Updated: January 21, 2014

In the desert regions of Arizona, a family of four typically spends more than $300 per year on electric water heating. By installing a solar water heater, the state's desert homeowners could save between 50 and 90 percent on their bill (depending on the efficiency of the solar water heating system and the amount of hot water used). The Solar Rating and Certification Corporation (SRCC) has compiled a list of solar water heaters and their efficiencies.

Initial investment in a solar water heater can vary greatly. Costs can range from $4,000 to $7,000 (installed), though some systems, such as do-it-yourself systems, cost less. Out-of-pocket costs can be reduced significantly through various financial incentives. The cost of the system can be offset by the Federal tax credit (30 percent) and State tax credits (25 percent) of the purchase price. The State tax credit has a $1,000 maximum cap. In addition to state and federal tax credits, check with your utility company to see if they offer a rebate for the purchase of solar water heater.

Most solar water heaters will recoup their initial investments during the first ten years of operation, some within the first few years. However, no other appliance is judged on its payback period, and for that reason we recommend homeowners consider a solar water heater as an investment, and view the savings as a return on investment.

The Solar Life Cycle Costing Analysis, a downloadable Excel spreadsheet available here, allows users to input specific information to obtain a personalized economic analysis for a solar water heating system. This tool also allows you to figure the purchase of a solar water heater as part of your mortgage (financed over 30 years) and calculate the device's internal rate of return and its net present value. Although this tool uses a 30 year time frame, most solar waters heaters will not last that long. The spreadsheet provides for a one-time maintenance cost during the 15th year, in addition to annual maintenance costs.

In order to use this spreadsheet you will need to know the system cost, how many kilowatt hours the system will save on an annual basis (SRCC system efficiency), consumer's tax bracket, and consumer's utility rate information. The program, based on user information, will produce a chart that estimates the monthly savings and cash flow based on financing a solar system as part of a home loan.