The amount of solar energy the Earth receives in 40 minutes is equivalent to global energy consumption for a year, so it’s no surprise that solar photovoltaic cells have become the world’s fastest growing energy source.

Whether you’re inclined to do your part for mother earth, or just want to lower your energy bills, a solar panel system may be an attractive fit.  Whether it’s a feasible option, however, will vary from home to home, depending on where you live and how much sunlight you receive.

Essentially, a solar panel system is a long-term investment.  Although a system typically has a high initial cost, the consumer saves money in the long run because the costs are eventually paid off in energy bill savings.  And, any solar power generated thereon after is entirely profit.

What varies is the amount of time it takes for you to make your money back – called, the payback period.  This depends on a number of variables – including: sunlight exposure, the system size, regional electric rates, household energy consumption, equipment placement, and the list goes on.  Generally speaking, systems typically average a payback period of 10-15 years.

Here’s how to calculate your payback period:

First step: Choosing a system size that suits your home’s energy needs
Solar panel systems are sized according to their energy output; so, a 1 kilowatt (kW) system will generate about 1 kW of electricity each hour in direct sunlight.  Of course, every city receives varying amounts of sunlight, which is why a 2 kW system in Nevada will have very different results than the same size system in Minnesota.

To maximize your sunlight exposure, a general rule is to mount roof panel systems to face true south if you’re located in the N. Hemisphere, or north in the S. Hemisphere, and tilted at the degree equal to your region’s latitude.  For example, La Jolla has a latitude of 32°, so you would tilt the panels at 32° and face them south.

Now, the average US home consumes 936 kilowatt-hours (kWh) of electricity each month.  Of course, this number will vary by household, depending on how many appliances are left running, how often air conditioning is used, and etc.  You can easily find out how much electricity your home uses by checking your monthly energy bill.  Next, you’ll need to know how much sunlight your area receives each day, on average.  Now, time to take out your calculators.

For the average US household located in La Jolla, CA (Use your own values where underlined):

Typically, residential systems range from 2 kW to 5 kW in size, so an 8.07 kW system is considered to be exceptionally large.  In most cases, a solar panel system will only cover a portion of the household’s energy usage.  However, by installing a system that matches the amount of electricity your household uses, consumers have the option to sell excess electricity back to the grid.  In either case, what it really comes down to is personal preference.  Bear in mind, the larger the system, the higher the initial investment.

Second step: Determining the costs of your suggested system
The cost of a system will vary by distributor.  To give you an idea, the average cost right now is $4.85/Watt (W), with prices continuing to drop each year.  Recent strides in thin-film PV have brought down costs to as low as about a dollar per watt.  In fact, both thin-film companies First Solar and Nanosolar have already announced to achieve production costs below $1/W, making it way cheaper than coal, which is around $2.10/W.

For an 8.07 kW size system using the average cost of $4.85/W:

Third Step:  Average Energy Bill Savings

The average cost of electricity in the US is about $0.12/kWh, but varies widely from state to state, from a low of $0.07/kWh in Idaho to a high of $0.22/kWh in Hawaii.  You can find the rate in your area on the back of last month’s utility bill or here.

The average household spends about $2,200 on energy bills every year.  For the average US household in La Jolla, CA:

Fourth step: Calculating your payback period

This payback period seems long, but keep in mind this is for a system that covers 100% of the home’s electricity needs, which is often not the case.  And, we have yet to factor in federal tax credits and state and local rebates.

Fifth step: Federal, state, and local tax credits and rebates

Effective until 2016, the federal tax credit for solar panel systems covers 30% of costs. For our system, the federal tax credit will bring our costs down to:

In addition, many states are offering solar incentives that can further cut your costs.  Search RecSolar or DSIRE to find rebate programs offered in your area.

Factoring in California’s rebate program, which currently ranges from $1.10-$2.30/W for systems under 50 kW, our new costs become:

Sixth step: Calculating your new payback period

Assuming most systems come with a 25-year warranty, this system is expected to be profitable for 15.34 years, (breaking even after 9.66 years of use), which translates into $32,329.66 in energy bill savings after the payback period!  How did your results compare?

*The formula above does not consider the rising cost of electricity, which would further reduce your payback period when taken into account.  In the last decade, the average US electricity rate has climbed from $0.08/kWh in 1999 to $0.12/kWh this year, and is expected to reach $0.18/kWh by 2030.  The formula also does not factor in the added value to your home with solar installation, which the Appraisal Journal estimates to add an average of $20 for every $1 reduction in annual energy bills.