Breaking Down Solar Panel Payback Time: What to Expect
VeloSolar • Updated on May 4, 2023 • [rt_reading_time postfix=”minute”] read
Solar Feasibility Study: Is Solar Right for Your Business?
At Velo Solar, potential customers often ask us “how long do solar panels take to pay for themselves?” The simple answer for commercial solar panels is typically between three and ten years, but that range is so broad that it’s not terribly helpful.
A solar panel system has a lifespan of around thirty years, and naturally most companies want to get to that breakeven point as quickly as possible – because the faster that happens, the more money they save.
The honest truth is that there are many factors that influence the number of years it takes for you to save as much on your electricity bills as you paid for your commercial solar energy system.
This is one of the many reasons you’ll want to work with a reputable solar provider. They can help you understand how long it will take for your solar panels to pay for themselves.
They can also help you understand how the decisions you make as you design your solar system will impact the payback period.
Here are a few of the factors you should keep in mind as you’re walking through the process.
Table of Contents
The Cost of Your Solar Panel System
Obviously, the starting point for any solar payback period calculation is the total system cost of the solar installation. The total price tag should include anything that raises or lowers the cost of your solar system.
Fees
You need to know what’s included as a part of your solar contract and what isn’t. Interconnection fees, for example, may be over and above the contracted price.
Also, if you’re financing your solar panels, be sure to include any interest payments and other fees associate with the solar loan.
Federal tax credits
The Inflation Reduction Act (IRA) is a total game changer for businesses looking to invest in solar panels and energy storage systems. The the IRA offers a 30% federal tax credit for commercial solar systems commissioned through 2032. And that’s just the base credit.
You might be able reduce your solar system costs even further by stacking bonus tax credits if your solar array is installed in a qualified energy community, or if it meets domestic content requirements.
The IRA’s tax credits reduce your initial investment by at least 30% because they represent a dollar for dollar reduction on the federal income tax that your company would pay to the Internal Revenue Service.
That means that if you install a $250,000 solar and battery storage system, you can reduce your company’s tax liability by $75,000 (30% of $250,000) in the year that the system is commissioned.
You can also take advantage of accelerated depreciation to further reduce the overall cost of a solar panel installation.
Other tax credits, incentives, and solar rebates
Many states also offer tax credits, solar incentives, or solar rebates for the purchase of solar panel systems. You’ll want to work with both your tax advisor and a trusted solar company to maximize the financial tools available to lower your upfront costs.
How Much Electricity You Consume?
The amount of electricity your business uses is another critical factor in determining your solar panel payback period. As a part of designing your commercial solar panel system, your solar partner will review your monthly utility bills to understand your energy usage over the past year, and how much peak demand charges have impacted your utility expenses.
They’ll talk to you about your goals with solar – are you looking to reduce your electricity bills, reduce your carbon emissions, have a reliable source of power, or all three?
They’ll also talk to you about your future plans and how that might impact your electricity demand.
Determining the size of your solar system
This information will help them to properly size the system so that it meets your needs and your budget. They’ll make a recommendation as to how many solar panels you need and where they should be located. Once your system is designed, you’ll have a good idea of how much grid electricity your solar power system will offset.
The bottom line is that the more electricity your system generates, the lower your electricity bill – and the less time it takes for your solar panels to pay for themselves because of the avoided cost of electricity.
We’ll dive into avoided costs in a minute.
The Efficiency of Your Solar Panels
The efficiency of your system is another factor that influences your solar panel payback period. A solar panel’s efficiency is the amount of sunlight (solar irradiance) that falls on the solar panel that can be converted into usable electricity. Modern solar panel efficiencies range between 16 and 22%, with an average of just over 20%.
What that means is that for a panel with a 20% efficiency rating, 20% of the sun’s energy absorbed by the panel will be converted into solar electricity. The more efficient the solar panel the more electricity it can generate.
Naturally, the most efficient solar panels cost more, but that shouldn’t scare you off. Because of the higher energy production offered by highly efficient solar panels, they may actually save you both in terms of upfront costs (because you need fewer panels to meet your demand) or in terms of the amount of grid electricity you need you buy.
Either way, the more efficient your solar panels, the shorter your solar payback period.
Factors impacting efficiency
Where your solar panels are located can impact their efficiency. Weather is perhaps the most obvious factor that can influence the energy production of your solar panels. Clearly, solar panels work their best on sunny days when they can absorb the most energy from the sun. But since we don’t see 75º and sunny blue skies every day, your solar provider will need to account for the impact of your region’s weather when designing your system.
Factors like latitude, time of year, solar panel orientation, and shading can also impact the efficiency of your solar panels.
Additionally, dirt, pollution, leaves, and anything else that sits on the surface of your solar panels and blocks the sun will negatively impact their efficiency.
Battery Storage
At certain times of day, it’s possible that your solar system will generate more electricity than you can use in real time. You have several options for that excess electricity.
One, you can, in most areas, sell it back to your utility at a fraction of your utility rate, but that’s bad economics.
Two, you can limit the production of your solar panels so that you generate only what you need, but that’s a waste of your resources.
Or three, you can invest in a solar energy storage solution, which is the best way to maximize your investment in solar power.
It’s also a great way to reduce your solar payback period.
Solar storage reduces your payback period
Simply put, energy storage solutions like batteries allow you to bank the excess energy generated by your solar array for future use – giving you energy flexibility and independence.
Commercial and industrial businesses typically pay more for electricity during peak demand hours, which is one of the primary reasons businesses invest in solar. A solar panel system that includes a storage system can help mitigate those higher rates by reducing the amount of electricity you need to pull from the power grid.
If you have excess solar energy stored in lithium ion batteries or another energy storage technology, you’ll be able to use that power to minimize your demand for grid energy during peak hours, which saves you money.
The math is simple – the less electricity you pull from the grid, the greater your monthly energy bill savings. And those savings can be used to reduce your solar payback period.
The Price of Electricity
The long term outlook for the cost of electricity is hard to nail down, in part because we don’t really know what the integration of cheaper renewable energy into our power grid will do to rates – and how quickly that impact will be felt.
What we do know is that average utility costs are going up for many customers, driven by rising fossil fuel commodity prices and the costs associated with meeting carbon emissions-related regulations set out by the federal government.
That said, you don’t really need a crystal ball to know that, like everything else, energy prices are bound to continue their march upwards for at least the next decade.
Everything from geopolitical unrest to supply chain disruptions can impact electricity rates.
If you want to see how that’s playing out in the energy industry, there are plenty of news reports on utilities asking their public utility commissions to approve significant rate increases for both commercial and residential customers.
Levelized cost of energy
So how do utility electricity prices impact your solar panel payback period?
A few paragraphs ago we mentioned avoided costs. What we were talking about is called the levelized cost of energy (LCOE) and this number is key to understanding the real value of solar.
This is because when it comes to solar panels, what you’re really purchasing is a hedge against future energy costs.
LCOE, which is expressed as a price per kilowatt hour (kWh), helps you compare two different ways of paying for energy over the same time period. Essentially, your LCOE compares how much your utility-generated electricity costs are escalating over time with the more fixed capital costs of the electricity provided by your solar panels and battery storage system.
Calculating LCOE
Think of it this way. Most renewable energy plants have a lifespan of thirty years, so first we need to know the cost of buying the solar system and how much you’ll pay for the energy it produces over that 30-year time span. Once you have the system paid for, the cost of energy produced by your solar plant is flat over time. Your only real costs are in the operations and maintenance fees (O&M), which could run as low as $0.01-0.02 per kW.
Next, you need to consider what you’d pay in electric bills over the same time frame if you didn’t have solar panels. Grid electricity costs can escalate 2-5% per year (or more if inflation rates are higher), which means your solar system can actually save you more money in ten years than it will when it’s first installed.
LCOE also considers the impact of different financing options, the cost of operating and maintaining your solar system and a variety of other factors.
Because of the complexity of the formula, it’s best to let a reputable solar provider like Velo Solar help you calculate your LCOE.
Net metering
In some states, you may be able to take advantage of net metering policies, also called net energy metering (NEM). Net metering is a billing tool offered by some electric utilities in the US. Customers with on-site solar panels or wind power plants in certain states can send the excess energy generated by their renewable energy system back to the electric grid. In exchange, the utility company gives them credit for that energy on their next bill.
Often, sending excess electricity back to the grid is referred to as “selling” it back to the grid, but that’s something of a misnomer – you won’t actually be making any money. Instead, the credit applied to your account reduces your electric bill. At the end of each billing cycle, the utility compares your grid electricity usage with how much you sent to the grid. The net number is used to calculate your bill.
How Long Do Solar Panels Take to Pay for Themselves?
So, bottom line – what does a good solar payback period look like for commercial solar? Experts say that having your solar energy investment paid for within half of its life cycle (15 year or less) is the sweet spot.
Taking advantage of things like the federal solar tax credit, solar incentives and rebates, more efficient solar panels, and more can all reduce your solar payback period.
Working with a trusted solar provider like Velo Solar can ensure that you minimize the time it takes for your solar panels to pay for themselves and maximize your investment. We’re excited to show you how.
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