Are Solar Panels Worth It?

Here’s the breaking news in case you missed it: solar is taking off. In the past decade, the expansion of the residential solar energy market has been nothing short of astonishing. Though it’s still early days, all key market metrics point to continued growth for the coming years. Like many homeowners, you may be asking yourself if you should invest in solar panels.

A vision of the future: your solar neighborhood (Photo credit: energy.gov)

Nobody wants to hear “it depends”, but that is the reality when it comes to solar. So we decided to write a guide to cover this topic with the level of detail it deserves. We will cover quite a few topics and go through a number of examples in this guide. At the end, we hope you will have the answer to the question are solar panels worth it with respect to your particular case.

“Today, solar is still something that folks are not used to seeing,” explains Jigar Shah, solar industry expert and SunEdison founder. “In ten years, everyone will have solar on their roof. In addition to saving more money, you want to be part of the ‘early mass market.’ You will get better service and more bragging rights than if you are the last one on the block to switch.”

Answering the question of whether you should go solar requires an in depth look at various factors that affect the profitability and feasibility of solar power. To make it easier, we have broken down this guide into discreet sections so that you can navigate more easily.

1. What Is The Solar Picture Today?

2. Electricity Cost Comparison: Solar Versus Utility

3. What Is Grid Parity?

4. Other Solar Considerations: Roof, Shade, Orientation

5. Do Solar Panels Increase The Value Of My Home?

6. Conclusion - Are Solar Panels Worth It?

Here are the top takeaways:

✓ Don’t fixate on latitude and weather conditions where you live: utility rates and incentive programs can make a huge difference, making solar profitable in many northern locations that aren’t sunny year round.

✓ Determining the cost per kilowatt-hour at your location is a bit tedious, but only an apples-to-apples comparison can give you the answer you need (we also make it simple with our calculator, Discover).

✓ When it comes to solar power, think like an investor, not as a utility customer. You have to look at the cost/savings over the lifetime of your solar panels.

✓ A solar lease may look like a good option for going solar, but in all likelihood, a solar loan is an even better option.

✓ It's never too late to start charting your solar strategy.

1. WHAT IS THE SOLAR PICTURE TODAY?

While solar panels are still a rare site in much of the United States, there are a few states where solar energy is taking off. Take a drive around Pasadena, California or down the streets of Fair Lawn, New Jersey, and you are bound to come across solar panels. Rapidly falling solar equipment prices and generous incentives, like the 30% federal investment tax credit for residential solar, have helped make this a reality.

“In 2006 there were only 31,000 U.S. homes with solar,” according to Alexandra Hobson, Press Officer & Communications Manager at Solar Energy Industries Association (SEIA). “Today, there are nearly 1 million and that number is only going to grow.”

Homeowners, frustrated by their ever increasing utility bills, are looking for an alternative that will save them money in the long run. They are also looking for ways to help the environment by producing their own clean energy. Jim Jenal, CEO of the solar company Run on Sun in Pasadena, California knows this firsthand:

“For most homeowners it starts with a desire to save money; however, even for the most cost conscious, the understanding that they are doing something good, sweetens the deal.”

With dramatic price drops in solar equipment, solar energy is more affordable than ever for homeowners considering the switch.

“With new financing options, and more capital moving into the industry, it has never been cheaper or easier to install solar on your home or business,” according to Hobson at SEIA. “Over the last decade, the price of residential solar has dropped nearly 60 percent.”

Decreasing solar costs is great but that doesn’t mean solar panels will make financial sense for everyone. Another important factor is the cost of electricity where you live. If you happen to live somewhere with cheap electricity, you’re unlikely to recoup your investment. Going solar in locations with cheap electricity is more about lowering your environmental footprint and being more self-sufficient.

“We have clients who don’t even care about what they will save; they just want to be as green as possible,” Jenal from Run on Sun explains. “For our non-profit clients it is about fulfilling their educational mission and being good stewards of the environment.”

2. ELECTRICITY COST COMPARISON: SOLAR VERSUS UTILITY

Chances are, when you think about the suitability of solar energy for your home, the first thing that comes to mind is sunny skies and long hot days. While the level of solar radiation in your city is an important factor, it’s not everything. There is another factor that is equally, if not more, important: your current utility rate. Ultimately, figuring out if solar energy will save you money in the long run boils down to figuring out if the cost of solar electricity is the same or cheaper than electricity from the utility. If the answer is yes, then solar energy makes financial sense.

So how do we do this? We will walk you through the steps.

Finding your current electricity rate

OK, I will admit, figuring out the cost of electricity from your utility is not as simple as it should be. It would be nice if the cost per kWh was clearly indicated, but in many cases, it is not. A ballpark figure can be determined by taking your total charge for the month and dividing it by the number of kilowatt-hours you used.

Utility bill sample (Source: Southern California Edison)

So in this example bill from a California utility, you would take $300.09 / 1500 kWh = $0.20/kWh.

But this is not really the most accurate number because it includes your fixed monthly charges, which inflate the cost per kWh. With solar panels, you would still stay connected to the grid and would continue to have fixed charges. Therefore, it would be better if you could find the total cost before the fixed charges. You can compare multiple monthly bills to see which charges are fixed from month to month, or speak to your utility to learn more about the fixed charges for solar customers.

If you don’t want to dig up your past electricity bills, you can also use the 12-month average for your state (for the latest 12-month averages by click here). In the case of California, the state average for the past 12 months is $0.17/kWh, which is lower than the figure we calculated above.

Now, how do you determine the cost of solar electricity?

For most people, determining the cost of solar electricity can be reminiscent of high-school trigonometry problems…not fun. It turns out that the math for solar electricity is actually much easier than a basic trigonometry problem: the issue is the novelty factor. We’re simply not used to thinking about electricity as something that we produce by investing in a “power generation asset”. But buying or leasing solar panels is exactly that, so we need to think like a producer, not a consumer.

To do that, we calculate the levelized cost of solar energy (LCOE), which is essentially the cost of solar electricity, including both the initial installation costs, as well as the ongoing expenses such as fuel and maintenance over the expected lifetime of the investment. The term "levelized" refers to making an apples-to-apples comparison of different sources of energy.

All other things being equal, the more sun a location receives, the lower the levelized cost of solar energy.

The levelized cost of solar energy should not be confused with another solar cost: cost per watt. The cost per watt is nothing but a handy way to "normalize" the total cost of installation. For example, if the cost of installation for a 5 kW (i.e., 5,000 watt) solar PV system is $20,000, then the cost per watt of this system is $20,000 divided by 5,000 watts: $4 per watt. Cost per watt is not dependent on the amount of sun a location receives, but it does vary from place to place because of other factors, such as the cost of permits and customer acquisition, to name a couple.

Location, Location, Location

As mentioned, where you are located greatly impacts the cost of solar electricity, or LCOE. Not only is the amount of sunlight that falls on your panels location dependent, but so are the available financial incentives, such as rebates and tax credits.

Since there are so many different municipal and state incentive programs, for simplicity, we will only consider the federal investment tax credit (ITC) of 30%, because that is available nationwide (after 2019 the ITC will be reduced to 26% for 2020, 22% for 2021 before disappearing completely for residential solar as of 2022).

If you live in Canada, there is no federal tax credit, but there are some incentives/rebates at the provincial level.

I just bombarded you with tons of information, so let’s take an actual case and illustrate some of these points:

Solar system installation cost: Assuming a cost per watt of $4, an average-sized residential solar panel installation with 5-kW capacity would cost about $14,000 ($20,000 minus the 30% federal investment tax credit). Other available rebates would decrease this cost further.

Operating and maintenance cost: An estimate for the operation and maintenance costs over the expected 25-year lifetime of your panels would be about 10 percent of the purchasing cost before tax credits (0.10 * 20,000) — in this case, about $2,000 for a 5-kW system. This is essentially a provisional budget to account for things like an inverter replacement or minor repairs. With no moving parts, solar panels themselves are virtually maintenance free, but some of the other electrical equipment may need some care.

Fuel cost: In the case of solar, the fuel comes from the sun, so there is no additional cost. In practice this means two things: 1) you will actually save money using a star that’s about 93 million miles from your panels; and 2) once you pay off your solar loan, your annual electricity cost will be minimal.

Coming back to Earth, let’s sum up the installation, as well as operation and maintenance costs, in order to estimate the total lifecycle cost: $14,000 + $2,000 = $16,000.

We’re almost done! But we still need to determine how much electricity you can produce with your system to determine the levelized cost.

Energy Produced with a 5 kW System in Los Angeles

Levelized cost of solar electricity in Los Angeles

Electricity Produced: Using our solar power calculator Discover, we can see that a 5-kW system installed in Los Angeles would generate about 8,100 kWh of electricity per year. By comparison, the same system installed in Portland, Oregon would yield about 5,840 kWh per year.

Because, as we mentioned, most solar energy installations have an expected lifetime of 25 years, we multiply the annual average generation by 25 to get 202,500 kWh over 25 years for Los Angeles, or 146,000 kWh over 25 years for Portland.

Levelized Cost: The final step is to divide the life-cycle cost ($16,000) with the amount of electricity the system will generate over its lifetime. In the case of Los Angeles: $16,000 divided by 202,500 kWh equals about $0.08/kWh, whereas in Portland, we are looking at about $0.11/kWh.

So far, we assumed that you would buy the panels with an all-cash transaction. In reality, many homeowners will need some sort of a financing mechanism (we discuss your financing options in more detail below). Incorporating the cost of financing into the levelized cost estimates complicates the math (compounded interest rate calculations anyone?), so I suggest that you use our Buy or Lease Calculator and quickly go through some alternative financing scenarios to determine the best option.

We were considering the same system with the same life-cycle cost, but because the amount of sunshine differs in the two locations and, therefore, so does the amount of solar electricity that can be produced, we find that the levelized cost is significantly different for the two example locations.

3. WHAT IS GRID PARITY?

Grid parity is achieved when the Levelized Cost of Electricity (LCOE) for solar electricity is the same or lower than the utility rate where you live. When you’ve reached grid parity switching to solar will save you money over the lifetime of the panels. (Of course, there are other technical considerations which affect your decision to go solar, such as the shade on your roof – we explore these other factors below).

In the case of Los Angeles, using the state average utility rate of $0.17/kWh and comparing that to the LCOE of $0.08/kWh, we see that solar energy makes financial sense, and you would save a significant amount of money over the lifetime of your panels.

Of course, if you live elsewhere, or learn that the cost is different than the $4/W we assumed, or that you can benefit from additional incentives, you need to run the numbers again (prices have been falling, so a more accurate figure is probably $3/watt now, but if the math work for $4/watt, it only gets better as the cost goes down!). You can sharpen your pencils, sort them in descending order, take out your favorite notepad and prepare to spend some time on the math, or just use Home Solar Discover and save yourself the hassle.

To see how your state compares when it comes to residential solar, you can check out our interactive grid parity map. You can even adjust the cost of solar panels to reflect falling prices. If your state hasn’t reached grid parity yet, you can see at what “cost per watt” it does. If you live in Canada, we have a map for you too.

You can easily see how critical the federal investment tax credit of 30% has been in stimulating the growth of the residential solar market. Just try switching it off with our interactive map and see what happens when there is no ITC. It’s helped residential solar take off in many locations.

Remember, any additional state or municipal incentives will only improve the profitability of solar where you live.

To sum up, I’ll just imagine what Yoda would have said about the topics we covered above:

“Remain the same over the lifetime of your panels, the levelized cost will. Almost certain to rise, the cost of electricity from your utility is. Yeesssssss.”

And if you don’t speak Yoda, this is a translation:

“While the LCOE will remain the same over the lifetime of your panels, the cost of electricity from your utility is almost certain to rise.”

4. OTHER SOLAR CONSIDERATIONS: ROOF, SHADE, ORIENTATION

You have determined that, from a financial perspective, solar energy makes sense! But even though the financials are sound, there may be other potential show stoppers. The state of your roof, its configuration, as well as the orientation and shade levels are all important factors.

Using Home Solar Discover, you can take into account the estimated level of shade, the orientation of your roof, and its slope. With that, you have a good start, but ultimately, solar installers will need to visit your home and see for themselves. They will make recommendations on the type of equipment and the placement of panels so that you maximize your investment.

James Hahn, CEO of My Solar Home, a solar company in New Jersey, explains the importance of a site visit like this:

“Our home site audit enables our field technicians to take detailed measurements of your home in order for us to optimize the design of your solar energy system to ensure it best meets your home's specific energy needs. We conduct a thorough examination of your roof which includes measurements, condition/age of roof, along with determining if there are vents, attic fans, chimneys or other obstructions that will impact the system design and production. We obtain comprehensive shade readings to ensure optimal power production. We complete a thorough inspection of your electrical service panel to determine how we will connect your system to the utility grid, as well as assess the structure of your roof by closely inspecting the home's framing. This comprehensive site audit and inspection ensures that we custom design the solar energy system to best meet your home's needs.”

If you already know that your roof is in need of repairs or will need replacing in the next few years, it likely makes more sense to do that work now before you speak with installers. However, in some cases, you may be able to combine the work, as some contractors do both roofing and solar installations, so this option may be worth examining as well.

Solar panels are a big investment, and for that reason, you want to be as prepared as possible before you speak with solar companies. Understand your options, from central inverters to micro-inverters, know your electricity usage so that you end up with the optimal system size, and read up on solar basics. The installers will be able to walk you through most of it, but you will understand much more and make a more informed decision if you do some simple research first. Home Solar is here to help, with articles on all these subjects and much more.

Alexandra Hobson from SEIA offers these additional tips for homeowners considering solar energy:

“Become an informed consumer - any homeowner considering solar should know their situation (electricity usage, roof, finances etc.); do your homework (make sure to get multiple bids for your solar system, research your solar company, understand how tax credits, local incentives and Renewable Energy Certificates may apply); and understand the agreement (know the terms of your contract and fully understand what your warranties protect and for how long).”

5. DO SOLAR PANELS INCREASE THE VALUE OF MY HOME?

With more and more homeowners choosing to install solar panels (nearly 1 million homes in the U.S. today, according to SEIA), both homeowners and appraisers/realtors need to better understand how solar panels affect the value of a home.

Whether the PV system is owned or leased is an important distinction. The studies we refer to below looked at owned systems. In the case of leasing, it is more relevant to consider the terms of your agreement if you think you might sell your home - can the lease be passed on to the next owner, what are the penalties for breaking the lease agreement, is there a buy-out option, can you take your panels to your new home, etc.

As with many solar panel related questions, the premium on solar homes is location dependent. Homeowners in jurisdictions that are favorably located for solar energy production, that have high retail electricity prices, and that encourage development through incentives and subsidies are more likely to find their investment will pay off. This is even more true in areas where green or renewable energy is very highly valued, such as neighborhoods with a higher concentration of hybrid or electric vehicles.

According to a recent study by the Lawrence Berkeley National Laboratory, supported by the U.S. Department of Energy SunShot Initiative, the average premium for a home in the U.S. with owned solar panels was $3.78/W, or $14,000 on an average sized PV system of 3.8 kW on a home sold in 2011. PV premiums varied across the U.S. (in the study, 43 home-sales pairs were studied in six states, where home-sales pairs are pairs of comparable PV and non-PV homes) and the premiums ranged from $2.68/W to $4.31/W. It was found that PV premiums were more similar to net PV costs, as opposed to gross PV costs, which is understandable as incentives/subsidies decrease the cost to the homeowner significantly. As the cost of solar PV installations decrease, it is expected that PV premiums will also decrease.

Investing in solar panels for your home is no longer just an environmental decision taken by green-living homeowners. It is an economic decision taken by homeowners looking to make a smart, financially sound decision with respect to the value of their home.

6. CONCLUSION - ARE SOLAR PANELS WORTH IT?

Congratulations! You made it to the end of this guide. By reading this, you already took an important step in taking charge of your own energy future. We are in the middle of an energy revolution, and it’s time to join the party.

A decade ago, rooftop solar panels were a rare sight. Today, more and more homeowners are taking a serious look at what solar energy can do for them.

“Growth in solar markets across the country is at a level unimaginable at the start of this decade,” according to Alexandra Hobson from SEIA. “Thanks to the recent extension of the solar investment tax credit, by 2020, the industry will be employing more than 420,000 American workers and deploying more than 20 GW of solar electric capacity annually. To put this in perspective, at the end of 2014, 20 GW was the total amount of solar that America had installed in its history.”

With rising electricity rates in most parts of the country, solar energy is increasingly an investment that makes sense for homeowners. Fortunately, the cost of solar has decreased significantly, making it a more affordable option.

“Whether you save 10% from day one or just 1%, utility prices are going up and the available solar incentives are going away,” says Jigar Shah. “The time is now to get your roof checked out and see if you have a nice unobstructed view of the sun.”

In addition to installing solar panels, there are many other things homeowners can do today to manage their electricity bills, starting with reducing electricity consumption, especially during peak periods, and implementing home energy-efficiency measures.

All of these steps have the added benefit of helping the environment and reducing the negative effects of climate change.

As Hobson sums it up, “if we are to have a realistic hope of continuing greenhouse gas reduction, then greater deployment of 21st century solar technologies – both in the United States and around the world – is absolutely critical.”

Whether you do it for the environment, for your finances or just to impress your neighbors, the time to go solar is now. All that's left to do is to crunch the numbers and find highly-rated installers in your area. Home Solar Discover is here to help!

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