How to calculate the return on investment for solar panels

By Eric Weddle · 6 min read

Is solar actually worth it?

If you are considering solar, you have probably asked the big question: is this really worth it? The clearest way to answer that is by looking at return on investment, or ROI.

Here is the part many people miss. Solar is not just about saving money today. It is also about protecting yourself from rising energy costs in the future. While utility rates tend to go up over time, solar helps lock in a portion of your energy costs. In this guide we walk you through how to calculate your solar ROI step by step, so you can evaluate it with confidence.

What ROI means for solar

In simple terms, ROI compares how much money you gain versus how much you spend. For solar, that means what you pay for the system versus what you save on electricity over time.

Solar works a little differently than most investments:

• It delivers long-term savings, not quick returns
• It creates predictable energy costs
• It helps protect against rising utility rates

So instead of thinking in months or even a few years, solar ROI is best understood over decades.

The basic ROI formula

ROI = (Total Savings Over Time − System Cost) ÷ System Cost

• System cost is what you pay to install solar
• Total savings over time is what you do not pay your utility company over the life of the system

Step by step: how to calculate your solar ROI

Step 1: Determine system cost

Most residential solar systems fall somewhere between $20,000 and $35,000, depending on size and home energy needs.

Step 2: Estimate annual energy savings

Start with your current electric bill. For example, $125 per month is $1,500 per year. A typical system may offset 80% to 100% of your electricity use.

Step 3: Estimate system lifespan

Most systems last 25 to 30 years. For conservative calculations, use 25 years.

Step 4: Calculate total savings at baseline

Multiply annual savings by years of use. This gives you a simple starting point, but it assumes electricity prices never change.

Accounting for rising electricity costs

Electricity rates rarely stay flat. Historically, many regions have seen increases of 5% to 10% per year. When you account for that, solar savings grow significantly over time.

Step 4A: Adjust savings for annual rate increases

Instead of assuming your $1,500 per year stays constant, you increase it each year. At a 5% annual increase:

• Year 1: $1,500
• Year 2: $1,575
• Year 3: $1,654
• Year 10: about $2,443
• Year 25: about $5,080

At a 10% increase, year 10 is about $3,891 and year 25 is about $16,250.

What this means over 25 years

• Flat-rate estimate: $37,500
• 5% increase scenario: about $71,000 or more
• 10% increase scenario: $120,000 or more

That is a major difference, and it helps explain why solar often performs better than initial estimates.

Simple rule of thumb

If you want a quick estimate without complex math, multiply your baseline savings by 1.5 to 3 times to reflect long-term rate increases. This keeps your projection realistic without overcomplicating things.

Step 5: Apply the ROI formula

Now plug your numbers in: ROI = (Total Savings − System Cost) ÷ System Cost.

Example scenario, with and without rate increases

Baseline, no rate increase: system cost $25,000, annual savings $1,500, total savings $37,500, ROI 50%.

With 5% rate increases: total savings about $71,000, ROI about 184%.

With 10% rate increases: total savings $120,000 or more, ROI over 300%.

What about payback period?

At baseline, $25,000 divided by $1,500 is roughly 16 to 17 years. With rising rates, payback often shortens by several years. Because your savings increase each year, you recover your investment faster than a flat estimate suggests.

Factors that affect solar ROI

• Electricity rates. Higher rates mean higher savings, and rising rates amplify long-term returns.
• Sun exposure and roof orientation. More sunlight means more production and savings.
• System size. Larger systems offset more energy but cost more upfront.
• Utility rate increases. One of the biggest drivers of long-term ROI.
• Financing versus cash purchase. Payment structure affects timing and overall return.

Payback period, quick overview

Your payback period is how long it takes for savings to equal system cost. After that, your system is producing effectively free electricity, and rising rates increase that value over time.

Why ROI is not the only benefit

• Protection from rising utility rates
• Predictable monthly costs
• Greater energy independence
• Potential increase in home value

Final thoughts

Now you know how to calculate solar ROI, and how to make that estimate more realistic by factoring in rising electricity costs. That one adjustment can significantly change how solar performs financially over time. If you want help running the numbers based on your home and energy usage, we are here to help. Schedule a solar consultation or learn more about our solar services.

Frequently asked questions

What is a good ROI for solar panels?

A positive ROI over 25 to 30 years is considered good. Many homeowners see 30% to 60% returns at baseline, often much higher when accounting for rising rates.

How long does it take for solar panels to pay for themselves?

Typically 10 to 18 years, often shorter when electricity prices increase over time.

Do solar savings increase over time?

Yes. As utility rates rise, your savings increase each year.

Is solar still worth it if I do not stay long-term?

It can be. Solar may increase home value and buyer appeal.

What is the biggest factor in solar ROI?

Electricity rates, especially how they change over time.