Installing solar panels is a major financial decision. Calculating your expected savings, payback period, and long-term ROI before signing a contract is essential.

Step 1: Calculate Annual Energy Usage

Find this on your electricity bills — most show a 12-month history. The US average is about 10,500 kWh/year (EIA data), but your home may vary significantly based on size, climate, and usage.

Annual kWh Usage = Sum of 12 months of electricity usage

Step 2: Estimate Solar System Size Needed

System Size (kW) = Annual kWh ÷ (365 × Peak Sun Hours × 0.80)

The 0.80 factor accounts for system efficiency losses (inverter, wiring, temperature, shading).

Peak sun hours by region (US):

  • Southwest (AZ, NM, CA desert): 5.5–7 hours/day
  • Southeast (FL, TX, GA): 4.5–5.5 hours/day
  • Midwest: 4–5 hours/day
  • Northeast: 3.5–4.5 hours/day
  • Pacific Northwest: 3–4 hours/day

Example: 10,500 kWh/year, Phoenix AZ (6 peak sun hours):

  • System size = 10,500 ÷ (365 × 6 × 0.80) = 10,500 ÷ 1,752 = 6.0 kW

Step 3: Estimate System Cost

System Cost = System Size (kW) × Cost per Watt × 1,000

2024–2025 average installed cost: $2.50–$3.50 per watt (before incentives)

Example: 6 kW system at $3.00/watt:

  • Gross cost = 6 × $3.00 × 1,000 = $18,000

Step 4: Apply the Federal Tax Credit

The federal Investment Tax Credit (ITC) provides a 30% tax credit on installation costs through 2032:

Federal Tax Credit = System Cost × 0.30
Net Cost After Credit = System Cost × 0.70

Example: $18,000 × 30% = $5,400 credit → Net cost: $12,600

Many states have additional rebates — check your state's energy office.

Step 5: Calculate Annual Savings

Annual Output (kWh) = System Size (kW) × Peak Sun Hours × 365 × 0.80
Annual Savings = Annual Output × Electricity Rate

Example: 6 kW system, 6 peak sun hours, $0.18/kWh:

  • Annual output = 6 × 6 × 365 × 0.80 = 10,512 kWh
  • Annual savings = 10,512 × $0.18 = $1,892/year

Step 6: Calculate Payback Period

Payback Period (years) = Net System Cost ÷ Annual Savings

Example: $12,600 ÷ $1,892 = 6.7 years

A typical solar installation lasts 25–30 years with a manufacturer warranty of 25 years at 80% output. Post-payback, most of the energy is essentially free.

25-Year ROI Calculation

Total Savings = Annual Savings × (25 − Payback Years)
Net Profit = Total Savings − Net System Cost
ROI = (Net Profit ÷ Net System Cost) × 100

Example:

  • Total savings over 25 years = $1,892 × 25 = $47,300
  • Net profit = $47,300 − $12,600 = $34,700
  • ROI = ($34,700 ÷ $12,600) × 100 = 275%

Electricity Rate Escalation (Important)

This calculation uses today's electricity rate. Historically, electricity rates have increased 2–4% per year. Using a 3% annual escalation:

Savings in Year N = Annual Savings × (1.03)^N

Total 25-year savings with 3% rate escalation significantly exceeds flat-rate calculation — making the actual ROI even more favourable.

Net Metering

If your utility offers net metering, excess solar electricity exported to the grid earns credits at the retail rate. This can push your effective offset above 100% of your usage.

Not all utilities offer net metering, and rates vary. Check your utility's net metering policy before sizing your system.

When Solar Makes Sense vs. Doesn't

Good candidates for solar:

  • Own your home (not renting)
  • Roof in good condition with 10+ years of life
  • South-facing roof, minimal shading
  • High electricity rates ($0.15+/kWh)
  • Live in a state with incentives and net metering

Poor candidates:

  • Frequent moving plans
  • Roof needs replacement soon
  • Heavy tree shading
  • Very low electricity rates (<$0.10/kWh)
  • Utility without net metering

Use our compound interest calculator to model the long-term savings with electricity rate escalation factored in.