California: Solar Economics

Learn the Basics: How Does Solar Financing Work

Key Points

• Cost of solar panel pricing in California depends on factors such as the size of the system and energy consumption
• Solar panels typically have a payback period of 5 to 11 years
• Net Energy Metering allows customers who generate more power than they consume to receive credits or rebates for feeding excess energy back into the grid

How Much Will My Solar Energy System Cost?

The average cost of solar panels in California is $2.68 per watt as of 2023, making a typical 6000-watt (6 kW) solar system $11,235 (after claiming the 30% federal solar tax credit).

Cost of Solar Panel Installation in California by System Size

The size of a solar panel system influences the cost of installation. Although larger solar installations typically have lower per-watt costs, the total cost is still higher because they require more individual panels.

Table 1: Average cost of residential solar systems by system size

How will Solar Affect My Home Value if I Want to Sell in California?

Installing solar panels on your home can increase its value, like a new roof or updated plumbing. According to a study on solar homes by the Lawrence Berkeley National Laboratory (Berkeley Lab) (commissioned by the United States Department of Energy), homebuyers in six out of the eight states studied were willing to pay an extra $15,000.

Additional research has shown that these gains in property value are proportional to the amount of money you save each month on your electric bill and over the life of your home.

Data from a 2008 NREL study concluded that home value increases by $20 for every $1 reduction in yearly utility bills. As a result, a solar energy system that saves a family $500 per year can increase the value of their home by as much as $10,000.

How Long Does it take for Solar Panels to Pay for Themselves in California?

The average payback period for solar panels in California is about 8 years. This is primarily due to the state's high electricity prices and small solar system requirements. In California, a payback period of 5 to 11 years is deemed acceptable.

The "solar panel payback period" is the amount of time it will take you to completely pay off your solar power system through electric bill savings.

It is calculated by subtracting the total cost of installation from the solar incentives and/or rebates and monthly electric bill savings until the total cost is paid off.

For example, if you spend $16,000 on a solar panel system and receive a $4,800 tax break, the total cost after incentives is $11,200. If the solar energy produced by your panels reduces your annual electric bill by $1,500, your payback period would be approximately 7.5 years, assuming electricity rates do not rise.

If you use a solar calculator to calculate your payback period and discover that it will take more than 11 years, your overall savings will most likely be less than the state average of $29,734.

Factors That Affect Your Solar Power Payback Period

There are some things you need to consider when determining the payback period for solar power:

1. Your system's overall cost (how much did it cost to install your solar panels?)
2. Tax credits and rebates for solar energy systems (Have you received credits or rebates for installing solar panels in your home?)
3. Additional incentives (Do you receive any other rewards for installing a clean energy source in your home?)
4. Electricity consumption (On average, how much electricity do you use each month?)
5. Energy production (How effective are your solar panels?)
6. Cost of electricity (How much does your utility's electricity cost?)

How do I Read my Electric Bill?

Here's what you need to know to read your electricity consumption accurately:

• Your monthly electric bill is based on the amount of energy you consumed during the billing period.
• Your monthly usage is measured in kilowatt-hours (kWh) and is determined by an electric meter reading.
• The utility compares the current reading with the previous month's reading.
• The difference between the two readings represents your total monthly usage, which is recorded in kilowatt-hours.

In addition to identifying you as the customer and verifying that energy has been consumed at your property, your electric bill should include the following:

The account number: Your account number, located in the upper left corner of your bill, is your entry point to billing and customer service from your utility. This number is also necessary when enrolling in an energy supply plan, as providers require it to complete your enrollment.

The rate schedule specifies the type of utility service provided and the billing method.

Service dates denote the beginning and the end of the billing period.

A "baseline quantity" is a portion of electricity billed to residential customers at a lower rate. The California Public Utilities Commission determines the baseline amount based on the number of days in the billing period, the season, the region's climate, and whether your primary source of heating or electricity. All electricity consumption above the baseline is charged at a premium.

Public Purpose Programs, such as the low-income discount and energy efficiency programs, are mandated by the state.

Transmission charges are associated with transporting electricity over long distances, from power plants to distribution substations in your neighborhood.

Distribution fees pay for the costs of providing local service. This includes delivering electricity to your home or business, as well as wires, poles, repair crews, and emergency and other customer services.

• Energy charges are calculated by multiplying the applicable rate by the number of kilowatt-hours consumed.
• The Usage Comparison section compares your usage during the current billing period this year to the same billing period last year in terms of total kWh and kWh per day. This data can help you assess your conservation efforts. Customers who reduce their electricity use this summer will receive a 20% discount on their bills under the California 20/20 Rebate Program.
• Rotating Power Outage Your block number represents your location in the utility's planned outage schedule. Outage announcements will specify which outage block was or will be impacted, which may assist you in planning for scheduled outages in your area.

Below is an SCE residential bill illustrating the baseline in the summary's upper portion. A PG&E residential bill depicting the baseline amount under the electric account detail is also shown below. Both display the base usage amount, which is billed at the lowest rate, as well as the usage in the next highest tier, which is billed at a higher rate, and so on.

The Usage Comparison Section will appear as follows:

The Electric Account Detail section will contain a box like this, showing your usage breakdown relative to your baseline quantity:

Total Usage: 1,500 kWh Total Charge: $290

Your electric bill is calculated by multiplying the number of kilowatt-hours (kWh) you consume by the rate per kWh. The calculation is performed according to usage "tiers."

An example of a tier is the charge for your baseline usage, which is the lowest rate. The second tier comprises usage between the baseline and 130 percent of the baseline.

A new and higher rate applies for usage between 130 and 200 percent of your baseline, the third tier. The fourth tier denotes usage between 200 percent and 300 percent of baseline, and the fifth tier denotes usage above 300 percent of baseline, where the highest rate applies.

What happens if I Produce more Electricity than I Use in California?

Net Energy Metering (NEM)

If your system generates more energy than is required, your local utility company may provide bill credits for the excess power you feed back into the grid.

This process, known as net metering, allows individuals, businesses and groups, or community projects with an on-site distributed generation solar system to turn back their meter and sell to their local electric company. The billing system was created and implemented to encourage the use of solar systems in both the residential and commercial sectors.

Customers who install small solar facilities to meet all or part of their onsite electricity needs qualify for the state's net metering program.

Participation in the NEM does not preclude a customer-generator from receiving any other rebate, incentive, or credit offered by an electric utility. More than 90% of all customer-sited solar capacity interconnected to the grid in California's three large investor-owned (IOU) territories (PG&E, SCE, and SDG&E) is on NEM tariffs.

The California Public Utilities Commission (CPUC) approved the NEM program (NEM 2.0) in Decision (D.)16-01-044 on January 28, 2016. The program is available to customers of Pacific Gas & Electric Company (PG&E), Southern California Edison (SCE), and San Diego Gas & Electric (SDG&E).

The program provides customer-generators full retail rate credits for energy exported to the grid and requires them to pay a few fees that more closely align NEM customer costs with those of non-NEM customers. Any customer-generator applying for NEM will:

• Pay a one-time interconnection fee. Customer-generators with facilities under 1 MW must pay a pre-approved one-time interconnection fee based on each IOU's historic interconnection costs. The PG&E fee is $145; SCE $75; and SDG&E $132. Customer-generators with systems exceeding 1 MW are mandated to pay an $800 interconnection fee and pay for all transmission/distribution system upgrades.

• Pay non-bypassable charges. Like other utility customers, customer-generators will pay small fees for each kilowatt-hour (kWh) of electricity they consume from the grid. These fees fund essential programs such as low-income and energy-efficiency programs.

• Transfer to a time-of-use (TOU) rate. If a customer-generator is not already on one, they will be required to take service on a TOU rate to participate in NEM.

If you are interested in installing a renewable system with NEM or encountering issues with your current system, please visit the Resources for Solar Customer page on the California Public Utilities Commission's website.

Net Surplus Compensation and Renewable Energy Credits (RECs)

At the end of a customer's 12-month billing cycle, any excess electricity is paid for at its fair market value. This is called "net surplus compensation" (NSC).

The NSC rate is based on the average price of energy on the market over the past 12 months. This rate is about $0.02 to $0.03 per kWh right now (for up-to-date NSC data, follow these links: PG&E, SCE, SDG&E).

Customer-generators could also get paid for the renewable energy credits (RECs) that come with this extra energy production. To get paid, a customer-generator must register their facility with the Western Renewable Energy Generation Information System (WREGIS) and follow the eligibility requirements in the latest version of the California Energy Commission's Overall Renewable Energy Program Guidebook.

How do I get Compensated for the Electricity I Produce in California?

Any customer-generator who wishes to be compensated for excess electricity produced under the Net Energy Metering program must fulfill these conditions:

1. Pay a one-time interconnection fee. Customers with facilities less than 1 MW must pay a one-time interconnection fee based on each IOU's historic interconnection costs. The PG&E fee is $145, the SCE fee is $75, and the SDG&E fee is $132. Customers with systems larger than 1 MW must pay an $800 interconnection fee and the cost of all transmission/distribution system upgrades.

2. Pay non-bypassable charges. Like other utility customers, customer-generators will be charged a small fee for each kilowatt-hour (kWh) of electricity consumed from the grid. These fees help to fund essential programs such as low-income housing and energy efficiency.

3. Transfer to a time-of-use (TOU) rate. To participate in NEM, a customer-generator must take service on a TOU rate if they are not already on one.

Bill Credits

• To be eligible for excess generation bill credits under the NEM tariffs, one must have paid for energy consumption in accordance with the applicable rate structure.
• NEM customer-generators must pay the same non-bypassable public service charges as other IOU customers, including bond charges from the Department of Water Resources, the public purpose program charge, the nuclear-decommissioning charge, and the competition transition charge.
• Customers who generate NEM are exempt from standby charges.

Net Surplus Compensation and Renewable Energy Credits (RECs)

Additionally, customer-generators may be compensated for the renewable energy credits (RECs) associated with excess electricity generation. To receive compensation, a customer-generator must register their generation facility with the Western Renewable Energy Generation Information System (WREGIS). They must also adhere to the eligibility requirements outlined in the most recent version of the California Energy Commission's Overall Renewable Energy Program Guidebook.

What Factors Affect the Cost of Solar Panel Pricing in California?

Energy Consumption: Homes that consume more electricity will require more solar panels to meet their energy needs.

Type of Solar Panels: The cost of solar panels can vary based on the type of solar panels you select.

Roof Type: Solar panels can be installed on flat, metal, and shingle roofs. Each type of roof requires a unique set of materials and a different amount of labor to install.

Financing Options: How you pay for your solar panels will also affect the total cost of installation.

Additional Considerations and Costs in California

Permits: Before solar installation, all towns and cities in California will require building permits to be filed and inspections to be performed.

Licenses: In California, all solar installers must have a C-46 license. This is a specialized license for solar installation that is not required in many other states.

Homeowners Associations (HOAs): California prohibits HOAs from prohibiting the installation of solar panels, but your neighborhood may still have specific requirements and approval processes.

Warranties: Your solar warranties protect your investment and your home, so you should carefully consider the coverage that comes with your system.

What Financing Options are Available to me in California?

There are three primary ways to pay for solar energy installations: cash purchase, solar loan, and solar lease/power purchase agreement.

Cash Payment

There are two ways to pay for an outright purchase of solar panels: an up-front cash payment and a solar loan. A cash purchase of a solar panel system is the optimal method for maximizing solar savings.

If your solar panel system is designed to produce 100% of your electricity needs, then you have just paid for 25 years' worth of electricity if you purchase your solar energy system upfront.

You are also protected from any future electricity rate increases, and you will receive all financial incentives and rebates associated with solar energy installation.

Solar Loans

The second most common way to acquire a solar panel system is through a solar loan. Solar loans are an excellent financing option because they enable you to go solar and own the system with no money down, and frequently at a lower cost than your current electricity bill. In other words, if you can afford your monthly electricity bill, you can afford to install solar panels on your roof.

With a solar loan, you own the system, whereas a third party owns a solar lease or PPA. This difference has two major implications. With a solar loan, you will be eligible for rebates and incentives for the solar panel system, but you will also be responsible for any future maintenance.

Solar Leases and Power Purchase Agreements

Solar leases and power purchase agreements (PPAs) function similarly, which is why they are frequently grouped together: they are both forms of third-party ownership (TPO) in which the third-party owner installs solar panels on your property, and then sells you the electricity generated by the solar panels at a predetermined rate.

There are subtle differences between leases and PPAs, but their similarities make it simpler to keep track of them.

With a lease/PPA, you will typically lock in an electricity rate for the next 25 years that is 10 to 30 percent lower than your current rate. Historically, leases and PPAs included an escalator to your payments, meaning that each year you would pay more for solar than the year before.

However, the current trend is for leases and PPAs to be locked in at a fixed rate for the duration of the contract. In addition, with a lease/PPA, the third-party owner is responsible for monitoring the system and performing any necessary maintenance, so someone is always looking out for the health of your solar panel system.

In a lease/PPA arrangement, because you do not own the solar panel system, you will not be eligible for financial incentives and rebates associated with solar; rather, the company that owns the system will be.

What are the Benefits of Owning my System?

Solar Reduces Your Energy Costs

The financial benefits of lower monthly electricity costs are one of the primary motivations for solar adoption. The payments for a solar energy system are typically less than the utility bill, and they cannot increase as electric rates rise. After they have been paid for in full, your solar panel system will produce free electricity.

Protection Against Rising Energy Costs

No one enjoys price increases, but it can be tough to stomach when it comes to a necessity. With a solar energy system, you can avoid these inevitable price increases. Even if solar customers must finance their entire system, having a monthly payment that is easy to budget for makes life significantly less stressful. Moreover, once the system is fully paid for, your monthly discretionary income will increase substantially.

Freedom from Centralized Grids

When you switch to solar energy, you automatically reduce your reliance on centralized private or public grids. In a climate of rising demand and variable supply, independence is the safest and most sustainable long-term bet. Solar energy is a secure investment for the future. The addition of a battery backup to your solar power system will increase your independence. In this case, you would not only generate your own power, but also store it for use in the event that the main power grid fails.

Solar Panels Increase Your Property Value

Installation of solar panels is a significant home improvement that significantly increases property values. At least one industry study indicates that it can increase a home's resale value by a greater margin than a kitchen remodel.

Green Energy Helps Save the Environment

Stopping fossil fuels to power your home contributes to preserving the planet's ecosystem. Every kWh of solar energy your residential system generates reduces greenhouse gas emissions, such as CO2, and other harmful environmental pollutants, such as nitrogen oxides, sulfur oxides, and airborne particles.

What does it Mean to go Solar through Third-Party Ownership in California?

Third-party ownership means that the solar panels installed on your roof will be owned and maintained by a solar company. As the homeowner, you simply purchase the power generated by the panels through a power purchase agreement (PPA) or pay a fixed monthly rate for the panels (lease).

PPAs and leases can provide a no-money-down option for going solar while still saving you money. Solar is typically less expensive than standard electricity, so that you will see immediate savings.

A PPA or lease contract typically lasts 15 to 20 years, with the homeowner often having the option to purchase the system outright later in the contract term. In this model, the system's owner will take advantage of the federal tax credit as well as any other available local incentives.

Will Going Solar Affect My Insurance?

Most homeowners' insurance policies consider a solar panel system installed on a home's roof a permanent fixture. In many instances, covering your solar panels under your homeowner's insurance will not necessitate a special add-on (or "rider"), change your plan, or increase your premiums. Nevertheless, each insurance policy is unique, so you should call your insurance provider to confirm that your PV panels are covered.

Solar panels are likely covered by your homeowner's insurance. Still, there are a few things to keep in mind:

Certain types of solar panel systems may require an additional or separate policy from your insurance provider. Other types of solar installations, such as ground-mounted solar panels and solar panel carports, may or may not be covered by your standard policy.

Solar is pricey, so you might wish to increase your coverage limit. The coverage limit of your insurance policy is the maximum amount it will pay toward a covered loss. In 2021, the average cost of a 6-kilowatt solar panel system before tax incentives and rebates was $16,860; many homeowners will install systems of 10 kW or more, making solar an investment worth tens of thousands of dollars. While your solar panels are likely covered under your standard homeowner's insurance policy, you may wish to discuss increasing the coverage limit with your insurer. Thus, you can rest assured that you are protected against all possibilities.

Your insurer might or might not cover damage incurred during installation. When you call your insurer to confirm coverage for solar panels, ask if the coverage extends to the installation process. In the unlikely event that your roof or solar panels sustain damage due to the installation process, qualified solar installers will typically provide you with a warranty on their workmanship.

What Loans are Available to Help me go Solar in California?

Property-Assessed Clean Energy (PACE)

PACE, also known as the Home Energy Renovation Opportunity (HERO), is a loan program that allows homeowners to finance qualified solar energy and energy efficiency projects through their property taxes.

Local or state governments fund the project's upfront cost in collaboration with traditional financiers, and homeowners repay their local authority through increased property tax bills, typically over 20 years. PACE programs are currently available in more than 20 states, including California.

Property Tax Exclusion for Solar Energy Systems

In California, a reassessment of your property at its full market value can be triggered in two primary ways: when you sell or purchase a home or when new construction or major renovations are completed. Section 73 of the state's revenue and taxation code exempts qualifying new solar installations from property taxes. Installing solar panels on your property will not increase your property taxes. This tax exemption was originally set to expire in 2016 but has now been extended until January 1, 2025.

Solar for Affordable Housing

The Single-Family Affordable Solar Housing (SASH) Program in California offers incentives to eligible low-income single-family homeowners to offset the initial costs of installing solar. The program offers a single upfront incentive level of $3/Watt to all eligible applicants within the service territories of PG&E, SCE, and SDG&E. GRID Alternatives administers SASH under the direction of the CPUC.

The state's Multifamily Affordable Solar Housing (MASH) Program, which is currently closed to new applicants but may have a waiting list, offers incentives ranging from $1.10 to $1.80/Watt for affordable multifamily housing that meets certain requirements. In SDG&E territory, it is administered by PG&E, SCE, and the Center for Sustainable Energy.