The proposal on your kitchen counter says "6-year payback." It is printed in bold, probably in green. It is also, for most homeowners, wrong by three to five years. Salespeople routinely quote 5-7 years. The real number for most homes lands between 7 and 12. The gap is not an accident — it is the product of skipped steps, inflated rate assumptions, and a convenient silence about financing costs. Here is how to run the math yourself.

Step 1: Determine your true system cost

Start with the gross system cost before any incentives — the total price on the contract including hardware, labor, permits, and fees. For a typical residential system, that is $25,000-$40,000 depending on size and equipment.

Now subtract the 30% federal Investment Tax Credit (ITC). A $30,000 system yields a $9,000 tax credit, bringing the net cost to $21,000. But here is where people stumble: the ITC is a tax credit, not a rebate check. You need $9,000 or more in federal income tax liability in the installation year (or subsequent years, since the credit carries forward) to capture the full value.

Red flag: If your annual federal tax liability is $5,000 and the proposal assumes you capture the full $9,000 ITC in year one, the payback calculation is wrong from the start. You will capture $5,000 in year one and carry $4,000 to year two, meaning your out-of-pocket cost stays higher for longer and the payback date shifts later.

State and local incentives layer on top. Some states offer additional tax credits, rebates, or performance-based incentives (SRECs) — subtract those from the net cost too. Example: $30,000 gross − $9,000 federal ITC − $1,400 state rebate = $19,600 true net cost. That is the number your payback calculation starts from. Not the gross price. Not the monthly payment. The net dollars out of your pocket.

Step 2: Calculate your actual annual savings

Every proposal lists estimated annual production in kWh. Multiply by your utility rate and you get annual savings — in theory. In practice, two traps inflate that number, and both are baked into nearly every proposal we review.

Trap 1 — Tiered rate averaging: If your utility uses tiered rates (e.g., Tier 1 at $0.12/kWh for the first 500 kWh, Tier 2 at $0.22/kWh for 501-1,000 kWh, Tier 3 at $0.36/kWh above 1,000 kWh), solar eliminates the expensive top tier first. Your first kWh of solar savings is worth $0.36, but as you offset more usage, you are displacing cheaper tiers. The blended savings rate drops as your solar production increases. A proposal that multiplies total production by the top-tier rate overstates savings by 20-40%.

The fix is unglamorous but essential: map your monthly consumption against the tiers and determine which kWh your solar production actually displaces. The blended avoided rate is almost always lower than the number on the proposal.

Trap 2 — Net metering export value: If your system produces more than you consume during daylight hours, excess kWh are exported to the grid. Under 1:1 net metering, exports earn full retail credit. But many utilities now use avoided-cost or wholesale-rate compensation for exports: $0.03-$0.05/kWh instead of $0.12-$0.30/kWh. If 30% of your production is exported and earns wholesale rates, your effective savings per kWh drop significantly. A system producing 12,000 kWh/yr where 3,600 kWh exports at $0.04/kWh and 8,400 kWh offsets at $0.20/kWh yields $1,824 in savings, not the $2,400 you would get at a flat $0.20/kWh.

Step 3: Account for panel degradation

Panels lose output every year. Slowly, but steadily. The industry standard degradation rate is 0.3-0.5% per year. A system producing 12,000 kWh in year 1 at 0.4% annual degradation produces approximately 11,520 kWh in year 10, 11,050 kWh in year 20, and 10,600 kWh in year 25.

Most proposals either ignore degradation entirely or plug in a single average production number for all 25 years. Neither reflects reality. Your savings shrink slightly each year because the system produces less electricity, and that quiet slide pushes the payback date later by 6-12 months compared to a no-degradation assumption. Not dramatic on its own — but it stacks with every other optimistic shortcut.

Step 4: Factor in financing costs

Paid cash? Skip ahead. Financed? This step is where the proposal's payback number typically falls apart.

Red flag: The salesman's payback period almost always ignores financing costs. A proposal that says "6-year payback" on a financed system is calculating net system cost / annual savings without including the $15,000-$35,000 in interest and fees you will pay over the loan term. Your actual payback = (net system cost + total interest paid + all fees) / annual savings.

On a dealer-fee loan, the total interest and fees can exceed the original system cost. That is not a typo. The financing can cost more than the hardware. In those cases, the real payback stretches past 15 years — or the system never reaches positive return within the loan term at all.

Worked example: the proposal says 6 years, reality says 9.7

System specs: $28,000 gross cost. 30% ITC = $8,400 credit (homeowner has sufficient tax liability). Net cost: $19,600. Annual production estimate: 11,500 kWh. Utility blended avoided rate: $0.18/kWh. Degradation: 0.4%/yr. Cash purchase (no financing costs).

The salesman's version: $19,600 net cost / ($0.18 × 11,500 kWh) = $19,600 / $2,070 = 9.47 years. But the proposal rounds to "approximately 6 years" by swapping in the top-tier rate of $0.28/kWh, ignoring degradation, and baking in an assumed 3% annual utility rate increase from year one. Three optimistic assumptions, compounded, shave nearly four years off the number.

The real calculation (year-by-year): Year 1 savings: 11,500 kWh × $0.18 = $2,070. Year 2: 11,454 kWh × $0.18 = $2,062. Each subsequent year, production drops by 0.4% while the avoided rate stays flat — because we do not assume future rate increases that are speculative. Cumulative savings reach $19,600 during year 9.7.

What changes the number: If you assume a 2.5% annual utility rate increase (reasonable but not guaranteed), the payback accelerates to approximately year 8.1. If you financed with a dealer-fee loan adding $8,000 in fees and $12,000 in interest over 25 years, total cost rises to $39,600 and the payback extends past year 17. The financing method is the single largest variable in your payback period.

How to calculate yours in five minutes

  • Net cost: Gross system price − ITC (30%) − state/local incentives. If financed, add total interest and fees over the loan term.
  • Annual savings (year 1): Estimated annual kWh production × your actual blended avoided utility rate (not the top-tier rate). Reduce export kWh to wholesale rate if your utility does not offer 1:1 net metering.
  • Payback estimate: Net cost / year-1 annual savings. Add 6-12 months for degradation over the payback period.
  • Reality check: If the result is under 7 years and you are not in a high-rate state (California, Connecticut, Massachusetts, Hawaii), double-check your avoided rate assumption. National average payback for cash purchases is 8-10 years.
Quick sanity check: Take the "payback period" from the proposal. If the installer quoted 5-6 years and you are paying $0.12-$0.16/kWh for electricity, the math almost certainly uses inflated rate assumptions. At $0.14/kWh average avoided rate, a $20,000 net system producing 11,000 kWh/yr saves $1,540/yr = 13-year payback. Payback under 7 years generally requires avoided rates above $0.22/kWh or substantial state incentives beyond the ITC.

None of this means solar is a bad investment. It is a 25+ year asset, and the post-payback savings are substantial. But the payback date marks the moment your investment flips from cost to return — and getting that number wrong by 3-5 years changes the financial calculus for a lot of families sitting at that kitchen counter.

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