Is Solar Worth It? A Financial Analysis Guide

The Federal Investment Tax Credit (ITC)

The federal solar Investment Tax Credit (ITC) allows homeowners and businesses to deduct a percentage of the total installed cost of a solar system from their federal income tax liability. As of 2025, the residential ITC is 30% under the Inflation Reduction Act, with no maximum dollar cap. A $25,000 solar installation generates a $7,500 tax credit.

Critical distinction: this is a tax credit, not a deduction. A $7,500 credit reduces your tax bill by $7,500. If your total federal tax liability for the year is $6,000, you claim $6,000 and carry the remaining $1,500 forward to the next tax year. If your federal tax liability is zero (perhaps because you are retired with low income), the credit has no value unless you have carry-forward years remaining.

The ITC applies to the total installed cost including panels, inverters, racking, electrical work, permitting, and labor. It does not apply to roof repair or replacement done separately from the solar installation. If the installer includes roof work in the solar contract, the IRS position on deductibility is murky — consult a tax professional.

Battery storage added to a solar system also qualifies for the ITC at the same 30% rate, as long as the battery is charged at least 80% from solar. This makes battery economics significantly more favorable. A $10,000 battery with the ITC effectively costs $7,000.

Net Metering: The Policy That Makes or Breaks Solar Economics

Net metering allows solar owners to export excess production to the grid and receive a credit on their electric bill. Under full retail net metering (1:1), every kWh you export earns the same credit as a kWh you would have bought. If your rate is $0.15/kWh, each exported kWh saves you $0.15. This effectively makes the grid a free, unlimited battery.

Net metering is the single largest factor in residential solar economics. With 1:1 net metering, a grid-tied system without batteries can offset 90–100% of your electric bill because summer overproduction credits offset winter underproduction. Without net metering (or with reduced-rate net metering), you only save on the electricity you consume in real time, which is typically 30–50% of production for a system sized to annual consumption.

The trend is away from 1:1 net metering. California's NEM 3.0 reduced export credits to wholesale-rate-equivalent values (roughly $0.04–$0.08/kWh instead of $0.30+/kWh retail). Other states are considering similar changes. This dramatically extends payback periods for new solar installations and makes battery storage more attractive (store excess and use it yourself instead of exporting at a low rate).

Before calculating solar ROI, verify your utility's current net metering policy, any pending changes, and the grandfathering rules. Many states grandfather existing solar customers under the net metering policy in effect when they interconnected, for a period of 10–20 years. Installing before a policy change can lock in favorable rates.

Rate Escalation: The Hidden Driver of Solar Returns

Electricity rates have increased at an average of 2–4% per year nationally over the past two decades. Some regions have seen 5–7% annual increases. Solar panels lock in your electricity cost at today's rate (plus the cost of financing, if applicable) for 25–30 years. The higher rates go in the future, the more valuable your solar production becomes.

A conservative rate escalation assumption of 3% per year means your $0.15/kWh electricity costs $0.20/kWh in 10 years and $0.27/kWh in 20 years. Your solar system is still producing at the same effective cost it did on day one (or lower, since a cash purchase has zero ongoing cost beyond minor maintenance). The value of your solar production increases every year.

Rate escalation is the reason solar salespeople love to show 25-year savings projections in the $50,000–$80,000 range. Those numbers assume consistent rate increases over 25 years, which is a reasonable assumption but not a certainty. If rates increase faster (possible with grid modernization costs, transmission upgrades, and the energy transition), savings are higher. If rates plateau or decrease (unlikely but possible with abundant cheap natural gas or nuclear), savings are lower.

For a conservative analysis, use 2.5–3.0% annual rate escalation. For an aggressive but historically supported analysis, use 4–5%. Do not use 0% — that assumption has been wrong in every US market for the past 30 years. Run the calculation at multiple escalation rates to see how sensitive your payback period is to this assumption.

LCOE: What Your Solar Electricity Actually Costs

Levelized cost of energy (LCOE) is the total lifetime cost of the system divided by the total lifetime energy production. It gives you a single $/kWh number that you can compare directly to your utility rate. If your solar LCOE is lower than your utility rate, solar saves you money from day one (on a cost-per-kWh basis, ignoring financing timing).

For a cash purchase: LCOE = (System Cost − ITC − Other Incentives + Lifetime Maintenance) / (Total Lifetime kWh Production). Example: $25,000 system, $7,500 ITC, $2,000 in state incentives, $1,500 in maintenance over 25 years, producing 250,000 kWh over 25 years. LCOE = ($25,000 − $7,500 − $2,000 + $1,500) / 250,000 = $0.068/kWh. If your utility charges $0.15/kWh, your solar is 55% cheaper.

For a financed purchase, add total interest paid to the numerator. A $17,500 loan at 5% over 15 years adds about $7,500 in interest. LCOE becomes ($25,000 − $7,500 − $2,000 + $1,500 + $7,500) / 250,000 = $0.098/kWh. Still cheaper than $0.15/kWh grid power, but the margin is thinner.

LCOE is the most honest metric for evaluating solar because it accounts for all costs and all production over the full system life. Be skeptical of "savings" calculations that do not show LCOE — they may be cherry-picking assumptions to make the numbers look better than they are.

Financing: Cash, Loan, Lease, or PPA

Cash purchase: Best long-term return. You capture the full ITC, avoid interest costs, and own the system outright. LCOE is lowest. The tradeoff is tying up $15,000–$25,000 of capital. If you have the cash and plan to stay in the home 10+ years, cash is the optimal financial choice.

Solar loan: Preserves cash while still qualifying for the ITC (you own the system). Interest rates range from 3–8% depending on credit and term. A 15-year loan at 5% on a $17,500 net cost (after ITC applied to the down payment or first-year tax refund) adds significant interest but keeps monthly payments below the utility bill savings for most systems. Watch for dealer fees disguised as low interest rates — a "0.99% loan" with a 25% dealer fee costs more than a 5% loan with no fees.

Solar lease: You pay a fixed monthly amount for the use of the system. The leasing company owns the panels, captures the ITC, and maintains the system. Monthly payments are typically set below your current electric bill. The problem: you save less because the leasing company captures the ITC and keeps the long-term value. Lease escalators (2–3% annual payment increases) can erode savings over time. Leases also complicate home sales.

PPA (Power Purchase Agreement): Similar to a lease but you pay per kWh produced instead of a fixed monthly rate. The PPA rate is set below your utility rate, so you save from day one. Same ownership and ITC issues as a lease. PPAs are common in states where leases are not allowed or for commercial installations.

For most homeowners with adequate tax liability, a cash purchase or low-interest loan maximizes lifetime savings. Leases and PPAs reduce risk and upfront cost but capture less value for the homeowner.

Calculating Your Actual Payback Period

Simple payback = Net System Cost / Annual Electricity Savings. For a $17,500 net cost (after ITC) and $2,400 annual savings: payback = 7.3 years. This is the most common metric quoted by solar installers and is useful as a rough benchmark.

But simple payback understates the true return because it ignores rate escalation. Your $2,400 savings in year one becomes $2,472 in year two (at 3% escalation), $2,546 in year three, and so on. Using discounted cash flow analysis with rate escalation, the payback period is typically 1–2 years shorter than the simple calculation.

A more complete analysis uses net present value (NPV) or internal rate of return (IRR). NPV discounts all future cash flows to today's dollars using a discount rate (typically 4–6% for homeowners). If NPV is positive, the investment earns more than the discount rate. IRR is the discount rate at which NPV equals zero — it represents the effective return on your solar investment. A well-priced residential solar system typically has an IRR of 8–15%, which compares favorably to most conservative investment alternatives.

The payback period is sensitive to: installed cost per watt, ITC and state incentives, electricity rate and rate escalation, system production (which depends on location, orientation, and shading), net metering policy, and financing terms. Change any one of these significantly and the payback period shifts by years. This is why generic "solar pays for itself in 7 years" claims are meaningless without your specific inputs.

Common Misconceptions About Solar Economics

"Solar panels pay for themselves": They can, but not everywhere and not for everyone. A homeowner in Arizona paying $0.14/kWh with 1:1 net metering sees payback in 6–7 years. A homeowner in Seattle paying $0.10/kWh with reduced net metering might see 12–15 years. Run your specific numbers.

"Solar increases home value by $15,000–$20,000": Studies show solar adds roughly $4/watt to home value for owned systems (not leases). A 7 kW system adds approximately $28,000. But this varies by market, buyer preferences, and system age. A 15-year-old system with 5 years of warranty remaining adds less value than a 2-year-old system.

"I need batteries to have solar": Grid-tied systems do not need batteries. The grid is your virtual battery. Batteries add $8,000–$15,000 to the system cost and are only economically justified if you have frequent outages, time-of-use rates with significant peak/off-peak differentials, or no net metering.

"Solar is maintenance-free": Nearly true. Panels need occasional cleaning (rain handles most of it). Inverters need replacement at 10–15 years ($1,000–$2,000 for string inverters). Monitoring systems need occasional attention. Budget $50–$100/year for maintenance over the system life. It is low-maintenance, not zero-maintenance.

"I should wait for panels to get cheaper": Panel prices have dropped 90% over 20 years but have stabilized in recent years. Meanwhile, the ITC decreases after 2032 and net metering policies are getting less favorable. In most markets, the financial case for solar is better today than it will be in 2–3 years because of policy changes, not panel prices. The best time to install was last year. The second best time is now.