States With the Highest ROI from Solar

Climate change-induced monster storms. Rising inflation. Overstressed, aging electrical grids. All these factors may contribute to the sticker shock many Americans feel when they open their electricity bills in 2022.

However, consumers looking for ways to lower electricity costs may find hope in the new solar incentives that are part of the recently passed Inflation Reduction Act (IRA). The IRA includes a 30% federal tax credit that will cover the installation of residential solar panels until 2034. This, combined with robust state-level incentives in some states, makes solar power an attractive way to lower electricity costs.

But would an upfront investment in solar "pay off" in your state? MoneyGeek analyzed factors like solar panel installation costs, state-level incentives, home solar power production and more to find the best states for solar. Our full methodology and analysis limitations are discussed below.

Some surprising findings? Some states are making it very attractive for homeowners to go solar, and the average rate of return on investing in solar overall is high — 14.6%, to be exact.

MoneyGeek also looked at the states with the highest electricity costs. Hawaii is first on the list, with consumers spending, on average, $2,841 per year. Connecticut comes in at a distant second, with consumers spending around $2,170 per year. Homeowners in Alabama, California and Georgia pay about $2,000 or more annually for electricity.

Fortunately, with a 48.3% return on investment and a savings of $2,841, houses with solar in Hawaii could see the cost of their solar panels covered after only a few years.

For those living in states with higher electricity costs, houses with solar may also benefit from state income tax credits. While you might not see your state in the top rankings for return on investment, the upfront costs of going solar are much lower due to generous state incentives.

In New Mexico, those solar savings can be up to 50%, while in South Carolina and Connecticut, two other states in the top ten for high electricity costs, solar savings with incentives amount to 26% and 22%, respectively.

For the average house with solar panels, the amount of time it takes to pay off the initial investment is 7.6 years. But this average payback period also varies by state. In states with plenty of sunlight and decent state incentives, that payback time can be much shorter.

For example, in New Mexico and Hawaii, solar panels will pay themselves off in about 2.4 and 2.5 years, respectively. For Florida, eight years is the average payback period.

At the bottom of the list, homeowners with solar in rainy Washington will see a 17.9-year delay, on average, before they recoup their initial investment.

The sweet spot seems to be for those who live in states with many peak sun hours and high energy costs. While the national average solar savings is around $1,100 annually, homeowners with solar panels in states like Hawaii and California can easily cover their yearly electricity costs. Arizona and Nevada, where the average electricity costs for 2022 are estimated to be around $1,766 and $1,539, respectively, will also break even.

Solar panels, which are now expected to last at least 25 years, can be part of an overall eco-friendly approach toward savings. As climate events increasingly impact both the cost of electricity and homeowners insurance, solar panels can offer immediate financial benefits and reduce the strain on aging or compromised power grids.

For example, in February 2021, Texas suffered an electrical grid failure during a winter storm that resulted in five million people living without power and at least 246 deaths. The increasing number of climate events resulting in power outages make solar power, combined with solar battery storage, an attractive option for homeowners in states prone to extreme weather events.

The 30% tax credit from the Inflation Reduction Act can make the upfront cost of solar panels more affordable, while many states have exemptions that keep property taxes from rising despite the added value to your home.

So what should homeowners consider as they calculate solar savings and weigh the costs and benefits of installing solar panels? MoneyGeek explored some key factors to keep in mind.

We analyzed the average costs of installing a 5 kW solar panel system at home by state and explored federal and state solar incentives to find the states that get the highest return on their investment in solar.

We calculated home solar power production using the average number of peak solar hours, energy consumption figures from the U.S. Energy Information Administration (EIA) and the cost of electricity per watt by state to find the amount of electricity produced by 5 kW solar panels. Annual electricity savings were calculated using the U.S. Energy Information Association's figures for the average electricity bill in each state and the cost offset by solar power production.

Solar payoff periods were determined by dividing the total cost of installing solar panels, after federal and state incentives, by annual electricity savings.

Limitations: Rate of return estimates are based on averages and the assumption that the average lifespan of a solar panel is around 25 years. ROI may vary based on factors like the efficiency and quality of panels used, the location of the solar panels, and whether or not net metering is available by state, which may increase returns on solar panel installation. Our analysis uses current energy prices and assumes they’ll stay the same for the purpose of measuring ROI over 25 years, but energy pricing is subject to change.

If you have any questions about our findings or methodology, please reach out to Melody Kasulis via email at melody@moneygeek.com.

The data points presented are defined as follows:

• Rate of Return: The internal rate of return for each state based on the calculated Annual Electricity Savings With Solar and the Cost of a 5 kW System After Federal and State Credits. See definitions of these metrics below.
• Solar Payback Period in Years: Divides the total cost of installing solar after federal and available state solar incentives by annual electricity savings with a 5 kW solar panel system.
• Annual Electricity Savings with Solar: Annual Electricity Bill less the calculated dollar value of the solar power produced by a 5 kW system. We calculated solar power production using the average power consumption by state, peak solar hours, the average price of electricity (cents/kWh), and power generated from a 5 kW system.
• Cost of 5 kW System: The average cost of a 5 kW system by state, minus the 30% federal tax credit and any available state income tax credits and/or sales tax exemptions.
• Annual Electricity Bill: Average monthly electricity bill by state from the EIA for 2022.
• Annual Electricity Savings with Solar (5 kW system): Amount of money saved on electricity per year by supplementing electricity consumption needs with solar power.