Why Solar Panels Are Expensive – And Why They’re Worth It

Solar panels are expensive – there’s no getting around it. That said, despite the high upfront costs, home solar adopters are likely to save money on electricity bills over time, improve the value of their home and reduce their carbon footprint.

This article will discuss why solar systems, also known as photovoltaic (PV) systems, are so expensive, how they can benefit homeowners and how you can make them more affordable.

Right now, EnergySage cites the average cost for a 6 kilowatt (kW) PV system at approximately $16,600 before federal solar tax credits or other local rebates and incentives, which we’ll discuss later. The actual cost will vary by your home’s location.

Why did we pick a 6 kW system? A system of that size will meet the yearly average energy demand for a single-family home, which is about 30 kilowatt-hours (kWh) per day. Your recommended system size may differ.

Why Solar Panels Are So Expensive

There are two main costs involved in the final price of installing solar panels.

Hardware is responsible for about 46% of the costs, notes SolarReviews. This includes the panels, inverters, wiring and the structure the panels are mounted on (also known as racking). Prices for the solar panel hardware reflect large amounts of high-grade silicon involved in manufacturing the panels.

Soft costs such as labor, overhead expenses for the solar company, permits, inspection fees and profit margin comprise the remainder of the cost.

It might be tempting to select the installer offering the lowest price. But experience matters with solar installers, so be sure they have a good track record of working with solar – especially in connecting with utility companies and local regulators.

So, is solar energy expensive? Solar power is currently the cheapest source of power for utility companies. It costs them an average of 6 cents per kWh to generate solar power, about half the cost of coal.

It’s also one of the only ways for homeowners to generate renewable energy – or energy of any sort. The costs for homeowners to install solar has fallen over time from 52 cents per kWh in 2010 to 16 cents per kWh in 2017. That’s a 70% decrease in less than a decade.

Advances in solar technology are likely to decrease costs even further, especially as solar panels get more efficient.

There are ways to reduce the sticker shock of a home solar panel installation costs. There are government incentives ranging from the federal to local level, and there may be benefits from your local utility company.

The most significant incentive, the Residential Clean Energy Credit, was recently extended as part of the Inflation Reduction Act of 2022. Qualified homeowners may receive a 30% tax credit for systems installed through 2032. The credit steps down to 26% and 22% for systems installed in 2033 and 2034, respectively. 

Some states also offer breaks on labor, sales and property taxes for homeowners with solar panels. Arizona, for example, doesn’t collect sales tax on solar equipment. That means a homeowner who had to purchase $16,600 worth of solar equipment would save nearly $930 based on Arizona’s 5.6% sales tax. Arizona also provides a 100% exemption for property value increases related to the solar panels.

Make sure to talk with a tax expert to determine whether your system qualifies for the investment tax credit and other incentives.

Unlike other home upgrades, it’s possible for solar panels to pay for themselves. Here’s how it works.

In most cases, homeowners are connected to the utility grid (also known as grid tied). The clean energy your system generates goes into the grid. For this, your utility company gives you certain benefits.

One of those benefits might be a better rate per kilowatt-hour or a credit for the amount of energy you generate monthly. This varies by utility company. Still, you’re likely to pay a lower monthly energy bill each month than a homeowner without solar panels.

Over time, those savings will equal or exceed what you spent on installing solar panels. The amount of time this takes is called your payback period.

How To Estimate The Payback Period For Solar Panels

If you’d like to get an idea of how long it might take for solar panels to pay for themselves on your home, you’ll need to run some numbers. Here’s how to get started:

System Cost: Start with the average 6-kWh system cost of $16,600. Your actual cost may vary depending on how many solar panels you need on your home.

Incentives: Deduct the maximum applicable percentage if you plan to install by the end of 2032, assuming you qualify. For this example, we’ll use the 2032 credit of 30%. Also, check your state and local governments as well as your local utility company for rebates, customer generation rates and other incentives.

Your Current Utility Bills: Compare how much your system will generate      to how much electricity you’ll need to buy from the utility company. If possible, compare bills going back over a year to account for seasonal fluctuations. You can also compare the rate per kWh you’ll pay as a solar customer versus your current rate. For our example, we’ll use average price per kWh in the U.S. – 11.18 cents, along with the average kWh used in a household per year - 10,950.

Crunch The Numbers: Now that you have an idea of the system costs and how much you could save each year. Divide your initial savings by the amount you’d usually pay the utility company each year.

For Example

In this example, these numbers serve as a model and your personal numbers will be different based on many variables, including location, type of residence, utility rates and more. This serves as a method to plug in your numbers and figure out your savings and payback period.

NOTE: Your actual payback period may vary.

Here are a few other common questions about the expense of solar panels.