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OWOE - Solar Power - Are home solar systems cost effective?
  Figure 1 - Cost trend for distributed solar installations (DOE)
Figure 1 - Cost trend for distributed solar installations (DOE)
Figure 2 - Cost per Watt of Solar System (EnergySage)
Figure 3 - 2014 Average Monthly Bill - Residential (EIA)
Figure 4 - Gross Cost of Solar System Installation (EnergySage)
Are home solar systems cost effective?
Topic updated: 2016-03-16

The cost of solar panels has dropped significantly in the last several years as illustrated in Figure 1, and home solar systems are becoming very cost competitive with electricity provided via the electrical grid, particularly in states with high electricity costs. However, keys to being competitive are the Investment Tax Credit (ITC) for new solar installations and the policy of net metering:
  • US Investment Tax Credits (ITC) can be used to deduct 30% of the cost of a residential solar system from federal taxes. The US Congress voted at the end of 2015 to extend the solar Investment Tax Credit (ITC) for another 5 years, which will continue to subsidize the cost of new systems and make solar systems more attractive to consumers
  • Net metering allows the owner to essentially sell excess electricity back to the utility at retail electricity prices. This effectively allows the solar system owner to utilize the electrical grid as a power storage and back-up system to overcome the mismatch between fluctuating solar generated electricity and usage. For more information on this topic and a discussion of the challenges facing net metering, see OWOE: How does net metering encourage private investment in home solar systems?.
To understand the true cost effectiveness of a home solar system, we can examine the cost and benefit of the average rooftop solar system presented in OWOE: What is the average size of a rooftop solar system?. With the average home in the US using 30 kW-h per day electricity, which would require 46 panels @150W per panel for an insolation value of 5, we get a system with rated capacity of 6.9 kW. Figure 2 summarizes data gathered by EnergySage which shows the average installed cost of a rooftop solar system at $3.79/W in 2015. At this price, our 6.9 kW system would cost about $26,000. Taking the ITC drops the effective cost to $18,200.

On the benefit side, 2014 EIA data for electricity rates across the US (Figure 3) range from a low of 8.67 cents/kW-h for Washington state to a high of 37.04 cents/kW-h for Hawaii, with a national average of 12.52 cents/kW-h. Using our average home usage of 30 kW-h per day at the average rate results in 30 x 0.1252 x 365 = $1,370 yearly electricity cost.

Assuming an average rate of increase of electricity of 3% per year, a simple calculation of payback time for this hypothetical system is a little over 11 years. Of course, payback time is directly impacted by cost of electricity. The same system and usage in California with an average electricity cost of 16.52 cents/kW-h would have a payback of 9 years and Hawaii at 37.04 cents/KW-h would have a payback of about 4.5 years. While the average use in those two states tends to be lower than the US average, which would allow one to install and pay for a smaller system, the payback time for the smaller system would be the same. Figure 4, also from EnergySage, indicates that the average payback time for all systems installed in 2015 was about 8 years. A payback time between 5-11 years would seem to be a reasonable expectation before calculating details on a specific system.

Final caveats:
  • All the above calculations are based on an insolation value of 5; economics in areas with less solar energy would not be as robust.
  • If the ITC disappears, installed cost would increase by 30%, and the payback time for the average US installation would go from 11 years to 15 years.
  • All calculations assume "pure" net metering, i.e., the utility buys back excess power at the same retail rate as it sells it to the homeowner. This is critical because the solar system only generates electricity during the day and only achieves peak generation for a short period during the middle of the day. Virtually all day long, 24/7, the system is either generating too much power to be used locally and sending it to the grid or not generating enough power, requiring electricity to be taken from the grid. If there is a disparity in the buy vs sell rate, it will make the economics less attractive.
And, finally, many companies now provide the option to install a system with no upfront cost to the consumer. The company provides the equipment, installs it, and maintains it in return for a contract to purchase a minimum amount of electricity at a fixed price over a fixed period of time. This price is usually significantly lower than the utility company's price. The company will also sell excess electricity back to the utility company to help pay for the cost of the system.

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