Solar Panels on a New Home: A Cost-Effectiveness Analysis

Homes with solar photovoltaic panels (PV) can appeal to some new home buyers because of reduced electric bills and a lessened environmental impact. The decision to proceed with such a major investment, however, raises a question about the return on investment.

Home Innovation Research Labs recently completed a study analyzing the cost effectiveness of rooftop solar PV across five different markets: Phoenix; Tampa, Fla; Boston; Kansas City, Mo.; and Seattle.

The analysis was performed using the System Advisory Model (SAM) – a software developed by the DOE’s National Renewable Energy Laboratory (NREL). The software models the energy performance of the solar PV array at the specific location and for a specific house configuration to accurately calculate the expected electricity production and cost-effectiveness metrics for the system using local utility tariffs.

The model evaluated a new house construction scenario, which assumed that the solar PV system was installed prior to the house sale as part of the overall equipment package. The analysis did not incorporate any financial incentives because such measures are temporary and vary greatly depending on the jurisdiction.

The analysis indicates that the following factors are the primary drivers in determining how cost effective a rooftop solar PV system is:

  • Local electricity price
  • Utility tariff for purchasing excess electricity generated at the house
  • Solar resource at the site and panel orientation
  • Installed cost of the PV panels

Electricity prices vary widely across the United States, with some of the highest rates in Hawaii and Massachusetts at 29.2 cents/kilowatt hour (kWh) and 18.5 cents/kWh, respectively, on average, compared to 8 cents/kWh on average in Seattle. In more expensive electricity markets, using solar PV will be more attractive than in markets with lower electricity prices because the site generation will partially offset the need to buy electricity from the utility.

The utility tariffs for purchasing the excess electricity generated at the house also vary widely across the country. For example, in Boston, the utility purchase price is set at nearly the retail sale price that customers are paying for electricity on their utility bills, so the consumer can sell the excess electricity generated at the site for a high price and bank the revenue. However, many utilities around the country purchase excess solar electricity at a much lower rate, making payback periods longer. The utility purchase price is a less significant factor for smaller PV systems (e.g., 3 to 5 kilowatts) that do not overproduce electricity.

The availability of solar resource also varies with the location. Among the five analyzed cities, Phoenix has the highest solar resource averaging 5.79 kWh/square meter (m2)/day, and Seattle had the lowest at 3.47 kWh/m2/day. The PV panel compass orientation is another factor that impacts the amount of generated electricity and the cost effectiveness of the system. PV systems facing south, southwest or southeast result in shorter paybacks.

The installed cost of the PV system can vary from market to market and project to project. The study evaluated a range of costs that a home buyer can expect.

Surprisingly, it’s more cost effective to install rooftop solar PV in Boston than in Phoenix or Tampa. This outcome is the result of Boston’s high local electricity pricing and favorable purchasing tariffs that outweigh the difference in the available solar resource and other factors. The table below summarizes key results for the five cities, and the two example charts show simple payback (first cost divided by first year savings) for Phoenix and Boston. Depending on the configuration and the installed cost of the PV system, the simple payback in Phoenix varies between 15 years and more than 40 years. In Boston, the simple payback varies between 12 and 21 years. More detailed results, including other cost-effectiveness metrics, can be found in the full report.

City Solar resource, kWh/m2/day Metering agreement Electricity price, cent/kWh* Price for site generated electricity, cent/kWh Simple payback
Phoenix 5.79 Net billing 3.4-26.8 2.8-3.0 16-42 years
Tampa, Fla. 5.22 Net metering 10.3-12.7  ** 18-33 years
Boston 4.06 Net metering w/ $ credits 19.6-22.3 18.0-20.7 12-21 years
Kansas City, Mo. 4.38 Net metering w/ $ credits 7.5-15.7 2.4 20-36 years
Seattle 3.47 Net metering 8.7-10.7 ** 25-59 years

* Prices vary by time of day, month, and/or max usage.

** Net metering agreements credit customers for site-generated electricity in energy units (kWh) and are not converted to $.

Notes: (a) Orientation indicates the PV system’s azimuth (compass orientation); (b) 6/12 and 9/12 are roof slopes (panel tilt); (c) “low-cost” and “high-cost” represent a range of costs for installed PV panels.

Other interesting findings of the analysis are:

  • The price range for PV panels expected in the market corresponds up to eight years differential in the simple payback period.
  • The PV system’s compass orientation can impact the simple payback period by as much as 12 years.
  • The panel tilt (roof slope) has a small effect.

In summary, the cost effectiveness of roof-mounted solar PV panels depends on a range of factors that are location specific (utility tariff, solar resource) and project specific (system cost, panel orientation). For the same location, the simple payback can range by a factor of two or more and may be outside the life expectancy of the solar PV panels if all factors cannot be optimized and assuming no financial incentives were used to offset the total system cost.

With questions, please contact Vladimir Kochkin.

Tags: ,

Comments (18)

Trackback URL | Comments RSS Feed

  1. Dave Marsh says:

    I believe in being environmentally friendly as much as anyone and we all know power companies will continue to raise rates indefinitely. So solar energy is a good thing, however when I looked in to it personally given system cost and cost of electricity the pay back was almost 15 years. Which is about the time you would have to completely upgrade or update the solar panel system with around the same cost. I look forward to taking a better look at Tesla’s solar energy system as I think it will be much better than what is available on the market currently.

    • Dan Semsak says:

      The solar systems degrade about 0.5% per year. So, in 30 years, it would produce about 13.5% less than when you first got it. If you have to change it out in 15 years, then you got the wrong system.

      The incentives are what is driving the payback efficacy. The key financial questions are:

      – What would your power bill be if you did not have the system?
      – How long do you plan to live in your house?
      – Will the system add value to the potential sale of your house?

      With my system, given our prior power bills, the tax rebates & incentives from the Feds and State of Washington, and low interest rates, my payback in northwest Washington was 46 months. It also added value to my house. It made sense – for us, at the time. The incentives are less now. Without the incentives, it would not have made good financial sense.

      However, there is that doing good for the environment thingy.

  2. Sean Gilligan says:

    Does this analysis include the federal and state tax credits? That has a major impact on the financial analysis. Also, I was told that the panels would be good for 25 – 30 years. They would slowly lose some efficiency, but that should be covered by the increase in electric cost going forward.

    • NAHB Now says:

      Sean: This analysis does NOT include federal and state tax credits, or any local utility incentives, which would certainly impact the financials and decrease payback periods.

    • FYI, unless congress acts to extend them (which they have been doing one-year at a time since 2006, except for when Trump extended them for 3 years) and the new President signs it in to law, those federal tax credits will go away on Jan 1, so the Research Center is correct NOT to include them in their calculations. Sean, panels installed 30 years ago still seem to be producing between 85% and 95% of their original advertised production levels. The newer panels are probably much better, with no noticable drop for the panels we first installed in 2008.

      • Joe says:

        The federal tax credit goes from 26% in 2020 to 22% in 2021. This was extended in December of 2015 when Obama was president. Trump hasn’t done anything for solar except increase tariffs on the equipment. The incentives help solar makes sense for a quicker ROI and should be extended just as oil and coal have subsidized for decades.

        If a new incentive program is done for solar it needs to focus on making the tax credits a rebate, as not everyone can fully realize tax credits.

  3. I find it interesting that they are using 8.7¢ per kWh for the Seattle market; I am paying about 12¢ per kWh there. With the current net-metering (what you pay is what you get), our systems are fully returning the investment in less than 16 years, which makes the PV system a better investment than the stock market, on average. When you factor in that you would have to pay income tax on your stock gains that would otherwise be used to pay for electricity, the solar panels are a much better deal.

  4. Armando Cobo says:

    I wonder if the study took into account the efficiency of the house, airtightness, etc. Its a whole lot difference when you talk about an existing house, a code minimum house, or a high-performance house. If your home has ratings near HERS 30-40, without PV, and 1ACH50 or less, you can reduce your PV system between 25-50%.
    This speaks volumes for moving the housing offering to the most cost-effective and highest-performing levels possible. Today, many Builders around the country have demonstrated that there is very little cost increase (1-3%) in moving to Zero Energy Ready and/or Passive House. All it take is a will, and education.

  5. Ross Ford says:

    I am not following in the study how we get such a wide spread in payback, IE Seattle 25 to 59 years or phoenix 15 to 42. The payback is obviously an important aspect of this decision paradigm and the difference of more than double the year renders that data ineffective.

    • NAHB Now says:

      Thank you for your interest in the research. The reported range in cost effectiveness for individual locations is the result of a range in possible PV panel orientations, PV system sizes, and PV system costs. The shorter paybacks are associated with PV panel installations that are south oriented and the installed system price at the lower end of the market spectrum. The PV system size can also make a difference in those markets where utility tariffs disincentivize overproduction through low purchase rates. The study helps with identifying the key factors that are more critical for specific markets and specific projects so that the designer and developer can optimize these variables to achieve a more favorable outcome.

    • Ross, I suspect some if this is because not all solar panel installations have the same solar exposure. I have done some with a solar fraction (the amount of sun the system “sees” over the course of the year, vs. what is actually available if there were no impediments (shadows) as little as 70%, and others with a full 100%. That can cause quite a difference in the “payback period”.

  6. Brett Snyders says:

    Ted, averages are based on statewide kWh rates. It could also be that you are on a tiered rate, meaning that for your first certain kWh (example: your first 600 kWh at 0.12 than the next 600 kWh are at .087) The .087 is probably an average from typical household usage. But it is also possible if you are not on a tiered rate you are just paying more than other utilities. However, if you noticed the major factor in making Solar more attractive with faster pay-back is kWh rates from the Utility. The more the Government regulates Generation the more the price of electricity goes up the faster the Government makes this happen the faster Solar and wind will “look” more appealing. So basically by shutting down coal, natural gas and nuclear plants that can produce cheap reliable electricity you force more “supposedly” renewable sources. It isn’t greed that has caused Utilities to increase the cost of electricity it has mostly been the Government regulations. The end consumer is ALWAYS the one that pays in the end. Just like lumber prices. (in most cases)

  7. The analysis does not include the federal or state taxes credits nor does it include local or state taxes on the utility bill. Some how a bit divergent from realty. Payback are actually quicker if one considers the average utility cost increase over time is between 2-4% which was not considered.

    • NAHB Now says:

      Katharine: The referenced report includes other cost effectiveness metrics that round out the overall evaluation: normalized simple payback and net present value. Normalized simple payback accounts for the value of electricity generated by the system, installation and operating costs, incentives, income taxes and depreciation, and debt-related costs over the life of the system. Net present value is a measure of project feasibility and is defined in more detail in the report. These cost effectiveness metrics used a 2.5% inflation rate on the price of electricity.

  8. Armando Cobo says:

    We all know we need to move away from fossil fuel, as much as we can, in the near future. Having incentives and tax breaks, not only will help us personally, but to the community. The sola rand wind renewable industry has created stable and high wage jobs in all states, at the same time, fossil fuel and coal plants are increasing their operational cost, and their price to the consumer, keeps getting higher.
    According to E2’s Clean Job America report found the clean energy industry with 3.3 million, many times over the coal industry jobs, with solar employing 250,000 Americans. It’s time for forward-thinking policymakers, and industry groups, like NAHB, to help push the demand to the inevitable. Coronavirus wiped out 65,000 jobs in the solar sector, but PV installers expect employment to grow by 50% in the next 10 years. We need a good plan for recovery, hopefully, Congress will extend tax credits to the industry.
    Here is a noble idea, let’s start supporting a Government that supports the future of American jobs, and in the process, helps with the economy and national security in the long run.

  9. ashley says:

    Thanks for sharing your knowledge! I’m doing some research for a client of mine, trying to get as much knowledge on solar PV trends and costs and this was super helpful.

  10. Mark Etrheim says:

    Since this is primarily a financial issue with the added bonus of helping the environment, why would you use a simple payback of cost divided by annual savings to determine payback? If the system costs $30,000 and your interest rate on your mortgage is say 3%, your financial cost is $900 per year in interest, less the fact that that cost is deductible so average cost of financing the installation is somewhere around $600 per year depending on a dozen factors. Take that off of your energy savings increases your payback period by 25% to 50% depending on the factors. With the federal tax credits figured in, it can make it all make sense, but I for one (only one?) think that getting a tax credit from the Feds is just increasing the deficit and that is a problem that is just waiting to blow up the economy. What am I missing??

    • Mark, the Federal Government, (which means all of us) is effectively investing in your PV system, in the belief (right ot wrong) that it will be far more cost effective to do this than to suffer the consequences of continuing to over-use and mis-use fossil fuels. It is also much more palatable for us to accept an incentive, rather than face a mandate at some later time.

      A major factor I think you missed in your calculation is that money earned to pay your electric bill will be taxed as regular income, whereas money saved by having your PV provide that electricity for you is not taxed. That alone can push your “payback period” way down!

Leave a Reply

Your email address will not be published. Required fields are marked *