How to compare solar to other investments

The stock market has seen some of the wildest swings in recent history since the beginning of this year—and it’s likely that volatility will persist over the coming months. 

As markets continue to react to the Trump administration’s ever-changing trade policy and byzantine Congressional budget bills, you’re not alone if you’re wondering what the safest ways to invest your money are in this uncertain economic environment. If you’re wary of investing in equities or bonds in the current climate, spending your money on other long-term tangible investments such as solar panels can be a smart option.

You're probably wondering how can solar panels provide financial beneficials that rival the stock market: In the U.S., residents spend an average of $2,518 annually on electricity—and investing in solar energy for your home either completely reduces or eliminates your electric bill right off the bat. That savings has a compounding effect because it frees up the money you previously spent on your electric bill to put toward other safer investments.

Plus, that annual solar savings seriously adds up: It nets out to around $50,000 over the 30-year lifetime of your solar panels.

Eliminating your electric bills provides a double benefit when it comes to your finances because you can reinvest your solar savings once you’ve achieved energy independence. Solar panels increase the value of your home, too. Just like any investment, it makes sense to compare the overall cost and savings of installing a solar system to other ways you could use your cash, like making other home improvements or putting money into the stock market.

Disclaimer: This article is intended to provide an informational overview of the financial benefits of going solar as a homeowner. It is not intended to serve as official financial guidance. Readers interested in installing solar products should use their own judgment and seek advice from licensed tax and financial professionals.

Since you’re paying far lower utility bills with solar, what you save can be considered your return on investment (ROI). ROI represents the amount of money generated or saved after making an upfront investment, usually measured as a percentage. ROI can be expressed as a single figure accounting for the entire life of the investment, or broken down into annual figures to understand how much you saved (or earned) each year.

To calculate the ROI of a solar system, let’s use the average price after the federal tax credit of $20,550, and an annual savings of $2,935 based on a seven year payback period. We can also use the typical 25 year warranty on panels to put a time limit on the investment (although many panels can last 30 years or more before needing to be replaced). From here, we’ll take the annual savings and reduce it by 0.5% each year to account for efficiency loss from the solar panels over time. For reference, the formula looks like this:

Total Savings ​= Year 1 Savings ​x (1−r)(n−1)

Here, "n" represents the year (1 - 25), and "r" represents the annual efficiency loss (0.5%).Using this formula, we can calculate that an average size solar system with an average payback period of seven years will produce $69,137 in total savings. This is a conservative estimate, because it doesn’t account for any increase in utility costs being offset across this time frame. Finally, to calculate the ROI we use this formula:

ROI = (Total Savings/Installation Cost) x 100

This formula reveals an ROI for an average solar installation of 336.6% over 25 years, or 13.46% annually. An annual ROI of more than 13% seems healthy, but how does it compare to other investments, like putting money into the stock market?

Now let's take a look at other types of common investments and how they compare to installing solar.

Index funds

Index funds track a broad selection of stocks to try to capture diversified growth in the economy. One of the most popular, the S&P 500 index, has an average return of 8.4% over the last 20 years. That’s lower than the ROI for a solar system by 5% per year.

Treasury bills

Buying Treasury bills (T-bills) from the US government is one of the lowest-risk ways to invest your capital, but the returns are relatively low and can change over time, since the longest term available for T-bills is one year. The return for T-bills over the last 10 years has fluctuated between 0.02% and 5.28%, meaning that investing even at the best possible moment would generate less than half of the calculated solar ROI. The risk is lower, but so is the return.

Cryptocurrency

Cryptocurrencies may seem like a quick way to achieve sky-high returns, but remember that those rapid gains are often outliers and don’t represent the vast majority of crypto purchases that usually lose money. Cryptocurrencies are some of the highest risk investments you can make, and even the most popular tokens like Bitcoin or Ethereum see large price swings and require paying close attention to changes in technology, regulations, and other factors. Compare that to a solar investment, which produces savings year after year with minimal need to monitor the system.

Overall, it's important to keep in mind that the length of these investments varies widely. If you have a higher appetite for risk, the S&P 500 could be the best choice, but could also result in larger losses. If you're looking for a safe and guaranteed long-term investment, solar is a smart choice because it results in significant savings on your electric bill and protects you from inflation at the same time.

If you want to park your money somewhere other than the stock market, but you still aren't completely sold on solar, there are other clean energy investments you can make to your property. Solar isn’t the only way to invest in home improvements that will provide ROI. Energy efficient options like installing new windows, insulation, or heat pumps can help lower energy bills.

New windows and insulation 

Replacing old windows with energy efficient ones or adding insulation and air sealing to your home can help lower utility costs by reducing the heating or cooling needs of your home. However, the payback period for these improvements is usually measured in decades, compared to less than 10 years for an average solar system. That’s because the annual energy savings generated by replacing windows or adding insulation are only around 15% based on where you live, and the improvements themselves can cost several thousand dollars. If a 15% cost reduction only saves you $30-$60 a month, achieving an ROI of over 100% on an improvement that costs just $3,000 could take more than 50 years.

Heat Pumps

Heat pumps can help reduce energy consumption in your home, especially if you live in a warmer climate and use air conditioning for much of the year. On average, heat pumps are about twice as efficient as other options, which could lead to significant savings over time if you already use electricity to heat your home. On the other hand, if you’re replacing a gas-powered boiler or other heat source in a cold climate, the difference between using gas and electricity as fuel for the system could cut into those savings. Heat pump installation costs can also vary widely, depending on the size of the system and existing HVAC infrastructure in your home. With so many variables, it’s difficult to determine an average ROI for a heat pump installation.

With that said, heat pumps can be a great upgrade to pair with a solar installation. The energy generated from the solar system can be used to power the heat pumps, providing big discounts on the expense of heating and cooling your home. With the right planning, heat pumps combined with solar can save on electricity bills while also lowering your heating and cooling costs, boosting the combined ROI of the improvements even more than solar on its own.

Now we've walked through the benefits of investing in solar energy for your home, you're probably wondering if it's affordable on your budget. There are two primary ways to purchase a solar system: buying it outright and using a solar loan.

Buy the system outright

Paying for the system in full is the most cost effective way to maximize your returns from solar. While the sticker price can feel intimidating, claiming the solar tax credit and state rebates further reduce the cost. The savings will outweigh your initial financial outlay, and you'll break even in around seven years, on average. Plus, unlike most large purchases such as a car, solar won't need constant maintenance and more financial investment down the road.

Buy the system with a solar loan

If paying upfront in cash isn't an option for you, many banks and other financial institutions, including specialized solar credit unions, offer $0-down, low-interest solar loans to help with your purchase. Monthly payments are typically lower than your monthly electricity bill, enabling you to save money immediately. Solar loans are a solid option and allow homeowners to go solar even if they don't have the cash on hand.

Overall, there are many ways to invest your hard-earned cash, but installing solar stands out as a unique way to achieve a high ROI with relatively low risk, while also increasing the value of your home and reducing your carbon footprint. Compared to most other investments, including stock market indexes, other home improvements, and even government-backed T-bills, installing solar generates better returns and provides peace of mind with long-term warranties, generating tens of thousands of dollars of savings on electricity bills over the life of the purchase.