What Is Solar ROI?
Return on investment (ROI) for solar measures the financial return relative to the cost of your system. Solar panels generate a measurable stream of income — reduced electricity bills (avoided cost) or direct revenue from grid exports. Solar ROI is typically expressed as:
- Payback period: Years until cumulative savings equal upfront system cost
- Net Present Value (NPV): Present value of all future savings minus upfront cost (positive NPV = good investment)
- Internal Rate of Return (IRR): Annualized rate of return, comparable to investment return rates
The 30% federal Investment Tax Credit (ITC), extended through 2032 under the Inflation Reduction Act, dramatically improves all three metrics by cutting effective system cost by nearly a third.
How to Calculate Solar Payback Period
The simple payback formula is:
Payback Period = Net System Cost ÷ Annual Electricity Savings
Residential example (7 kW system in the US Midwest):
| Item | Value |
|---|---|
| System size | 7 kW |
| Installed cost at $3,000/W | $21,000 |
| Federal ITC (30%) | −$6,300 |
| Net cost after ITC | $14,700 |
| Annual production (7 kW × 1,300 kWh/kW) | 9,100 kWh |
| Local electricity rate | $0.17/kWh |
| Annual savings | $1,547 |
| Simple payback period | ~9.5 years |
After the 9.5-year payback, the system continues producing for another 15–20 years — delivering an estimated $23,000–$40,000 in additional electricity savings over its lifetime (assuming 2% annual electricity rate escalation).
Key Factors That Affect Solar ROI
Local electricity rate is the most important variable. Every kilowatt-hour your panels produce saves you the retail rate you'd otherwise pay. Hawaii ($0.38–$0.42/kWh) and California ($0.28–$0.35/kWh) deliver the strongest solar ROI nationally. States with lower rates — Louisiana ($0.11/kWh), Wyoming ($0.12/kWh) — have proportionally longer payback periods, though incentives and strong irradiance can compensate.
Solar resource (GHI): Sunnier locations produce more electricity per kW installed. Arizona generates 1,700–1,900 kWh/kW/year; New England generates 1,100–1,300 kWh/kW/year. Our solar data portal provides location-specific GHI, production estimates, and financial analysis for 200+ US cities.
System installed cost: National average for residential solar is $2.50–$3.50/watt. Commercial systems are often $1.50–$2.50/watt. Utility-scale systems can be as low as $0.90–$1.20/watt. Lower installed cost directly shortens payback period.
Net metering policy: Full retail net metering (available in ~35 US states) credits exported solar electricity at the retail rate — maximizing ROI. States compensating at avoided cost (wholesale rates, typically $0.02–$0.05/kWh) significantly reduce the financial benefit of exporting excess solar power.
System degradation rate: Quality solar panels degrade ~0.5% per year. Factor this into long-term savings projections for accurate ROI modeling.
The Federal Solar Tax Credit (ITC)
The Investment Tax Credit is the single most impactful US solar incentive. Under the Inflation Reduction Act of 2022, the residential and commercial ITC is:
- 30% through 2032
- 26% in 2033
- 22% in 2034
- Potentially phased out for residential after 2034
To claim the residential ITC (Form 5695), you must own the system (loans qualify; leases do not) and have sufficient federal tax liability. The credit reduces your taxes dollar-for-dollar — a $6,300 credit on a $21,000 system saves you exactly $6,300 in federal taxes. If you can't use the full credit in one year, the unused portion carries forward to the following year.
Commercial and utility-scale projects may also qualify for bonus credits: domestic content bonus (10% additional), energy community bonus (10% for projects in coal communities or brownfields), and low-income community bonus (up to 20%).
Net Metering and Its Impact on ROI
Net metering is the billing mechanism that credits solar system owners for excess electricity exported to the grid. Under full retail net metering, your exported kWh are valued at the same rate you pay for grid electricity — typically $0.15–$0.35/kWh — maximizing the value of solar.
Under net billing or avoided cost compensation (increasingly common after utility commission decisions in states like Nevada, California with NEM 3.0, and Hawaii), exports are credited at $0.03–$0.08/kWh. This makes oversizing your solar system financially unfavorable — the key strategy becomes sizing your system to match your actual consumption.
Battery storage increases ROI in states with low export compensation by allowing you to self-consume solar energy that would otherwise be exported at a low rate. Battery payback periods have fallen significantly — a Tesla Powerwall 3 can add $0.05–$0.10/kWh of additional value in markets with time-of-use rates.
Example: Commercial ROI Calculation (100 kW System)
| Item | Value |
|---|---|
| System size | 100 kW |
| Installed cost at $2.00/W | $200,000 |
| Federal ITC (30%) | −$60,000 |
| Net cost after ITC | $140,000 |
| Annual production (100 kW × 1,300 kWh/kW) | 130,000 kWh |
| Commercial electricity rate | $0.12/kWh |
| Annual savings | $15,600 |
| Payback period | ~9 years |
| 25-year lifetime savings (2% rate escalation) | ~$390,000 |
Net profit over system life: ~$250,000 on a $140,000 investment — roughly a 10–12% IRR, comparable to strong equity market returns.
Modeling ROI with Solar Analysis Tools
Accurate ROI modeling requires location-specific solar irradiance data rather than national averages. SolarScope integrates NREL solar data to estimate production for any US location, calculates pre- and post-ITC system costs at configurable $/watt rates, and generates financial summaries for systems from 5 kW to 5 MW. Explore solar data for your city or start a free site analysis to model your specific project's ROI.