Time it takes to repay cost of solar panels
Back in August 2022, Climate website Carbon Brief said the time for an average rooftop solar panel installation to start being cost effective had plunged from 16.7 years in October 2020 to 4.1 years in April 2023 when bills were expected to rise as high as £5,277. But now that electricity prices are coming down, what does the Solar Panel Payback time look like now?
While the average cost of solar panels is around £7,000, making solar panels an expensive outlay, having a solar panel system means electricity bills are slashed as households are not buying from the grid (at least as much) and can even sell back any surplus energy generated to the grid.
While having solar panels saves people money on their variable electricity costs, many have been reluctant to invest, particularly if they are not sure if they will still be in their homes in 20 years' time to reap the rewards.
Ultimately, homeowners need to understand how long it will potentially take to pay back their panel investment—because at that point, their solar-generated electricity is officially 'free'.
Solar panel payback calculation
The experts at NimbleFins estimate that it can take around 8-12 years for a solar panel system producing 3,100kWh of electricity per year to payback solar panels, assuming all of this energy is used by the home (in place of energy bought from the grid).
How is this calculated? Let's compare two solar panel systems for which the NimbleFins team recently received Solar Panel Quotes: one without a home battery and one with a 5.8kWh home battery.
| Solar panel payback examples | Solar panels, no home battery | Solar panels, with home battery |
|---|---|---|
| Cost of solar panel system | £6,500 | £9,300 |
| Electricity production per year | 3,100kWh | 3,100kWh |
| Battery size | n/a | 5.8kWh |
| Daily home electricity consumption | 7.9kWh | 7.9kWh |
| Variable cost of solar electricity | 0p/kWh | 0p/kWh |
| Variable cost of grid electricity | 24.5p/kWh | 24.5p/kWh |
| Potential electricity savings | £760 | £760 |
| Payback time | 8.6 years | 12.2 years |
Note, for this analysis we used the EPC cost of electricity for April - June 2024 of 24.5p/kWh and a real-life solar panel system quote from a national installer for a size that would suit the typical household.
At first glance, it appears that the solar panel system without a home battery has a better pay back time of 8.6 years, however, there is more to the story.
The pay back times above are only valid if the home can use all of the solar-generated power. And since this is much more likely to be achieved in a system with a battery, we think the more realistic payback time of a solar panel system is around 12 years. But if a household is home all day and can use the solar energy as it's produced, that household may achieve the shorter payback period of 8-9 years. Let's walk through the two scenarios and explain further.
Note, we have not included the SEG payments you can earn by selling energy back to the grid in this example, nor have we included benefits of having a home battery such as being able to buy cheaper grid electricity during the night that can be stored in the battery. As you can see, payback calculations are not necessarily simple!
Solar panel payback time, no battery
We were recently quoted for a solar panel system (without a home battery) costing £6,500 for 3.9 kW of total solar power—a system expected to produce 3,100 kWh of electricity per year.
Given the current cost of electricity of 24.5p/kWh, 3,100 kWh of electricity would cost £760 if purchased from the grid. That implies the solar panel system would pay itself off in 8.6 years (£6,500 divided by £760).
BUT this math assumes the home actively consumes every bit of solar power as it's generated (since the system doesn't include a home battery). If it's not possible to use all of the solar energy as it's generated during the day (and it's probably not...), the pay back time would be longer than 8.6 years.
Two solutions would be to sell some energy back to the grid on a SEG tariff or to install a home battery to store the energy for later use.
SEG export tariffs for selling energy back to the grid are pretty low at around 3-4p/kWh, so let's set that aside.
Installing a home battery for solar is an effective way to ensure all solar-generated power is used by the home, but batteries come at a cost. How does the pay back time look if you add in battery cost?
Solar panel payback time, with home battery
We were also quoted for the same solar panel system (3.9 kW of total solar power, expected to produce 3,100 kWh of electricity per year)—this time WITH a 5.8 kWh home battery—for an all-in cost of £9,300. The battery added £2,800 to the cost, in this case.
The addition of the home battery helps ensure that the solar-generated power can actually be used by the home, not wasted.
As before, the current cost of electricity is 24.5p/kWh and the 3,100 kWh system could potentially save £760 in electricity purchased from the grid. That implies the solar panel system including battery would pay itself off in 12.2 years (£9,300 divided by £760).
This setup could theoretically store 5.8 kWh of energy per day (although batteries will lose some energy when charging and discharging—they're not 100% efficient). Is this enough to ensure a home actually uses all of the solar-generated energy (making the 12.2 year pay back time realistic)?
A quick calculation: the average home uses 2,900 kWh of electricity per year, or 7.9 kWh of electricity per day. Theoretically, a home consuming 7.9 kWh of electricity a day should be able to make the most of their solar panels using a 5.8 kWh home battery. While the storage capacity of the battery is less than the daily usage, keep in mind that some of the solar energy will be used as it's generated, so not all of the energy needs to be stored for nighttime use. Even if people are out during the day, a home continues to draw on electricity to run the refrigerator, other appliances and even possibly heating (e.g. water heating).
Another benefit of having a home battery is that you can sign up for a Time of Use tariff, enabling you to buy cheap electricity at night that you store in the battery. For example, we quoted a Time of Use tariff from Octopus (called Octopus Flux) for our area and found that the rate during most of the day was pretty typical right now at 25.7p/kWh. But the rate was 40% higher for three hours in the late afternoon/evening (4pm - 7pm) and 40% lower for three hours in the middle of the night (2am - 5am). On this type of tariff you can load up your home battery during the night for cheaper (e.g. 15.4p/kWh vs 25.7p/kWh), and use this during the day if your solar panels don't produce enough. This also affects your pay back calculations.
Final thoughts from an expert
Dr Simon Evans, senior policy editor at Carbon Brief, told the i: "Stratospheric gas prices are driving our energy bills through the roof.
"That’s making low-carbon options even more cost effective. Whether it’s large-scale wind farms now costing four times less than gas power, or home solar systems that could pay back the initial outlay within less than five years, the economic case for net-zero has never been stronger."
Even though we calculate that the solar panel payback period is at least 8 years now, we echo Dr. Evans' sentiments.
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