Are Solar Panels Cost Effective?

solar panels

I’m all for clean and renewable ways of creating electricity, and one popular option is installing a home solar power system. The problem is solar panels and the other needed equipment are not cheap, nor are they efficient. Not to mention, only a few select geographic locations will provide the means to recoup the cost of purchasing the system due to local climate conditions and electric company incentives.

For a very basic system, you will need solar panels, roof mounts, combiner box, DC disconnect switch, cabling, permits, and a grid-tie inverter. You’r also going to need someone to install it for you, unless you plan to do that yourself. You will be required to provide detailed plans before a permit will be approved by the city and your electric company. And in some areas, they require you to hire a licensed contractor.

The above mentioned equipment will get you going with a basic system. You can also add batteries, but this will greatly increase the cost of the system. Here are some estimates on the materials needed for a basic grid-tie PV system:

  • Grid-tie Inverter = $3,000 or a bunch of microinverters
  • Solar Panel Mounting Hardware = $100
  • DC Disconnect Switch = $300
  • Utility Disconnect Switch = $300
  • 180-watt solar panel = $200 x 24 = $2,400
  • Wiring and cables = $1,000
  • Electrical permit = $500
  • Labor = varies greatly, but isn’t cheap

On average, this is going to cost the homeowner about $20,000. And, the above example assumes a 4 Kilowatt system, but this too can vary depending on your electricity needs. Some people will need more than 24 if they have want to eliminate their electric bill. There are tax breaks, but they are for limited time only and may not be available.

To get an idea of how many solar panels you need, take a look at your last electric bill. Somewhere you will see how much electricity you used and it will be measured in Kilowatt/hours (kWh). As an example, our home averages about 650 kWh a month (no air conditioner). To calculate how much solar power we need to break even, I’ll use the following equation:

  • 650 kWh per month divided by 30 days = 21.67 kWh a day
  • 9 hours of sun on a good day (Very optimistic)
  • 21.67 kWh divided by 9 hours = 2.4 kWh solar system
  • 2.4kWh X .85% efficiency = About 3kWh

Many forget the sun isn’t positioned overhead all day long, which means less sunlight is hitting the solar panels early in the morning and later in the afternoon. There is only about 1 hour a day where the panels are operating at peak efficiency if they are pointed due south and titled at the right angle. If that isn’t the case, they’re even less efficient.


If there is shade part of the day (clouds), they’re even less efficient. During the winter months, the days are shorter and the sun is lower in the sky which cuts their efficiency even more. Take this all into consideration, and it’s very hard to get sustained peak efficiency. The only way to do that is with a ground-mounted solar tracker, and those will run you thousands of dollars.

One thing a lot of people overlook is the attenuation loss of a DC signal across copper wire. The longer the cabling, more power that’s converted and lost to heat. Still yet, the inversion of the DC voltage to AC voltage conversion can cut the efficiency by another 10%. When you add just those two things together, you can lose at least 15% of the power generated by the solar array.

It’s also very important to make sure your electric company will allow you to spin the meter backwards. When your solar panels generate more power than you use, the electric meter on your house will spin backwards. This pushes electricity back onto the grid and you earn a credit.

However, many electric companies will only allow you to have $0 balance. That is to say, they will not pay you for excess electricity created by your solar panels. Compensation rates are not the same everywhere. Many electric companies charge a lower rate during daytime which means you earn less money. For example, in Colorado Springs, electricity costs about $.04/kWh during the day, and as much as $.14/kWh at night starting in the evening. That means you only earn $.04 for each kilowatt pushed back onto the grid, but when you’re home after work, you’re getting charged $.14/kWh.

Let’s say I was interested in how long it would take to recoup the costs of purchasing a solar powered grid-tie system in Colorado. Because no one is home during the day, I use little to no electricity. All the electricity I generate during this time would be used to spin the electric meter backwards building a credit. Let’s also assume I get 9 hours of sunlight a day, I also get $.10/kWh payback rate (an average of day and night rates), and instead of 84% efficiency I get 100% efficient (again, this is not possible):

  • 2.4 kWh per hour X 9 hours X $.10 cents per kWh = $2.16 a day
  • $2.16 x 30 days = $64.80 a month
  • $14,000 (cost of a 4-kilowatt system) divided by $64.80 = 216 months
  • 216 months divided by 12 = 18 years to pay off

Most people don’t live in their house 5 years let alone 17 years! And please remember, the above example assumes 9 hours of 100% direct sunlight, which is impossible due to all the inefficiencies previously mentioned.

solar panels on cloudy day

The example I’ve been using assumes every day all throughout the year produces 9 hours of full sunlight. This won’t happen anywhere. As a best case real-world scenario, let’s say I lived in the Arizona desert which averages about 85% of all possible sunlight. We would have to cut back on the power production derived above by about 15%, so my 18 year payoff estimate is more like 21 years. If you also include another 10% decrease in efficiency caused by the inverter and cabling, it goes up to 23 years. After about 10 years, solar panels can lose up to 12% of their efficiency. So that payoff date increase even further into the future.

Now, there are Federal government rebates on all solar and wind powered home systems with no upper end cap, provided you qualify. But, you only qualify for the credit if a licensed contractor installs the system. If you do it yourself, you do not qualify for the credit.

I don’t mean to dissuade anyone from installing solar panels. It’s a good thing to do, but you have to be honest about your intent. Are you doing it to save money? Or are you doing it to help the climate? If the former, the payoff is not what is being advertised by many of the licensed installers.

The good thing is, solar panels do increase the resale value of your home. Provided they are in good working condition and not too old.

Now, if you are serious about solar power, you are in a great geographic location and you don’t care about the costs, then you might want to make your home as efficient as possible before pricing out a solar power system. If you can replace electric range stoves with gas, use Energy Star appliances, and turn off lights when they are not in use, you can cut back on your electricity usage by about 15% which means you won’t need to spend as much money on solar panels. I’d stay away from the compact fluorescent light bulbs due to environmental disposal concerns, but LED lights are becoming more popular and they are even more efficient.

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