Solar Panels: How They Work, Costs, and Installation

Solar panels are now the fastest-growing source of new electricity worldwide. IEA and IRENA data indicate the world added roughly 420–440 GW of solar PV in 2023 alone, bringing global solar capacity to about 1.4 TW (IRENA, 2024; IEA, 2024). Costs have fallen dramatically—utility-scale solar’s levelized cost of electricity dropped around 89% between 2010 and 2022 (IRENA, 2023)—making solar panels a mainstream option for homes, businesses, and utilities.

This guide explains how solar panels work, compares technologies, breaks down costs and incentives, and walks you through sizing, installation, maintenance, and environmental impact—using data from NREL, IEA, IRENA, LBNL, and other credible sources.

What are solar panels? Types and key components

Solar panels (photovoltaic or PV modules) convert sunlight directly into electricity. A typical residential solar energy system includes:

PV modules: Series-connected solar cells laminated between glass and a backsheet or glass-glass construction.
Inverters: Convert the panel’s direct current (DC) into alternating current (AC) used by your home and the grid. Options include string inverters (often with module-level power electronics/optimizers) and microinverters (one per panel).
Racking and mounts: Attach modules to roofs or ground arrays; include ballast or penetrations, with wind/snow load engineering.
Balance of system (BOS): Wiring, combiner boxes, rapid-shutdown devices, disconnects, and monitoring hardware.
Optional batteries: Store excess solar for nighttime use, backup power, or rate arbitrage; integrated with hybrid inverters or AC-coupled.

Common module types by cell structure and packaging:

Monocrystalline (mono): Single-crystal silicon wafers; highest efficiency and most common today.
Polycrystalline (poly): Multi-crystal silicon; lower cost, somewhat lower efficiency; declining market share.
Thin-film: Semiconductor layers (e.g., CdTe, CIGS, a-Si) deposited on glass or flexible substrates; lower efficiency but strong in hot or diffuse-light conditions; utility-scale niche.
Bifacial: Cells capture light from the front and reflected light from the rear; typically glass-glass construction; widely used in utility-scale for 5–15% higher yield depending on site albedo.

Key components inside a module:

Solar cells: Silicon p-n junctions create an electric field to separate charge carriers when photons strike the material.
Encapsulants and backsheets: Protect cells from moisture and mechanical stress; glass-glass designs improve durability.
Junction box and bypass diodes: Consolidate wiring and mitigate shading impacts across cell strings.

How solar panels work: PV physics, efficiency, and performance metrics

At the cell level, photons excite electrons across the silicon bandgap, creating a voltage and current. The module’s power (watts) is current × voltage at its maximum power point (MPP). Because irradiance and temperature vary, real-world output is below laboratory ratings.

Core performance terms:

Efficiency: The percentage of sunlight converted to electricity. Modern mono modules commonly achieve 20–23% at standard test conditions (STC: 1000 W/m², 25°C cell temperature, AM1.5 spectrum). Commercial TOPCon and heterojunction (HJT) lead the market in module efficiencies around 22%.
Temperature coefficient: Power typically drops about −0.30% to −0.40% per °C rise in cell temperature above 25°C. Lower absolute values are better in hot climates (see manufacturer datasheets).
STC vs PTC/NMOT: STC ratings are lab-based. PTC (PVUSA Test Conditions) and NMOT (Nominal Module Operating Temperature) better approximate field conditions (hotter cells, lower output).
Capacity factor: The fraction of time a system generates at rated power over a year. Typical residential PV capacity factors range from ~14–22% depending on location, orientation, shading, and system design (NREL).
Degradation rate: Output slowly declines over time due to environmental stress. Meta-analyses show median degradation around 0.5%/year for crystalline silicon, with best-in-class modules closer to 0.2–0.4%/year (NREL, Jordan et al.; LBNL).

Real-world energy yield

Specific yield: Annual production per unit of capacity, expressed as kWh/kW-year. In the U.S., many sites fall between ~1,300 and 1,800 kWh/kW-year (NREL PVWatts), driven by solar resource and system design.
System losses: Inverter efficiency, wiring, soiling, mismatch, temperature, and shading typically reduce output by 10–20% from nameplate potential. Module-level power electronics help mitigate partial shading and mismatch.

Comparing panel technologies: monocrystalline, polycrystalline, thin-film, and bifacial

Monocrystalline silicon

Efficiency: Generally 20–23% at module level.
Pros: Highest power density (more watts on limited roof area); strong reliability record; broad supplier ecosystem.
Cons: Slightly higher costs; performance drops in high heat (mitigated by better temperature coefficients in newer cell types like HJT/TOPCon).

Polycrystalline silicon

Efficiency: Typically 16–19%.
Pros: Historically lower cost; adequate for larger roofs where space is not constrained.
Cons: Lower power density; diminishing market availability as mono costs have fallen.

Thin-film (CdTe, CIGS)

Efficiency: Commercial modules often 17–21% (CdTe utility-scale leaders higher on a module-area basis); CIGS varies by supplier.
Pros: Lower temperature coefficient and stronger diffuse-light performance; potential for lower embodied energy; vertically integrated recycling in some supply chains (e.g., CdTe).
Cons: Less common in residential; lower power density; limited supplier base.

Bifacial modules

Efficiency/yield: Front-side efficiency similar to mono; rear-side gains of ~5–15% typical, higher on bright, reflective surfaces (snow, white gravel) and elevated racking.
Pros: Higher energy yield for the same DC nameplate; especially compelling for utility-scale trackers and some flat-roof commercial sites.
Cons: Modeling complexity; rear-side shading and soiling matter; residential benefits vary and may be modest on dark roofs.

Durability and warranties

Product warranties: 12–25 years against defects; premium modules increasingly offer 25-year product coverage.
Performance warranties: 25–30 years, often guaranteeing ~84–92% of initial output by year 25, depending on technology and manufacturer.

Costs, incentives, and payback: pricing, tax credits, and ROI examples

Installed costs vary by market, system size, and component choices.

Typical installed cost ranges (U.S.)

Residential: Median installed price around $3.0–$4.0/Wdc in 2023–2024 datasets; LBNL’s Tracking the Sun (2024) reports ~$3.5/Wdc median for 2023 residential systems.
Commercial/industrial: Often $1.5–$2.5/Wdc depending on size and complexity (LBNL, NREL benchmarks).
Utility-scale: Frequently $1.0–$1.5/Wdc for large ground-mounted plants (LBNL Utility-Scale Solar, NREL).

Incentives (U.S.-centric examples)

Federal Investment Tax Credit (ITC): 30% through 2032 under the Inflation Reduction Act (IRA), applicable to residential and commercial projects meeting domestic content and labor rules for certain adders (DOE/IRS guidance).
Direct pay and transferability: Nonprofits, tribes, and municipalities may access credits via direct pay; developers can transfer credits (IRA provisions).
State/utility incentives: Net metering or net billing, solar renewable energy certificates (SRECs) in some states, property and sales tax exemptions, and low-to-moderate income (LMI) rebates (DSIRE database).
Commercial depreciation: Accelerated depreciation (MACRS) and potential bonus depreciation improve ROI for businesses (IRS).

Net metering vs net billing

Net metering: Exports credited at retail rates. Many states still offer this policy, though terms can cap credits or monthly/yearly rollovers.
Net billing/NEM 3.0-style: Exports credited at a value-of-solar or wholesale-based rate, often lower than retail. This favors self-consumption and can strengthen the case for batteries and load shifting (state commission filings).

ROI examples

Example A: High-rate state with net billing

System: 7 kWdc rooftop at $3.2/Wdc = $22,400 gross. 30% ITC → $15,680 net.
Production: 7 kW × 1,500 kWh/kW-year = 10,500 kWh/year (NREL PVWatts midrange).
Utility rate: $0.22/kWh; exports compensated at lower rates yields 70–80% bill reduction in practice. Assume effective savings $0.17/kWh across self-consumed and exported energy.
Annual bill savings: ~10,500 × $0.17 = $1,785.
Simple payback: $15,680 / $1,785 ≈ 8.8 years; implied IRR often 8–12% depending on escalation and O&M.

Example B: Moderate-rate state with robust net metering

System: 8 kWdc at $3.1/Wdc = $24,800 gross. 30% ITC → $17,360 net.
Production: 8 × 1,400 = 11,200 kWh/year.
Retail rate: $0.14/kWh net metered.
Annual savings: 11,200 × $0.14 = $1,568.
Simple payback: $17,360 / $1,568 ≈ 11.1 years; IRR typically 6–9% depending on assumptions.

Method notes

Use actual quotes, shading analysis, and your rate structure with season/time-of-use (TOU) details. Model with NREL PVWatts or full PVsyst and include expected degradation (~0.5%/yr) and O&M.
Panel and inverter warranties can reduce lifecycle risk; inverter replacement may occur around year 12–15 for string inverters (budget $0.15–$0.30/W for a future swap).

Sizing and system design: roof vs ground, grid-tied vs off-grid, batteries

Right-sizing begins with your load and site.

Load and site assessment

Annual consumption: Pull 12–24 months of bills. Many homes fall between 7,000 and 12,000 kWh/year; EVs and heat pumps can add 2,000–5,000+ kWh/year each.
Solar resource: Orientation and tilt matter. South-facing roofs at 20–40° give strong yields; east-west can be effective, often with flatter profiles that align with morning/evening loads.
Shading: Trees, dormers, chimneys reduce output. Use shade analysis tools (e.g., Solmetric SunEye) and module-level power electronics where partial shading is unavoidable.
Structural: Verify roof age, framing, and local wind/snow design loads. Many installers recommend reroofing if shingles have <5–10 years remaining.

Roof vs ground mount

Roof: Lower BOS cost, shorter wiring runs, fewer permitting challenges. Space-limited and roof geometry may constrain layout.
Ground: More flexible orientation/tilt, easier O&M, potential for bifacial and tracking. Requires yard or acreage, trenching, and posts or ballast; typically higher soft costs.

Grid-tied, hybrid, or off-grid

Grid-tied: No batteries; simplest, lowest cost per watt. Uses the grid as backup; subject to local net metering/billing rules.
Hybrid (grid-tied plus storage): Adds a battery for backup and TOU optimization; supports self-consumption under net billing regimes.
Off-grid: Standalone with batteries and often a generator; designed for critical reliability and seasonal autonomy. Requires careful load management and typically higher costs.

Battery storage basics

Sizes: Home batteries typically 10–15 kWh usable per unit; two units (20–30 kWh) cover longer outages or larger homes.
Economics: Installed costs often $1,000–$1,600 per usable kWh in recent U.S. quotes, varying by brand, labor, and code requirements (NREL/LBNL benchmarks). Savings come from TOU shifting, demand charge management (commercial), and resilience value; pure bill savings may be modest without TOU or incentives.
Backup: Most systems back up critical loads via a subpanel; whole-home backup requires larger inverters and batteries.
Safety: Lithium iron phosphate (LFP) chemistries dominate for residential due to thermal stability; compliance with UL 9540/9540A and local fire codes is essential.

Installation process and timeline: permits, steps, and common pitfalls

Typical timeline (U.S.) is 6–12 weeks from contract to energization, varying by jurisdiction and utility.

Steps

Site survey and design: Roof measurements, structural review, electrical assessment (main panel capacity and service). Preliminary layout and single-line diagram.
Permitting: Apply to the Authority Having Jurisdiction (AHJ) with plansets that meet the National Electrical Code (NEC), fire setbacks, wind/snow loads, and rapid shutdown requirements (NEC 690.12).
Utility interconnection: Submit application, engineering review, and net metering/billing enrollment. Timelines vary significantly by utility.
Procurement: Order modules, inverters, racking; confirm availability and lead times.
Installation: Mount racking, set modules, run wiring, install inverters/battery, labeling per NEC.
Inspections: AHJ electrical/structural inspection and utility meter swap or permission-to-operate (PTO).

Common pitfalls

Roof condition surprises: Build reroofing into scope if needed.
Main panel upgrades: Many homes have 100–150 A services; PV plus EVs/heat pumps may require a service upgrade or a load-management device.
Shading underestimates: Small obstructions can cause disproportionate losses; validate with measurements, not just satellite imagery.
Interconnection delays: Some feeders are capacity constrained; early utility engagement helps.
Paperwork: Incentive and tax credit documentation must be accurate; keep all invoices, spec sheets, and commissioning reports.

Maintenance, lifespan, warranties, and end-of-life recycling

Maintenance

Routine O&M: Most residential systems are low-maintenance. Monitoring portals flag underperformance. Occasional visual checks for debris, pest guards, and unobstructed airflow are advisable.
Cleaning: In many climates, rain provides adequate washing; dry and dusty regions may benefit from periodic cleaning. Avoid abrasive tools; use deionized water if possible. Soiling losses can range from 2–7% or higher in dusty seasons (NREL/IEA PVPS Task 13 case studies).
Inverters: String inverters often have 10–12 year standard warranties with optional extensions. Microinverters and DC optimizers frequently carry 20–25 year warranties.

Lifespan and performance

Module life: Many systems operate well beyond 25 years. With a 0.5%/year degradation assumption, a module would retain ~88% of initial output at year 25; tighter warranted degradation is common on premium products.

Recycling and end-of-life

Policy and infrastructure: The EU includes PV under WEEE, mandating collection and recycling; PV Cycle supports takeback. In the U.S., Washington State has an extended producer responsibility law; California treats some PV as universal or hazardous waste under specific rules.
Processes and costs: Glass, aluminum, and silicon recovery is feasible; thin-film (e.g., CdTe) has established manufacturer-run recycling. Current U.S. recycling costs are often higher than landfill disposal (estimates on the order of $12–$25 per module), though materials recovery and policy are evolving (IEA PVPS Task 12, state agency reports).
Circular design: Glass-glass modules and lead-free solders reduce environmental risk; research aims to enable higher-value silicon and silver recovery.

Environmental impact, emissions savings, and frequently asked questions

Emissions and energy payback

Life-cycle emissions: Utility-scale crystalline silicon PV typically ranges ~20–50 gCO2e/kWh depending on manufacturing energy mix and system design; thin-film can be lower (IPCC AR6; NREL harmonization studies). This is roughly 10–20× lower than natural gas and 40–80× lower than coal on a lifecycle basis.
Energy payback time (EPBT): Modern systems commonly recoup their manufacturing energy in about 1–2 years in moderate to sunny climates (IEA PVPS Task 12; Fraunhofer ISE analyses). With 25–30+ years of operation, most energy generated is net-zero relative to manufacturing inputs.
Water and land: PV has minimal operational water use compared with thermal power plants. Land requirements for utility-scale fixed-tilt PV often fall around 5–7 acres per MWac, 7–10 acres with single-axis trackers (NREL). Co-location with agriculture (agrivoltaics) and pollinator-friendly vegetation can improve land productivity.

Biodiversity co-benefits

Studies from Argonne National Laboratory and others show native prairie and pollinator plantings under/around arrays can increase pollinator abundance and species richness versus turfgrass or gravel, while reducing mowing and irrigation.

By the Numbers

~420–440 GW: Solar PV added in 2023 (IEA/IRENA).
~1.4 TW: Global cumulative PV capacity by end of 2023 (IRENA).
20–23%: Typical module efficiency for mono modules shipping today (manufacturer datasheets; NREL).
−0.30% to −0.40%/°C: Typical temperature coefficient of power.
~0.5%/yr: Median PV degradation rate (NREL/LBNL analyses).
1,300–1,800 kWh/kW-year: Typical U.S. specific yield (NREL PVWatts).
$3.0–$4.0/Wdc: U.S. residential installed price range in recent datasets (LBNL/NREL).

FAQs

Do solar panels work in winter or cloudy weather? Yes. Output scales with sunlight, but cold temperatures actually boost efficiency. Snow reduces output while coverage persists; steep tilts and dark panels shed snow faster. Annual models include seasonal effects.
What about hail and extreme weather? Most modules are tested for hail impact (e.g., 25 mm at 23 m/s) and high wind/snow loads per IEC/UL standards. In hail-prone regions, consider modules rated for larger ice balls and tempered glass thickness; insurance may cover storm damage.
Will solar panels void my roof warranty? Reputable installers coordinate with roofing manufacturers; many roofs maintain warranties with approved flashing and penetrations. Ask for documentation and installer workmanship warranties.
How much roof space do I need? Roughly 50–70 square feet per kWdc for modern high-efficiency modules. A 7 kW system may need 350–500 square feet depending on layout.
Do batteries pay back? It depends on TOU rates, incentives, demand charges (commercial), and the value you place on backup power. Without favorable rate structures or incentives, the financial payback can be long, but resilience and self-consumption benefits are real.
What if my utility changed net metering? Net billing reduces export value. Design for higher self-consumption with east-west arrays, load shifting (EV charging, water heating), and consider batteries. See our guide to net metering.
Do solar panels increase home value? Multiple LBNL studies find homes with PV sell at premiums broadly correlated with system size and remaining warranty life; values on the order of ~$4/W have been reported in prior analyses, varying by market.
Can renters benefit from solar? Look for community solar subscriptions, green tariffs, or landlord-installed systems that credit your bill. See community solar basics.

Practical implications

Homeowners: Get multiple quotes with module/inverter makes, production estimates, and line-item costs. Confirm roof condition and interconnection terms. If exports are devalued, target self-consumption with controllable loads and possible storage.
Businesses: Model demand charge reduction and ITC + depreciation benefits. Evaluate rooftop, carport, and ground-mount options; consider power purchase agreements (PPAs) where capex is a barrier.
Policymakers and utilities: Clear interconnection timelines, stable tariff design, and data-driven value-of-solar methodologies can unlock deployment while maintaining grid reliability. Advanced inverters (IEEE 1547-2018) add grid support functions (volt/var, frequency-watt).

Where the technology is heading

Higher-efficiency cells: TOPCon and HJT are mainstream; tandem perovskite-silicon cells are under rapid development, with lab efficiencies exceeding 30% (NREL Best Research-Cell Efficiency Chart). Expect gradual module-level gains and better temperature performance.
Materials and manufacturing: Silver thrifting, copper plating, and larger wafer formats reduce costs; domestic manufacturing is scaling in multiple regions with policy support.
Smarter systems: Native rapid shutdown, module-level monitoring, and hybrid inverters are standardizing. Batteries are increasingly LFP with improved cycle life. Software optimizes load shifting and EV charging to match PV output.

Resources and next steps

Use NREL PVWatts for a first-pass energy estimate and compare it to installer proposals.
Check incentives at DSIRE and IRS/DOE guidance for ITC eligibility.
See our deep dives: How Net Metering Works, Solar Batteries: What to Know, Agrivoltaics Explained, and Clean Electricity Standards.

Solar Panels Explained: How They Work, Costs, and Installation Guide