Long Run Decisions and Solar Panels: Why We're Bad at Sustainable Investing

Solar panels are becoming an increasingly popular sustainability initiative for many reasons. Their costs have declined significantly in recent years, making them more accessible and affordable. In Ohio, 16 out of 29 climate action plans identify solar panels and town solar programs as one of the top three most important climate actions to reduce emissions.

Because of their popularity, many people wonder if solar is right for them and whether it can actually save them money. The short answer is yes: in most cases, solar saves you money over 25 years of using electricity in your home. Home solar is essentially a way to buy electricity in bulk—similar to purchasing a giant can of coffee grounds from Costco instead of buying 50 individual cups at Starbucks. The $25 can of coffee grounds costs more upfront but pays for itself after just nine lattes at $3 each, ultimately netting $125 in savings over its lifespan.

The Economics of Solar Panels

For an average home in Ohio that requires 17,420 kWh of electricity per year:

• Grid Electricity Costs: Ohio’s electricity comes from 24% coal, 59% natural gas, and 12% nuclear energy. This results in an average cost of 14.12 cents per kWh—equal to $2,460 per year in electricity payments.

• Solar Panel Costs: Installing home solar panels costs approximately $31,886 upfront, plus $3,000 every ten years to replace the inverter.

Rebates and Incentives

• Federal Incentives: As of this writing, the Residential Clean Energy Credit offers a 30% tax credit on the cost of new clean energy equipment for your home. For a typical solar installation, this would result in a $9,566 tax credit the following year. However, this incentive may not be available indefinitely.

• State and Local Incentives: Depending on where you live in the U.S., you may qualify for additional state and local rebates through property tax or sales tax credits, net metering programs, or Solar Renewable Energy Credits (SRECs). In Ohio:

  • Sales tax on solar equipment is fully exempt, saving around $1,000 at installation.

  • In certain cities, property upgrades from solar panels are exempt from property taxes.

  • Net metering allows customers to receive credits for excess energy sent back to the grid; however, utilities often credit customers at rates lower than the full retail rate.

  • SRECs are certificates awarded for every 1,000 kWh generated by a solar system. These can be sold to utility companies to help them meet renewable energy goals. In Ohio, SRECs are valued at about $3 each—resulting in an additional $27 per year in savings.

Economic Aside: Social vs. Economic Benefits or Why your Cost-Benefit Analysis is Wrong

When evaluating decisions like installing solar panels, you’re likely familiar with cost-benefit analysis—a simple comparison of economic costs and benefits over time. This analysis typically considers only direct monetary costs coming out of your pocket or tax deductions you may receive. For example, when evaluating solar panels economically, we would compare:

1. The total costs of installing and maintaining the panels over time.

2. The money saved by reducing monthly grid electricity payments.

3. Any additional tax benefits.

Most blogs or informational materials about solar panels stop here. However, there are additional benefits that economists call social benefits—benefits that go beyond simple accounting costs. These can affect either the individual making the decision or society as a whole. Ignoring these benefits often undersells the total value of solar panels and leads to incorrect decision-making.

In the case of solar panels, social benefits include:

1. Decreased Carbon Emissions: Reduced emissions prevent further warming and mitigate negative impacts like natural disasters fueled by climate change.

2. Improved Air Quality: Reduced fossil fuel usage improves air quality by lowering rates of asthma and reducing the risk of premature death. This leads to better human well-being and lower medical costs for families while increasing productivity through healthier populations.

3. Enhanced Water Quality: Solar development designed as green infrastructure can improve water quality in streams, lakes, and rivers while reducing nitrate contamination in drinking water. This boosts agricultural efficiency and improves community health.

The figure below illustrates this concept using supply-and-demand curves to show how many solar panels we might expect to see installed based on their costs.

• Producers (Supply Curve): Companies supplying solar panels want to produce more as prices increase (red line).

• Homeowners (Demand Curve): Homeowners weigh the costs versus benefits when deciding whether to install solar panels. As prices rise, demand decreases (light blue line).

If only economic costs are considered (e.g., installation costs versus grid electricity), we would expect Q1 number of solar panels installed. However, when social benefits are included—such as environmental improvements—homeowners perceive greater value from switching to solar (dark blue line). For example:

• If a homeowner initially perceives that switching to solar electricity costs $0.50 per kWh (after rebates), they might also recognize an additional $10/kWh benefit from avoided environmental damage or improved health outcomes.

• This shifts the demand curve outward (to Q2), resulting in more installations than predicted by economic factors alone.

Only accounting for economic costs, greatly undersell the values of solar panels as well as underestimates the amount that should be utilized and produced. 

Figure 1: The difference in supply vs demand when accounting for purely economic benefits vs accounting for economic and social benefits.

Valuing Climate In Practice

For those interested in climate action, accounting costs aren’t the only factors influencing decision-making. Through CIW, we have access to datasets that estimate dollar values for social benefits like reduced carbon emissions or improved air quality.

Here’s how these benefits translate into measurable impacts:

• Reduced Carbon Emissions: Switching from grid electricity to solar saves approximately 0.28 lbs of CO2 per kWh in Ohio—equaling 2.2 metric tons annually for an average household. This is equivalent to planting 110 trees or driving 11,000 fewer miles. This translates into a savings of $170 per year

• Improved Air Quality: A 10% increase in renewable energy consumption improves air quality by 0.62%. For Ohio cities, this reduces asthma rates and premature deaths while lowering hospital costs and increasing workplace productivity. If even 1 household switches to solar panels, this benefits the community by $5,950 through decreased health care costs and increased productivity. 

• Increased Home Value: Solar panels increase home resale values by approximately 4%. For an average home in Ohio, this translates into an extra $9,200 at closing.

Figure 2: Summary of all the benefits calculated for installing residential solar panels. Estimated for a 17,420 KwH solar panel for an average home in Ohio. Source: all calculations are my own.

Total Solar Costs

The graph below shows cumulative spending over a typical solar panel lifespan (25–30 years) for households in Ohio. It compares yearly payments for grid electricity versus various scenarios for solar:

1. Gray - Yearly grid electricity payments.

2. Yellow - Installation costs minus federal/state/local rebates.

3. Orange - Total economic plus social benefits from reduced carbon emissions and improved air quality.

Figure 3: Cumulative spending on electricity for grid electricity, solar panels, and solar panels plus social benefits. Source: All calculations are my own.

Depending on how you view this decision, if you only care about the economic costs of your decision or you care about the total social and environmental cost as well, the solar panels end up being less expensive than using grid electricity in either 13 years or 10 years, respectively. From a purely economic perspective, households can expect savings of about $10,000-$20,000 over a 25-year lifespan compared to grid electricity alone.

Economic Aside - If solar panels are better in the long run both for people who do and don’t care about social and environmental issues - why don’t more people have them?

The answer lies in human psychology—specifically time-discounting bias. Although solar panels end up being cheaper in the long run, the large upfront cost of solar panels often “feels worse” to pay instead of smaller payments over time, even if those smaller payments are more expensive. People tend to prioritize immediate costs over future savings because distant outcomes feel less significant today. It’s similar to procrastinating on homework or saving for retirement because we perceive those futures as distant and don’t give them as much consideration in our decisions as we give ourselves in the present.

Figure 4: Using net present value to consider the decision of watching Netflix now versus doing homework now.

Decision Making In Practice 

Using net present value (NPV), we can quantify this bias by summing up the value of all the cumulative spending in the chart above and discounting (or shrinking) payments in the future as this represents the amount of money that it “feels” like to spend in this present moment.:

• The NPV of using grid electricity for 25 years is about $35,000.

• The NPV of switching to solar is approximately $36,000 when considering only economic factors—making it feel like a $1,000 loss despite actual savings of $10,000 over time.

• For homeowners who value social/environmental impacts as well as economic ones, the NPV drops to $28,000 due to perceived added benefits—making it easier to justify the upfront investment.

Figure 5: Using Net present value to evaluate the total costs for grid electricity, solar panels, and solar panels plus social benefits. Source: all calculations are my own.

Conclusion

Solar panels are well worth their investment over time. From a purely economic perspective, households can expect savings of about $10,000-$20,000 over a 25-year lifespan compared to grid electricity alone. However, many homeowners hesitate due to the large upfront cost feeling worse than smaller recurring payments—a psychological barrier rooted in time-discounting bias.

For households that value social and environmental impacts such as reduced CO2 emissions and cleaner air quality, the total benefits increase significantly—to around $5,950 over time—making it easier to justify even with high initial costs.

By considering both economic reasoning and human decision-making processes alongside scientific data on sustainability initiatives like solar energy adoption, we can make better-informed decisions that align with long-term environmental goals while addressing real-world behavioral challenges.