Can I Really Save Money by Putting Solar Panels on My Roof?

Saving money solar panels

Two factors are making solar panel installation a better deal for homeowners than it was in the past—the federal and state tax incentives, and the rising cost of electricity from traditional sources.

According to a study from the Edison Electric Institute, electricity prices went up 2.5% annually from 2000 to 2006, (which means they beat inflation, which was calculated to be increasing 1.99% annually in that period) and are following a steady upward trend. That rising cost is being driven in part by the rising cost of fuels, such as coal and natural gas.


Chart shows the rising costs of fossil fuels, which is reflected as a rising electricity cost to the consumer. Source: Edison Electric Institute, U.S. Dept. of Energy.   

As those lines continue to go up, so will your electricity bill. That means making an investment in solar panels likely to pay for itself in a shorter period of time.

On top of that, there are the tax credits. In an effort to encourage homeowners to go green, the U.S. government has offered significant tax credits for installing solar panels as an alternate energy source. While a tax break that allowed renewable energy companies to recoup 30% of a new project back as a cash grant after construction expired this year, a residential federal tax credit of 30% will remain in place until December 31st of 2016.

Additional credits vary state by state, but if you live in a sunny state with a high solar rating—a measurement of the average solar energy available for your home—such as Arizona, California, or New Mexico, you may find additional incentives like cash back, waived fees, and expedited permits. You can look up the available credits in your state here.

How much will residential solar panels cost me—and how much can I save?

Solar panels don’t come cheap: with installation, they can cost around $5 per watt, or $15,000 for an average residential 3kW system. While the system itself is a significant initial investment, it has immediate monetary and environmental benefits.

The average U.S. household consumes about 1 kW per hour of electricity, or 900 kWh per month. For example, an energy efficient fridge will use about 350 kWh per year (at an average utility cost of $0.12/watt, that’s less than $50 a year), while a large plasma screen TV can use as much as 700 kWh per year (about $100/yr).

But those costs aren’t expected to stay steady—remember that electricity costs are on the rise, and your use of electricity probably is, too.

If you installed a 3kW system, you can approximate that, based on an average amount of sunlight, the system would create 450 kWh per month—about half of your monthly electric bill. Estimating that bill at $100, your initial investment will save you approximately $50 a month for the life of your solar panel system.

Research offers from different solar companies—some have programs that lower your cost of installation substantially. For instance, Gen110 gives users a low cost installation of solar panels as well as a guaranteed electricity rate.

Here’s a cost breakdown for an average residential solar panel system:

Approximate Cost of 3kW System After 30% federal Tax Credit:

$10,500

Approximate Yearly Savings:

$600

Years Required to Recoup Investment:

17.5

If this homeowner lived in New Mexico, for example, they could also take advantage of a 0.027 per kWh tax credit, a 10% credit for purchase and installation costs, and property tax exemption, among others. Most states with good to excellent solar ratings are currently very generous with incentives for alternative energy consumers.

Remember that you don’t have to buy solar panels—you can lease them, too. That offers a lower upfront cost, although since you don’t own the panels, they won’t raise the value of your home.

NerdWallet Recommendations

If you live in a state with a suitable solar rating and can afford the initial investment, it’s well worth installing solar panels in your home while the 30% tax break is in place—for the good of the environment, but also for your wallet. You can approximate the solar rating and effectiveness of a solar energy system in your hometown here simply by entering your zip code, your utility provider, and the cost of your monthly energy bill.

If you do decide to install solar panels, keep an eye out for other government incentives. A few states, including Oregon and California, allow homeowners with large solar panels to essentially sell excess power to their local power companies through “feed in tariffs,” resulting in residential income of hundreds of dollars a year. These systems are limited and fill up quickly, but as solar power continues to grow in popularity across the United States, citizens and lawmakers are pushing to expand the program. Keep in mind, however, that as alternative energy becomes more popular the prices will continue to fall—don’t invest in solar panels with the expectation that you will recoup the expenditure in the resale of your home.

Above all, remember that even though your solar energy panels are saving the planet—and, eventually, your bank account—it’s still important to conserve energy as much as possible.

Expert Recommendations: 

Cole Eaton, operations manager of Day and Night Solar, had this advice for homeowners considering acquiring solar panels:

“Homeowners comparing different options available to them in terms of the acquisition have quite a few options available, with more on the horizon. While there are more traditional acquisition methods, such as a second home equity mortgage, new options are becoming available, such as PACE financing, power purchase agreements and structured loans to be budget neutral (what you save in power each month is what your monthly payment is). We recommend that homeowners explore these different options with their solar installer/integrator as well as their local banks and funding sources. Ultimately, due to the nature of the incentives it is also a good idea to bring in a tax professional to ensure the homeowner is applying all of the incentives correctly for their particular financial needs.”

Guillermo Santomauro, director of sales at SolarMax, cited the rising cost of electricity from traditional sources as a good reason to switch to solar:

“I just went to my mailbox yesterday and inside was a notice from [Southern California Edison] that they have already filed for a 5% rate increase as of Aug. 1, 2012. This falls on the heels of a 10% rate increase that took effect this past June. Solar panels, once installed, offset retail energy prices, and as rates go up your [Return On Investment] and long term saving skyrocket. Homeowners purchasing a solar system today will have an average ROI greater than 20%.”

Bill Anderson, CEO of Milestone Solar, had this to say:

“The federal and state incentives are all politically controlled, so it is really difficult to predict what will happen with any degree of certainty.  But it is accurate to say that many industries – oil exploration and production, railroads, banking, telecommunications infrastructure, and many other industries currently enjoy tax breaks which amount to incentives, and the solar industry still needs incentives to make it affordable to more than a select group of people.  As we have seen in Pennsylvania, when the state incentive funds ran out, installations went down and the environmental advantages of renewable energy declined dramatically.”

Kenneth Allen, COO of Principal Solar, noted the falling cost of solar programs:

“The cost of electricity from a solar system should not increase over time and with some programs like ‘net metering’ excess generation can be sold back to the utility company or used as a credit on your next month’s electric bill. When making a decision to buy a solar system, local utility rates and renewable energy incentive plans must be evaluated.  A local installation company can show the cost savings and payback period for different sized solar systems. Based on the falling prices for PV Modules, within the next five years solar energy will compete with local utility rates, without incentives. This is based on the cost of retail electricity and the annual cost increases. Some customers are paying over $0.20/kWh and others paying $0.05/kWh for electricity.  If you are in an area where the price of electricity is costly, solar generated electricity may already be competitive with conventionally generated electricity, especially if you live in an area of the U.S. with significant sunshine.”

Solar panel image via Shutterstock