There is a common but wrong idea that solar panels are only effective in places with a lot of sunshine. The reality is that home solar panels are being used successfully in less sunny regions like the US Northeast and Pacific Northwest.
You can also find examples in other parts of the world: Netherlands and other nations have more than 600 watts of solar capacity per person, according to a recent report by SolarPower Europe (PDF). Those nations have relatively low sunshine.
Abundant sunlight makes solar panels more productive, which means they produce more kilowatt-hours per year. But, you also need to consider local electricity prices, since they determine the dollar value of those kilowatt-hours!
As a quick example, let’s assume you install two identical home solar systems. Both have 10 kW of capacity, but they are installed in locations with very different climates:
- The first solar system is located in a very sunny place, generating 17,000 kWh per year.
- The second solar system is installed in a place with modest sunshine, producing only 12,000 kWh per year.
At a glance, it might seem that the first homeowner will save more on power bills. However, this is only true if both homes have similar electricity prices. If the second home is paying a much higher tariff, 12,000 kWh can be more valuable than 17,000 kWh.
If you’re considering solar panels for your roof, also keep in mind that local governments and utility companies may offer financial incentives for them. There are many types of incentives, but in general they improve the savings per dollar invested.
For example, cash rebates reduce the purchase cost of your home solar system, while tax credits let you deduct a part of its cost from your next declaration.
In a few words, sunlight is not the only factor that matters when installing solar panels. You also need to consider local electricity prices and incentive programs. Having local laws that favor solar power is also important.
How Electricity Prices Affect Solar Power Savings
Using the same example as above, let’s assume the first home has a tariff of 10 cents/kWh, while the second home pays 20 cents/kWh.
- At 10 cents/kWh, 17,000 kWh will save you $1,700 per year.
- However, at 20 cents/kWh, 12,000 kWh will save you $2,400 per year.
- The first home solar system produces 42% more electricity per year (5,000 kWh), but the second system saves $700 more per year despite its lower output.
This is just a simplified calculation, but it shows our point. Even with modest sunshine, the electricity produced by solar panels is very valuable in places with high kWh prices. When electricity is expensive, solar panels can achieve considerable savings even with moderate amounts of sunlight.
According to the Solar Energy Industries Association, the three states who have installed the most solar megawatts in 2021 are Texas, California and Florida.
All three are sunny states, but you can also find less sunny locations like Michigan and New York among the top 10 solar markets. By checking the latest electricity price data from the US EIA (October, 2021) we can see that Michigan and New York both have above-average kWh prices.
- The EIA reported an average electricity price of 13.99 cents/kWh for US homes.
- However, the average residential price was 17.96 cents/kWh in Michigan and 20.59 cents/kWh in New York.
California is a state with both abundant sunshine and expensive electricity (22.00 cents/kWh), while Texas and Florida are sunny, but their electricity rates are below the US average. The EIA reported 12.56 cents/kWh for Texas, and 12.21 cents/kWh for Florida.
As you can see, the savings achieved by solar panels don’t depend only on how much sunshine they get. In places with expensive electricity, each kilowatt-hour saves a few extra cents. In fact, you can find sunny locations with very cheap electricity, where solar panels have a long payback period.
Increasing the ROI of Solar Panels with Incentives
The US Northeast is not particularly sunny, but many states in the region have offered generous incentives for solar power.
Among the solar incentive programs that are currently active, two of the largest examples are the NY-Sun program in New York, and the SMART program in Massachusetts. These are also states with expensive electricity, which means that solar generation becomes more valuable.
There are many types of solar incentives, but they can be classified into two broad categories: incentives that make solar power systems easier to purchase, and incentives that reward you for generating clean power.
Whenever compelling solar incentives and benefits are available in your location, the ROI of solar panels is increased, and their payback period is shortened.
The following are some examples of incentives that reduce the ownership cost of solar panels:
- Cash rebates: Subtracted directly from your upfront costs.
- Sales tax exemptions: Subtracted directly from your upfront costs.
- Property tax exemptions: You are not taxed for the increase in home value after installing solar panels.
- Federal and state tax credits: You can claim back a percentage of your solar PV system costs on your next declaration.
On the other hand, the following are incentives that reward you for generating electricity. These incentives are less common, since most programs focus on reducing ownership costs:
- Solar Renewable Energy Certificates (SREC): You earn an REC for every 1,000 kWh of solar electricity produced, which can be sold to utility companies and other organizations with a legal mandate to support renewable energy.
- Performance-Based Incentives (PBI): Some programs reward you directly for each kilowatt-hour produced, which represents extra income beyond your power bill savings.
If you see many homes with solar panels in a place with modest sunshine, there are two possible explanations: expensive electricity or generous incentive programs. Some states meet both conditions, and solar panels can achieve a very short payback period.
Massachusetts is an example of this: homeowners are charged 22.59 cents/kWh on average, according to the latest EIA data. However, Massachusetts also has the SMART program, which gives you extra payments for the electricity produced by solar panels.
On top of that, you can claim a 15% state tax credit when going solar, up to a maximum amount of $1,000. With the combination of expensive electricity and a performance-based incentive, solar panels can achieve a payback period of less than five years in the state.
Let’s summarize all the benefits available for solar power in Massachusetts, even when the state is not particularly sunny:
- 26% federal tax credit
- 15% state tax credit up to $1,000
- Sales tax exemption
- Property tax exemption
- Saving up to 31 cents/kWh, when adding the SMART incentive to the power bill savings
If you purchase a 5-kW home solar system for $15,000, you can claim a total federal solar investment tax credit of $4,900 and the net cost becomes $10,100.
Assuming an electricity production of 7,000 kWh per year, the savings can reach $2,170 per year thanks to the smart program. In this case you’re looking at a payback period of 4.7 years, and high-quality solar panels can last for 25 years or more.
Keep in mind this is just a quick calculation. Before installing solar panels on your home, a professional assessment of your power bills and roof conditions is strongly advised.
Does Your State Have Favorable Laws for Solar Power?
State governments can also encourage the use of home solar systems by having favorable laws. However, the opposite is also true: there are places where home solar panels are not viable due to unfavorable laws, even with abundant sunshine.
There are three main ways in which state governments can use laws to increase the usage of solar power:
- Establishing a local renewable energy target.
- Simplifying the connection requirements for solar power systems owned by homes and businesses.
- Establishing net metering, where local energy companies must give you credit for surplus solar power sent to the grid.
When a state government establishes a renewable energy target, local power companies have a legal requirement to help the state reach that target. This means bringing more megawatts of renewable energy online, and home solar systems owned by their customers count towards the goal.
Did you know? Power companies/utilities often create their own incentive programs shortly after the local government sets a renewable energy target. Instead of installing all the required capacity on their own, they can encourage homes and businesses.
Simplified connection requirements and net metering are also helpful for grid-tied solar systems. Without favorable laws, power companies often impose complex requirements for anyone who installs solar panels connected to the grid. This makes the installation more expensive, and many homeowners are discouraged.
Net metering also improves the business case for going solar, since you get credit for all the surplus electricity produced around noon. Without net metering, energy companies will often pay a minimal tariff for that electricity, or they may simply not compensate homeowners.
Sunshine makes solar panels more productive, but it’s not the only condition that matters when you’re considering a home solar system. The ROI of solar panels also improves with expensive electricity tariffs, incentive programs, and favorable legislation.