Solar savings estimates from installers are notoriously optimistic. This guide walks you through an honest calculation using your actual data — so you know what to expect before signing anything.
Step 1: Find Your Annual Electricity Usage
Pull 12 months of electricity bills (or log into your utility's online portal). Add up all 12 months of kWh consumption. The US household average is about 10,500 kWh/year, but you might be quite different — especially if you have an EV, electric heat, or a pool pump.
Step 2: Find Your Effective Utility Rate
Divide your total annual bill by your annual kWh consumption. This is your "effective rate" — all fees included. It's usually higher than the advertised "energy charge" rate because it includes distribution, transmission, and other fees.
Example: Annual bill = $2,400 ÷ Annual usage = 10,500 kWh = 22.9¢/kWh effective rate
Step 3: Size Your System
A solar system producing 100% of your usage is ideal but not always achievable (roof size, shading). The formula:
System size (kW) = Annual kWh ÷ (Daily sun hours × 365 × 0.80)
The 0.80 accounts for system inefficiencies (inverter losses, temperature, wiring). For 10,500 kWh/year in Phoenix (6.5 sun hours):
10,500 ÷ (6.5 × 365 × 0.80) = 5.5 kW system
Step 4: Calculate Gross Annual Savings
Annual savings = System size × Sun hours × 365 × 0.80 × Your rate
Using our Phoenix example: 5.5 × 6.5 × 365 × 0.80 × $0.13 = $1,356/year
Step 5: Apply Incentives to Get Net Cost
| Cost Component | Example ($) |
|---|---|
| System gross cost (5.5 kW @ $3.20/W) | $17,600 |
| Federal ITC (30%) | -$5,280 |
| Arizona state tax credit (25%, up to $1,000) | -$1,000 |
| Net cost | $11,320 |
Step 6: Calculate Payback and 25-Year Return
Payback = $11,320 ÷ $1,356/yr = 8.3 years
25-year savings (with 3% annual rate escalation): ~$47,000
25-year net return (subtract system cost): ~$35,700
What About Electricity Rate Increases?
US electricity rates have risen an average of 3.4% annually since 2010. If rates continue rising, your savings accelerate each year. At 3% annual escalation, a system with $1,356 savings in year 1 generates $2,170 in savings in year 20 — 60% more. This is why 25-year savings estimates are significantly higher than simple 25× math.
📊 Use our calculator: Enter your ZIP code for a calculation that uses your actual local utility rate (live EIA data) and current state incentives — not national averages.