The initial cost of a solar hot water system is more expensive than a conventional gas or electric hot water system. However, energy savings over the lifetime of the system typically make solar hot water systems a more cost-effective option. Energy savings depend on the size and type of system installed, as well as on household hot water demand. Solar hot water system owners generally save 50-85% in annual energy costs over traditional electric hot water heaters.

A simple payback period is defined as the amount of time required to recover an initial investment through reduced or avoided energy costs. This payback period can vary from system to system, but as fuel costs rise, payback periods will consistently lessen. After the simple payback period, system owners enjoy the benefits of a free energy source—the sun—and are cushioned from future energy shortages and price increases.

As of 2006, the federal government is offering homeowners a tax credit of up to $2000 or 30% of the total installed cost of a residential solar hot water system, whichever is less. For businesses, there is no cap on the 30% tax credit. This Federal Solar Tax Credit shortens payback periods and makes purchasing a solar thermal system more affordable.

A rough estimate calculator:

1. Determine the net cost of the installed system. Net costs include the total installed cost minus any tax credits or rebates.
2. Determine annual fuel savings costs. This is the cost that you would have paid for gas or electric using a conventional gas or electric water heater.
3. Divide Step 1 (the total installed costs) by Step 2 (the annual fuel savings cost). This is the simple payback period in years.

In the example above it would take about 10 years for the system to pay for itself. Note that this simple payback period is just an approximation. For more accurate estimates of the payback period, depreciation, maintenance, and operational costs must also be considered.