Solar Payback Period: How to Calculate It Honestly

What payback period means

The payback period is the time it takes for your savings to equal what you spent. If a solar system costs a certain amount after subsidy and saves you a certain amount each year, the payback is how many years of savings it takes to cover that cost. After that point, the electricity the system produces is effectively free apart from small running costs, for the remaining life of the panels.

Families use it most often to judge rooftop solar, and a calculator and your electricity bill are enough to work it out. It is also easy to misuse: some quotations show a short payback by using a high tariff, ignoring maintenance or assuming a subsidy the buyer may not get. This guide shows how to calculate it honestly, so you can check any figure you are given.

The numbers in this article are examples with assumed prices, tariffs and generation. They are not quotations or promises. Your own result will differ, so replace the assumptions with your bills and a written proposal.

The basic formula

Payback period (years) equals the net cost of the system divided by the yearly saving on your electricity bill. Net cost is the installed price, including taxes and approval charges, minus any subsidy you will actually receive. Yearly saving is the money you no longer pay because solar produced power you would otherwise have bought from the grid.

A more careful version also subtracts yearly running costs from the saving, and adds the cost of a future inverter replacement to the total spend. We will do both in the example below, so that you can see how each step changes the answer.

Step 1: Find the net cost

Ask the installer for a written, all-inclusive price that covers panels, inverter, structure, cables, earthing, net metering paperwork, installation and applicable taxes. Then subtract the subsidy that applies to your connection. For households, the central subsidy under PM Surya Ghar depends on system capacity and has fixed amounts for certain sizes, which are published on the official portal. Check the current table, because it can be revised.

Watch the subsidy timing. In many cases you pay the full amount first and the subsidy arrives in your bank account after inspection and commissioning, which can take some weeks. If the scheme changes, a delay can alter the plan. Do not count a subsidy that you may not qualify for. Commercial connections, for example, are not eligible for the residential subsidy.

Step 2: Estimate yearly generation

As a rough guide, one kilowatt of rooftop solar in Uttar Pradesh produces around 4 to 5 units per day on average across the year, which comes to roughly 1,400 to 1,700 units per kW per year before losses. Real generation depends on shade, tilt, direction, dust, temperature and the quality of the installation. Many designers use a lower figure, around 1,300 to 1,500 units per kW per year, to be cautious.

Panels also lose a little output each year. If your panel's warranty guarantees a certain level at year 25, you can estimate an average decline of a few tenths of a percent per year. For a payback of a few years the effect is small, but it matters for lifetime savings. You can read more in our guide on panel lifespan and degradation.

Generation is also seasonal. Monsoon months and foggy winter weeks produce less than clear spring months. Your yearly figure is an average of all of these.

Step 3: Work out your yearly saving

Multiply the units you use directly or offset through net metering by the rate you would otherwise pay. Because electricity tariffs are commonly in slabs, the rate that matters is the rate of the slabs that your solar units replace. If your use is high, solar removes units from the costly top slabs first, so your average saving per unit can be higher than your overall average bill per unit. If your use is low and sits mostly in a cheaper slab, the saving per unit is smaller.

Do not use the bill total divided by units as your rate, because that figure includes fixed charges and duty that solar does not remove. Read our guide on reading your electricity bill to separate these items. Also remember that surplus units fed to the grid are settled under net metering rules, which may not give the same value as units you use yourself, so avoid oversizing.

A worked example with assumed numbers

Suppose a household installs a 3 kW system. These are example numbers for illustration only. Assume the all-inclusive installed price is Rs 1,80,000 and the subsidy received is Rs 78,000, giving a net cost of Rs 1,02,000. Assume the system produces about 4,500 units a year, and that the units replaced are worth an average of Rs 6.50 each. The yearly saving is then about Rs 29,250.

Simple payback is Rs 1,02,000 divided by Rs 29,250, which is about 3.5 years. Without any subsidy, the same system would take Rs 1,80,000 divided by Rs 29,250, or about 6.2 years. The subsidy makes a large difference, so count it only if you qualify.

Now make it more realistic. Suppose cleaning and inspection cost Rs 2,000 a year, so the net yearly saving falls to Rs 27,250. Payback becomes Rs 1,02,000 divided by Rs 27,250, which is about 3.7 years. If an inverter replacement of Rs 25,000 is needed around year 10, it adds to lifetime cost but does not change the early payback much.

What can make payback longer or shorter

These factors move the result, and they help you judge whether a quotation's promise is realistic.

• Shade, dust and poor tilt lower generation and lengthen payback.
• A higher tariff or higher use in costly slabs shortens payback.
• A larger subsidy or a lower installed price shortens payback.
• Oversizing so that most output goes to the grid at a lower settlement value can lengthen payback.
• Loan interest adds cost; if you finance the system, include the interest in your calculation.
• Future tariff changes can move savings up or down, so avoid relying on assumed rises.

If you pay with a loan

If you finance the system, compare your monthly instalment with your monthly saving. A common aim is to have the saving cover most or all of the instalment, so that your cash outflow stays similar to what you pay for electricity today. Include processing fees and interest in the true cost, and check the loan term. Our guide on ways to pay for rooftop solar explains savings, loans and subsidy in more detail.

Payback on a financed system is longer in practice, because interest adds to cost. It can still make sense if the monthly numbers work, but decide using the actual interest rates and charges in a written loan document.

How to check a payback claim

Ask the installer to put the assumptions in writing: generation per kW, tariff or value per unit, subsidy amount, running cost and any rise in tariff. Then recalculate with your own numbers. Be wary if the installer promises a fixed payback or a zero bill and cannot show the assumptions. Our article on common mistakes when buying rooftop solar lists other warning signs.

You can also use the calculator on our home page for a quick estimate, then ask us for a written quotation for your roof. We show our assumptions so you can check them.