Calculating Payback period for solar

The solar energy industry has seen a rapid boom in popularity in recent years. In 2009, as much as 20GW of solar systems were installed worldwide, and currently, the number of installed solar systems has increased rapidly at 480GW, a rate of 24 times of growth in just over a decade. With this fast-paced growth of people switching to this renewable energy source, many people wonder: Is solar really worth it? Will solar panels save you money? How much do solar panels for the home cost?

When it comes to reducing your electricity bills by using alternative energy sources, you can save money by cutting down the amount of energy used when using power grids. Solar panels are beneficial when it comes to powering your home using a natural source of energy. However, it is important to note that the total savings you can obtain from solar panels will depend on a few key factors:

  • Direct hours of sunlight
  • Local electricity rates
  • Size of your solar system

In this article, we will be tackling how to calculate the payback period when installing a solar panel in your home and how the factors mentioned above weigh in. Before we dig deep into these calculations, we need to have a better understanding of how solar power works. 

How Solar Power Works?

As early as the 1950s, people have been using photovoltaic (PV) solar technology to power their homes. Over the years, solar module prices have declined significantly which resulted in the widespread popularity of considering solar power as a financially viable technology of harnessing energy that can run their homes. 

Solar panel size is quoted based on the measurement of theoretical electrical output potential in watts. When talking about the theoretical output of solar systems, we are referring to the “capacity factor” which is roughly around 15% to 30% of the theoretical output. A 3 kilowatt-hour (kWh) household system running at a 15% capacity factor would produce 3 kWh x 15% x 24 hr/day x 365 days/year, which sums to 3,942 kWh/year, or roughly one-third of the typical electricity consumption of an Australian household.

But this calculation will not always be the same with all households. In fact, solar may make sense for one household, but not efficiently for the house next door. This difference can be attributed to the financial and practical factors considered in determining viability. We will list down other viability factors in the latter section. 

Comparing the Costs of Solar

Since solar systems are getting cheaper and the technology is improving and developing over time to reap more benefits, is it fair to assume that it is the best investment compared to other renewable energy? It is imperative to know how clean energy stacks up against alternative methods of supplying power to your home to know if it is the best investment. After all, solar panels are only worth the investment if they can bring better results compared to other options on the market.

For grid-tiered systems, the cost of solar against the cost of buying power from a utility company is compared to determine the payback period, as easy as that. These computations can also be applied to evaluate off-grid systems; however, instead of utility power, you will compare solar to the costs of running a power line on your property or consider alternative power sources such as hydro, wind, and a generator. For maximized cost-cutting results, you can combine these methods. 

How Much Do Solar Panels Save?

To understand how much money solar panels save on your electric bills, we have to determine how much you spend on your annual electricity bills. For example, the average Australian family home uses around 19KWh per day, and when converted to electricity bill consumption, this is around $2,500 a year. Moreover, larger homes with pools and ducted reverse cycle air conditioning can easily be 50+ KWh a day or around $5,500+ a year.

If you were to multiply the above electricity consumption by the national average electricity rate (34.41 cents per kWh), you would get how much you’re spending on electricity every year. Now, let’s add solar systems to the equation. You can get “free” electricity if you generate electricity using a solar system and you don’t need to feed it back into the grid since your home is consuming the gathered solar energy.

However, keep in mind that the sun is not available 24 hours a day, so you are technically only getting free electricity from 8 am to 6 pm. Regardless of the sun’s availability, a large percentage of electricity consumption happens during this period — around 40% of the daily energy consumption. This means an average household can save up to $1000 a year when we cut off 40% of the $2,500 annual electricity bills. 

What is Feed-in Tariff?

Another to consider before getting a solar system is the feed-in tariff (FiT). When you export excess solar energy that is not consumed within your household, you’re paid by your electricity provider with a feed-in tariff. It is usually a set rate per kilowatt-hour and paid as a credit on a household’s electricity bills. It is the Australian government’s way of subsidizing and encouraging homeowners to switch to renewable energy.

FiTs vary depending on where you are, but it is typically anywhere between 6 to 12 cents per kWh exported. Let’s say your state offers 8 cents per kWh of eligible FiT. For a 6.6kW solar system, you are able to export about 700kWh of your solar generation which means you will be subsidized with $56 (8 cents x 700kWh) that will be credited on your electricity bill. With the FiT being credited to your electricity bills, you are able to save up to $1,600 per year on your electricity bills. 

Going back to the question of how much you save in total with your solar system, once you sum up the amount you save from using solar power instead of electricity from your power grid plus the feed-in tariff, conclusively, you are getting a decent return on investment.

As mentioned above, the 6.6kW system used in this example would cost about $4,100.00 (excluding installation prices) at today’s prices. Saving $1,600 per year gives you a 39% annual return on a $4,100 solar system. We can conclude that your solar system investment will return in a matter of three years! 

Other Factors That May Vary Your Solar Payback Period

The factors that we have listed above are based solely on national averages, but as previously mentioned, different households and circumstances, different computation of solar power efficiency as well. Here are some factors that can determine whether your home will have a better and faster return on investment compared to others

Installation Costs

The most varying factor that makes choosing which contractor to install your solar system would be the installation costs. Most solar systems would be priced the same but the installation costs will have a big difference. Although you can opt for a DIY install kit, it can have a huge drawback for the quality, hence, resulting in bigger costs and possible power hazards in your household. 

If you want to get the most reasonable pricing for solar system installation packages, Natural Technology Systems can offer assistance. With 30 years of specialized off-grid and on-grid-connected Solar Electricity installation practical experiences, you are guaranteed to get the best efficiency when it comes to solar power. 

Value of Incentives

Aside from government-mandated feed-in tariffs, there are also financial incentives offered by the Federal Government and some states across Australia to eligible households. To check if you can apply for this incentive, visit the Department of Industry, Science, Energy and Resources website.

Home Ownership

On average, Australian families stay put for around 7.5 years before they move into a new home. And if you have a solar system installed in your home, it will greatly increase the house value which makes your solar system investment more recoupable. Before installing a solar system at home, think about whether you will be staying in your home long enough until your investments have returned. 

Sun Exposure

The potential of a solar system is greatly influenced by the location of the solar panel, which includes the angle or the tilt. Since the sun moves constantly throughout the day, it is smart to have it installed where it will face the sun most of the time. Solar panels that are faced in the wrong direction typically would produce 28% less solar energy compared to those panels installed correctly. 

Since Australia is in the southern hemisphere, the sun moves towards the north, so north-facing panels will provide the maximized solar output. In Sydney, north-facing panels with a tilt of 30 degrees produce the maximum amount of solar energy throughout the year. It is ideal for those who have a fixed feed-in tariff, as it maximizes the savings.

Though the overall solar energy production will be less for west-facing solar panels, it can still produce more power during afternoon peaks. This would lower the pressure during peak demand periods and help in saving the homeowner’s money by reducing the electricity bill.


With the increasing electricity rate and the undeniable effects of global warming, it is not questionable why many Australians are switching to a solar system to power their homes. In the long run, solar energy costs less than buying power from a utility company plus the environmental benefits it can provide to the Earth.

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