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Understanding Solar's Return on Investment

Solar energy is widely known for its ability to drastically reduce a home's carbon footprint, but the main reason homeowners today buy solar systems is because they pose a number of substantial financial advantages. This article explores the return on investment (ROI) of solar and how to ensure that you make the most of your solar investment.


Elements of Your Solar Investment

By far the most compelling financial benefit of installing solar on your home is the elimination of your electric bill. A properly sized off-grid system will, in fact, completely eliminate a homeowner's electric bill. If you are buying a grid-tied system, it will eliminate your home's outside energy needs but there will likely be a small monthly fee that your utility company charges to remain connected to the grid. Some homeowners elect to oversize their grid-tied systems so they may sell extra energy produced back to the grid to make passive income. It is important to note that while grid-tied solar systems will reduce your net annual cost for electricity to zero, you may still receive an electric bill from your utility company in the winter months when the system is not producing at its full potential. However, renewable energy credits generated from extra energy produced during the summer months will offset these costs if your system is properly sized. Another important aspect of the relationship between grid-tied systems and utilities is that utility companies do not pay the same price for energy sold back into the grid as they would charge you on your electric bill. Instead, utility companies will typically pay you somewhere between 70% and 85% of what they charge for a given kilowatt-hour of electricity. Nonetheless, a properly sized system will result in substantial profits for the homeowner due to reduced electricity demand.

Another lesser-known financial benefit to putting solar on your home is that it significantly increases the value of your home. The national (and New England) average is a 4% value increase in resale value. This value increase is sometimes greater than the cost of the system itself, meaning that solar can be a worthwhile investment even for homeowners who do not plan on owning their home for a long time.


The Effects of Financing and the Federal Investment Tax Credit on ROI

If you choose to finance the purchase of your solar system, as most homeowners do, it will materially affect the return on investment of your system. How it affects the ROI depends on the terms of the loan. If the term of a loan is longer (i.e. a 12-year vs. a 5-year loan), the monthly payment for the homeowner will be lower but the amount spent on interest will be significantly higher, resulting in an overall lower - but still positive - ROI. Conversely, if the term of the loan is shorter, the monthly payment for the homeowner will be higher but the overall ROI will be higher as well. Thus, the ROI is almost always higher on shorter term loans and lower if getting longer term loans, especially because longer term loans also tend to have higher interest rates.

If you file for the Federal Investment Tax Credit (ITC), it can reduce the cost of your system by up to 30%. Here's how the Federal ITC works. When filing your taxes, include IRS Form 5695, where you or your tax preparer can indicate the total amount spent on your solar installation. Note that you can only receive credit for home improvements relevant to improved energy efficiency or renewable energy generation, so if your solar installer also installed a new roof or other home improvement that does not fit these criteria, those additional costs will not be eligible for the Federal ITC. The credit also cannot be applied to interest incurred by loans associated with a solar installation. Once approved, the ITC will reduce your tax liability for that year by an amount equivalent to 30% of the cost of your solar installation. If your tax liabilities are less than this 30% figure in a given year, the remainder of the credit can be applied to future years. Only installations that were completed in the years 2022 to 2032 are eligible for the full 30% tax credit, but installations made in some prior or future years can receive a slightly lower credit. Some solar installers like to spread misinformation about the Federal ITC to pressure homeowners into buying sooner rather than later, but do not be fooled; the Federal ITC will not be canceled and will be available until 2034.


What Outcomes to Expect

Considering the dynamics introduced by financing and the Federal ITC, a homeowner can expect an average payback period of 8 to 10 years on their solar investment. When your system is designed with high quality materials, it can be expected to last between 25 and 30 years, meaning that you will profit for about 17 to 22 years after the system has fully paid itself off. While this potential outcome is exciting, it also underscores the importance of purchasing a system made with quality materials. Otherwise, the system may not last long enough to provide the homeowner with the savings they were hoping for. Here are two criteria to look for to gauge the quality of a solar system:

  1. The solar panels and optimizers/microinverters are warrantied for at least 25 years. If the manufacturer will not warranty their products for this period of time, this is a telltale sign that the manufacturer does not expect their products to function properly for the 25 to 30 years that a modern solar installation should function for. Most often, Chinese and Vietnamese solar manufacturers will not have such a warranty on their products, while Japanese, American, and European manufacturers will - but you should always verify that your products have such a warranty.

  2. The installation is being completed by a licensed electrician. Not only is it illegal in most states for solar installations to be completed without the guidance or direct involvement of a licensed Master Electrician, but it is also unlikely that an inexperienced layperson would be capable of successfully installing a functional solar system.

Notably, the payback period can be a few years longer than the aforementioned 8 to 10 year range, depending on financing terms and the price you get from your installer - or a few years shorter if you get a great price and/or are able to pay for the system out-of-pocket. This means that even though every properly sized and properly installed solar system should have an attractive return on investment, the terms of your financing and the pricing of your system can profoundly affect how profitable your solar investment becomes.

Overall, if your solar PV system is build with quality materials that are made to last, financed at fair rates with a shorter loan term (5-7 years), and quoted at an affordable price, the annual return on investment for the system can outperform the stock market (which returns an average 10% per year), even if you do not take into account the increased resale value of your home. Fortunately, Green Lightning Energy was made to give homeowners these exact attributes to make solar as affordable and beneficial to homeowners as it can possibly be; and in each estimate we give, we will provide you with a detailed breakdown of the return on investment you can expect from your system. If you are interested in learning more about what solar could mean for you and your home, please click the button below to sign up for a free estimate.


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