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What difference does the price you pay for electricity make?

There are a lot of things that go in to calculating the financial return for solar: the total up front cost, rebates, tax credits, how much sun your house gets, and more; but perhaps the most important factor is how much you pay for electricity.

After all, solar energy directly replaces energy that you would have bought from the utility company, so each kWh saved is like a deposit directly into your bank account—it’s money you won’t have to spend!

But with a solar panel installation costing thousands of dollars, does the difference between $.12 and $.17 per kilowatt-hour really matter? You bet your sweet bippy it does.

What a difference a penny makes

Electricity is sold to you at a certain rate per kilowatt-hour (kWh). Basically, your home is populated with appliances, lighting, and electronic devices that require a certain number of watts of power to operate or charge, and as they draw this power over the course of an hour, their usage is measured.

The national average price per kWh of electricity is $.13. People in some states pay more, and people in a some other states pay less. If you live on the east coast, California, Hawaii or Alaska, you’re paying a ton for power. If you live in the southern midwest or the Pacific northwest, you’re not paying much at all.

Average electricity prices in 2015

The reasons for the differences are complicated, but for the most part, cheap electricity comes from coal or hydro power, and the fuel source and production tends to be found close to where it’s consumed. In those expensive states, the fuel sources tend to come from further away (there’s very very little coal or oil in Connecticut, for example).

At the average rate of $.12/kWh, solar can pay itself back in about 15 years, and ends up returning about 6%—about equal to an investment in the stock market—over 25 years. That payback time and investment return gets better as your electricity price increases. As long as your state has net metering, every kWh of solar electricity you produce is one you won’t be paying for, and though the difference between $.12 and $.17 seems small, it’s actually a 42% increase in those solar savings.

Take a look at a good example between New Mexico and California, two sunny states with very few solar incentives, but a 5-cent difference in electricity prices:

Every cent counts

As you can see from the image above, for each one-cent increase in electricity price, solar payback time goes down almost 1 full year, investment rate of retuen (IRR) goes up by over 1%, and Net Present Value of a solar investment goes up by almost $2,000. That’s a huge difference for just a penny!

Of course, not all states are as sunny as our examples, New Mexico and California. But even the cloudiest places in the lower 48 are about 65% as sunny, so if you’re living in a place that gets less sun, the improvements in the benchmark numbers become a little smaller.

Still, if you live in New York, New Jersey, Connecticut, Rhode Island, Massachusetts, Vermont or Maryland, you’re paying too much for electricity, and solar can save you thousands in the next few decades. Connect with solar expert in your area to learn more.

Last modified: April 3, 2017

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