 – Instead of dropping $13,671 in true purchase price for the 6.3 kW system, deposit the money into an index fund and let it grow at 7% for 20 years – that gets you almost $53,000. Thanks to compound interest, that’s almost $40,000 in profit.
• Example 2 – Instead of paying $93 a month for 20 years, invest that money in an index fund every month for 20 years, growing at 7% that would get you around $46,000 – half of which would be profit.

So with that information in mind – why bother buying a solar panel system at all?

Our Reasons

I can’t tell you why you should buy a photovoltaic system, I can only tell you the top reasons why we decided to get one:

1. We have a south facing house, with no trees shading our roof to speak of. We do live in a pretty cloudy climate – 84% of the days of the year are cloudy, and 56% of the days are classified as “days of the heavy cloud” according to this site but our system does pretty well for it’s size.
2. Once the system is paid off, it will generate 547 kWh average (some months generate more or less than others) per month, that reduces our monthly kWh need from the utility company. This will reduce our average monthly energy bill by $72. This will cut current AND future utility costs, reducing the amount we need to save in order to cover our annual expenses, to the tune of around $21,600 less – a la the 4% rule.
3. If we decide to not stay in our house after we reach financial independence, then we will be able to add the cost of the system to our list price if we sold it. Or if we decide to rent it out – we could likely charge higher rent since the tenant’s electric bill would be lower.
4. We are big nerds – the idea of a photovoltaic system as a technology is super cool for us. Though the system does shut down when the power goes out in our neighborhood, it’s nice to know that we are generating energy that’s already been paid for.

What has been your experience with solar? Do you disagree with any of the assumptions or calculations that we made in this post? Let us know in the comments!