· solar energy · 5 min read

# A Simplified Guide to Solar Energy ROI

This simplified guide helps you understand the factors that influence ROI, aiding in making informed decisions.

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Understanding the financial benefits of switching to solar energy goes beyond just considering the upfront costs. It involves a comprehensive understanding of how these costs translate into savings over time. But how can you accurately calculate your Solar ROI?

### ### **Solar Costs & Savings: A Hypothetical Overview**

To provide a realistic example, let’s consider national averages alongside a hypothetical scenario. According to the U.S. Energy Information Administration, the average U.S. home consumed about 886 kWh per month in 2021. The cost of solar panels from reputable companies averages around $3 per watt, and the national electricity rate is approximately $0.17 per kWh.

In our hypothetical case, we look at a home using 12,000 kWh annually, offsetting half of its energy needs with a 6KW solar system. This system consists of 15 panels, each at 400 watts, costing a total of $18,000. The homeowners pay $0.15 per kWh to their utility provider.

These examples serve as a baseline, but individual circumstances like location and home size will vary.

**Start with Understanding the TRUE Net System Cost**

When it comes to solar investments, the TRUE net system cost is your starting point. This is the total out-of-pocket cost you incur, whether you opt for a cash purchase or a loan. To keep things simple and straightforward, you can calculate your TRUE net costs by multiplying your monthly payments by the number of months. This gives you a solid reference point for ROI calculations and for comparing solar loans. In this scenario, we’re looking at two different TRUE net system costs to compare with solar: one cash price and the other a basic solar loan.

**Consumption Cost = Price of Staying on the Grid**

To calculate the ROI, you also need to factor in your current electricity consumption cost. This includes your monthly electricity bill and the expected annual increase in utility rates. On average, utility rates increase by about 3.5% annually due to inflation and grid maintenance. In this scenario, we’re saying it’s $0.15 per kWh being charged and consumes about 12,000 kWh of energy a year.

**The Amount you Offset is Your Solar Savings**

The amount offset is the electricity your solar panels produce that replaces your current electricity consumption. This figure is crucial in calculating your ROI as it represents the savings you make by switching to solar energy. In this scenario, we’re offsetting 50%.

**Calculating Solar ROI: The Final Calculation**

- Total Cost Without Solar Over 25 Years: If we factor in a 3.5% annual increase in utility rates, the total cost of electricity over 25 years would be approximately $70,109.74.
- Total Cost With Solar Over 25 Years: Now, let’s consider a scenario where you offset 50% of your electricity consumption with solar. The total cost of electricity over 25 years would be approximately $35,054.87.
- TRUE Net System Cost Let’s assume the total cost of your solar system, including installation, is $18,000. After applying the 30% federal tax credit, the TRUE net system cost would be $12,600.

Now, let’s calculate the Solar ROI: **Solar ROI** = (Total Cost Without Solar - Total Cost With Solar - TRUE Net System Cost) / TRUE Net System Cost * 100

**Solar ROI** = ($70,109.74 - $35,054.87 - $12,600) / $12,600 * 100

**Solar ROI** = 178.21%

So, in this example, considering the 30% federal tax credit, the Solar ROI would be 178.21%. This means that over 25 years, you would get a return of 178.21% on your initial investment of $12,600 (after tax credit). This is a simplified calculation and actual ROI will vary based on other factors such as maintenance costs, financing costs, net-metering, backup battery storage, and changes in utility rates.

**How interest fees effect your Solar ROI**

Let’s consider the same example but with a 5% interest rate over 25 years.

Total Cost Without Solar Over 25 Years: Stays the same at $70,109.74.

Total Cost With Solar Over 25 Years: Stays the same at $35,054.87.

**TRUE Net System Cost**- keeping the same scenario, your system’s cash price was $18,000, you’re applying your 30% incentive to get a new system price of $12,600. Now you’re financing the $12,600 at a 5% interest rate over 25 years, total repayment amount would be approximately $22,097.50, and would be your new TRUE net system cost.

Now, let’s calculate the Solar ROI:

**Solar ROI** = (Total Cost Without Solar - Total Cost With 50% Solar offset - Loan Repayment Amount) / New TRUE Net System cost _100 **Solar ROI** = ($70,109.74 - $35,054.87 - $22,097.50) / $22,097.50_100 **Solar ROI** = 58.64%

So, in this example, considering the 30% federal tax credit and a 5% interest rate over 25 years, the Solar ROI would be 58.64%. This means that over 25 years, you would get a return of 58.64% on your initial investment of $22,097.50 (after tax credit and including the loan repayment).

**Conclusion**

We’ve aimed to streamline the decision-making process for you, but remember, this is just the starting point. There are additional elements like state incentives, net-metering, and battery storage options that could further influence your Solar Return on Investment (ROI). Plus, be aware of **potential hidden costs** from solar providers, such as dealer fees, which may not be included in a basic ROI calculation.

Now that you understand how to calculate your Solar ROI, you might be wondering how you can maximize it. In our next article, we’ll cover what factors effect your Solar ROI, we delve into the controllable factors that can help you get the most out of your solar investment.