Understanding the Cost of Residential Solar, Potential Savings, Tax Incentives, Financing Options, and More
When considering whether to have solar installed on a home, two of the most common questions that come up is how much the system will cost and how long will it take before real savings can be achieved. This is completely understandable because for so many of us, rising electric rates can place a strain on our budgets, especially in the summer when air conditioner use can send electric bills sky high.
In this post, we will look at how residential solar will impact your finances, from cost and potential savings to tax incentives and alternative financing options that can help make going solar more affordable.
How Much Does the Average Solar System Cost?
Despite solar’s ability to save homeowners money and reduce carbon emissions, the number one thing that stops so many households from having solar installed is the upfront cost, which can be sizable for many families. But how much does a solar installation really cost?
While equipment and labor costs can vary by city and state, the national average is $18,500 for a 6kW solar panel system for a 1,500 square ft. home. Solar panels can account for a significant part of a project’s installation with the price per watt for solar panels currently ranging from $2.50 to $3.50.
You can get a more accurate estimate for your home using an online solar cost calculator, like this one offered by Modernize.com.
What Kind of Savings Can I Expect from Solar?
Your savings will depend on several factors, including how many solar panels you have installed, how much sunlight your panels are exposed to throughout the year, your region’s electrical rates, and how much electricity your household uses.
Using the 6kW solar setup from above, you can expect the system to produce between 400 and 900 kilowatt hours (kWh) of electricity per month. According to U.S. Energy Information Administrations, in 2020 the average American home used approximately 893 kWh of energy per month. Based on these numbers, if you live in an area that receives abundant sunshine, then a 6kW solar system could provide you with all, or nearly all, your energy use per month.
Tax Incentives for Residential Solar
One way to help cut the cost of going solar is to have your solar system installed while federal tax incentives are still available. The federal residential solar energy credit is “a tax credit that can be claimed on federal income taxes for a percentage of the cost of a solar photovoltaic (PV) system.” It is a dollar-for-dollar reduction in the amount of income tax you would otherwise owe.
To be eligible for the credit, your solar system must be placed in service during the tax year and generate electricity for a home located in the United States.
The federal solar tax credit was set to expire, but in December 2020 Congress passed an extension, which will provide homeowners with a 26% tax credit for any systems installed from 2020 to December 31, 2022. In 2023 the credit drops to 22% and then the tax credit is again set to expire in 2024 unless Congress renews it. There is no maximum amount that can be claimed.
Solar Financing Options
Today, there are several options available to help a homeowner afford their solar installations. Many banks and solar installers offer loans designed to help make it easier to pay for solar systems. Fannie Mae offers a mortgage options called The HomeStyle Energy Program that gives borrowers “the ability to complete clean energy upgrades up to 15% of the as-completed appraised property value of the home.”
For those looking to avoid taking out loans, leasing programs and power purchase agreements (PPA) are also available. A lease/PPA typically locks a homeowner in a set rate for electricity for 25 years, about 10 to 30% below the rate currently paid for their electricity.
How Long Does It Take For A Solar System to Pay for Itself?
When you go solar, you will accrue savings every month that will eventually equal to your system paying for itself (unless you enter a lease or PPA). How fast this happens is again determined by the same factors that can impact your savings potential, including your system’s size, the amount of sunshine it receives, the tax incentives you qualify for, and your local utility rate. The average “break even” point for solar in the U.S. is currently 7.5 years.
What this means is that in fewer than eight years, your solar system may be able to pay for itself. When you consider that most solar installations have an average lifespan of 40 years, any money you save on your energy bills after your break even point stays in your pocket.