System Costs & Benefits Primer
Wondering about the various costs and incentives associated with installing solar? You've come to the right place. Understanding how these work is essential for both installers and homeowners.
To determine solar's financial returns, it's important to have a solid understanding of the basic economics that dictate PV system costs. There are two general categories of expenses — capital costs and operations & management (O&M) costs.
Here, we'll look at both before moving on to some important incentives, net energy metering, and how to calculate the savings a solar system delivers.
Capital costs
Capital costs refer to the fixed, one-time expenses associated with designing and installing solar systems. These can further be categorized into hard costs and soft costs:
- Hard costs cover expenses related to the physical equipment that goes into a solar system — including modules, inverters, balance of system (BoS) components, optional batteries, and even electric vehicle charging.
- Soft costs include intangible expenses stemming permitting, taxes, financing, customer acquisition, and the actual installation labor itself.
According to the Solar Energy Industries Association (SEIA), hard costs have come down dramatically over the last decade, while soft costs have remained largely constant. However, tools like Aurora Solar's Sales Mode, and Design Mode can help drive down these soft costs — allowing installers to serve more customers using fewer resources.
Cost breakdown
The figure to the left illustrates the relationship between soft and hard costs.
Operations and management costs
Operations and management (O&M) costs refer to expenses associated with running, maintaining, and repairing a solar PV installation. These can include fuel, repairs, and operation personnel. But with virtually zero moving parts and panels backed with multi-decade warranties, residential and commercial PV systems generally have low O&M costs. Maintenance requirements can change, however, when managing industrial-scale solar facilities.
Solar energy incentives and policies
High capital costs are one of the biggest factors that discourage people from going solar. To combat this, there are a number of incentives and policies in place to make PV systems financially competitive.
Cost-based incentives
Cost-based incentives, such as the solar Investment Tax Credit (ITC), allow those who invest in a solar system to apply a credit towards their income tax. The incentive is determined by the cost of the system and is independent of its performance.
The ITC was originally scheduled to expire at the end of 2023. But thanks to a 10-year extension under the 2022 Inflation Reduction Act, PV system owners qualify for a one-time 30% tax credit in the year after their installation becomes operational.
In addition, some cities and states offer cash rebates for those who go so solar. For a list of potential rebate programs in your service market, visit the Database of State Incentives for Renewables & Efficiency (DSIRE).
Performance-based incentives
Performance-based incentives (PBIs) encourage PV system owners to install and maintain efficient systems through payments that are based on the monthly energy production of the PV system. These programs are highly regional and might not be available in your service area.
Net energy metering
As mentioned earlier, many states across the country offer some form of net energy metering (NEM) — a mechanism that credits consumers for any unused solar power they send to the electricity grid.
For instance, if a residential PV system produces an excess of 100 kWh over the course of the month, the owner will be reimbursed for 100 kWh worth of utility credits (sometimes at below-market rates). The owner is then free to use these reimbursement credits to “buy” electricity from the grid when solar is not meeting their current energy needs. Therefore, solar customers who enroll in their state’s net metering program are often able to significantly reduce their electricity bill.
Some states offer a similar program know as a feed-in tariff (FiT). Though less common, feed-in tariffs result in cash payments for unused solar power — and not utility credits.
A basic financial calculation
In return for their upfront investment, homeowners that go solar benefit from reduced monthly electricity bills.
For instance, assume that upon installing a $10,000 rooftop PV system (after incentives), a customer’s residential electricity bill is reduced by $1,500 per year. In order to calculate the simple payback period, which is the approximate time for a PV system to “break even,” we divide the cost of the PV system by the savings.
Thus, the payback period for a $10,000 PV system that saves a customer $1,500 in annual electricity bills is 6.7 years.
Simple Payback Period = System Cost / Annual Savings
6.7 years = $10,000 / $1,500/year
Total Savings = Annual Savings × Years (after Payback Period)
$27,450 = $1,500/year × 18.3 years
However, a PV system can last much longer than the duration of its payback period. Standard rooftop panels have warrantied lifetimes of about 25 years. This means that for the last 18 years of its life, after it has paid itself off, the hypothetical PV system described above will deliver net returns in the form of additional savings. To calculate these returns, we multiply the annual savings by the remaining lifetime of the system, after it has paid itself off.
Based on this simple analysis, the system will generate approximately $27,450 in savings over its lifetime. It is important to note that this is an approximation and does not take into account factors such as maintenance costs or degradation over time. However, as grid electricity prices increase, the value of the PV system increases as well. This is because solar helps to shield the user from rate increases — resulting in a shorter payback period and higher lifetime savings.
