Why is payback shorter than the simple cost divided by saving?

Because electricity tariffs rise. Each year the same generation is worth more, so the later years pay back faster than the first.

Should I use payback or internal rate of return?

Payback is intuitive and ignores everything after it. On a 25-year asset that is most of the value, so the rate of return is the better measure of whether it was worth doing.

Construction & Homeenergy

Solar ROI and Payback Calculator

Solar payback with the two effects that pull against each other: tariffs rise, which helps, and panels degrade, which does not. Both compound, so a flat saving assumption is wrong within a few years.

Also called: solar panel payback period, is solar worth it.

Payback period

6.6

Paid back in 6.6 years. Over 25 years the system saves $1,523,891.43 in nominal terms, worth $293,740.70 today, an internal rate of return of 17.19%.

Lifetime saving, nominal

$1,523,891.43

Net present value

$293,740.70

Internal rate of return

17.19%

First-year saving

$33,000.00

Saving in the final year

$99,943.66

Lifetime saving against cost

609.56%

How this is calculated

An estimate, not an offer or a guarantee. Projected returns assume the rate you entered holds for the whole term, which no market does.

Method and background

How this is calculated

The saving in the first year is the bill the system removes. After that it grows with electricity tariffs and shrinks with panel degradation, and both compound. Maintenance comes off each year. Payback is the point where cumulative saving covers the installed cost, interpolated within the year rather than rounded to it. Net present value and internal rate of return are shown too, because payback alone ignores everything that happens after it.

saving in year t = monthly bill * 12, grown by tariff inflation, reduced by panel degradation, less maintenance

B: Monthly bill removed (currency)
e: Tariff inflation (decimal)
d: Annual output degradation (decimal)
M: Yearly maintenance (currency)

Method and limits

What it assumes

The cost entered is after any subsidy or tax credit.
Output degrades at a constant rate, which is the manufacturer convention.
The system keeps working for its full stated life.

What it deliberately does not model

Inverter replacement, typically needed once in a system life, is not separated out.
Net metering rules and export tariffs vary by state and are not modelled.

Formula version 1.0.0 · definition 1.0.0 · United States · Report a problem with this calculator

Frequently asked questions

Why is payback shorter than the simple cost divided by saving?: Because electricity tariffs rise. Each year the same generation is worth more, so the later years pay back faster than the first.
Should I use payback or internal rate of return?: Payback is intuitive and ignores everything after it. On a 25-year asset that is most of the value, so the rate of return is the better measure of whether it was worth doing.