Is It Time to Install Solar Panels?

If your electric bill is busting your budget, look to the sun for relief

A worker is installing a solar panel on the roof of a home in Southern California.

E+ / Getty Images

Adam Shell,

AARP

En español

Published May 17, 2022

Using electricity to turn on the lights, run the AC and dry your clothes is getting more costly. Last year, U.S. retail electricity prices rose at their fastest rate since 2008 and hit a record 13.72 cents per kilowatt-hour (kWh), according to the U.S. Energy Information Administration. The EIA expects electricity prices to jump nearly 4 percent this year, so the hit to your wallet is likely to continue.

At the same time, the cost to generate electricity with solar panels that convert sunlight to energy has been falling for a decade. Ten years ago, an average 6 kWh residential solar system could cost $50,000 or more. But now a typical home installation will run between $16,200 to $21,400 — a drop of more than 60 percent, according to Sunrun, a maker of residential solar panels.

To boost their affordability, the federal government is still offering a generous tax credit to homeowners who install solar systems, but the incentive program is set to be phased out in 2024. Add in the fact that homes with solar energy systems sell for 4.1 percent more, according to online real estate marketplace Zillow, and the fact that renewable energy is more environmentally friendly, and the case for solar gets a little sunnier.

“The biggest reasons for powering your home with solar is reducing or even eliminating your electricity bills and doing right by the environment by lowering your carbon footprint,” says Nick Liberati, communications manager at EnergySage, a renewable energy marketplace that helps people comparison shop solar projects.

In fact, a recent SaveOnEnergy and CNET survey found that the top motivations for switching to solar were to “save money on electric bill” (82 percent) and “environmental reasons” (65 percent).

So should you bite the bullet, pay the up-front costs and go solar? It depends on a number of factors. Here, we’ll break down what you need to know to make an informed decision.

Tax credits offset setup costs

If you’re looking to lower the cost of installing a solar photovoltaic (PV) system on your roof and shortening the time it takes for your investment to pay off, taking advantage of the federal government tax credit is key. It’s the best financial incentive for solar. Unlike a tax deduction, which reduces your taxable income, a tax credit is a dollar-for-dollar reduction in the amount of income tax you’ll owe.

Currently, the U.S. provides a 26 percent tax credit for systems installed in 2020-2022 and a 22 percent credit for installations completed in 2023. But unless Congress renews the credit, it will expire in 2024. (There’s always a chance, however, that the solar tax credit could be extended, notes Liberati. President Biden’s Build Back Better Act, he says, proposed a 10-year investment tax credit (ITC) extension that would bump the tax credit back up to 30 percent. But it’s unclear whether the bill will pass.)

To claim the tax credit, the solar installation must be placed in service during the tax year and generate electricity in a primary home or secondary residence (such as a vacation home) in the U.S., or a community solar project in which you subscribe to local solar farms to get power. That means you won’t be able to take advantage of the tax credit if you bought solar panels and don’t get them installed by year-end 2023. You’ll also need to own the system, which must be new or being used for the first time, by paying for it in cash or financing it.

Here’s how the math works. Say it cost $20,000 to install a solar PV system before Dec. 31, 2022. The tax credit would be calculated like this: $20,000 x 0.26 = $5,200. Which means the real cost of your system would drop to $14,800. “That’s a substantial reduction in out-of-pocket costs,” says Ben Airth, senior distributed generation policy manager at the Center for Sustainable Energy (CSE). You might also be eligible for rebates from your electric utility or state and local government, as well as state tax credits. So do some homework to find out.

To get an idea of whether solar makes financial sense for your situation, you can plug your information into a solar cost “calculator,” like the one offered by EnergySage. Estimates are based on your roof, your electricity bill and offers in your area.

Keep in mind that the ITC is not a refundable tax credit. That means if your tax credit exceeds your tax liability, you won’t get a refund for the amount of the tax credit that exceeds your tax bill. You can, however, carry over any unused amount of the tax credit into the next tax year.

When does it make sense to go solar?

While there’s no one-size-fits-all answer to what types of homeowners benefit most from solar panels, there are a few key factors to consider. For starters, living in a state where the sun shines virtually all the time, such as Arizona, Florida and California, is a big plus. What side of the street you live on is also important, since the more sun you get, the better.

“Generally speaking, the best fit for solar would be a single-family, stand-alone home that you own, with a southern-facing roof that’s in good condition and receives little shading,” says Liberati. Homeowners who have high electricity costs are also good candidates, since the more you spend on electricity, the more you’ll save with solar, he adds.

There are other benefits of solar that go beyond dollars and cents. One plus of not relying on the traditional electric grid is so-called “resiliency,” says Liberati. “When paired with a battery, a solar panel system can keep the lights on during outages,” he says. Batteries for a solar system can cost from $5,000 to $7,000.

Is it worth the trouble?

The answer is yes, says the CSE’s Airth. Your utility bill savings are immediate. And “over time, the system pays for itself,” he says. “Rather than always paying a utility for all your electricity, invest in your own power system — that’s the bottom line.” The payback period for solar is typically seven to 10 years, he adds.

How much will you pay for electricity once your solar system is installed? It depends on how much solar energy your system produces and where you live. But the savings can be meaningful.

“In a productive solar month, typically in the spring and summer, a bill can get down to $0 or even negative, where credits will be given back on a customer’s utility bill,” Airth says. “In the fall and winter, when there are fewer hours of sunlight, a utility bill may vary from 25 percent to 100 percent of your previous bill without solar.” There are many variables, he adds, including the size of your system and your monthly energy consumption.

Adam Shell is a freelance journalist whose career spans work as a financial market reporter at USA Today and Investor’s Business Daily and an associate editor and writer at Kiplinger’s Personal Finance magazine.