Solar water heating systems are used in homes as an effective way to provide hot water while simultaneously lowering energy costs. These low cost, simple systems can have efficiencies as high as 70%, making them more attractive than photovoltaics for harnessing solar energy for domestic use. [1,2] Different solar water heating system designs exist for different scenarios, the most important factors being climate (freezing tolerance), insolation, and size of home. In general, simpler systems such as direct thermosiphons or batch collectors can be used in sunnier and warmer climates. Both of these systems heat the water directly and rely on passive means to create flow of hot water.  Systems like these cannot handle freezing temperatures, however. For more temperature climates a common system is one where a glycol/water mixture is circulated in a closed loop by a pump between solar collectors and a hot water tank, heating the water indirectly. 
If solar water heating can deliver cheaper hot water to homes than conventional water heaters, why isn’t its usage more widespread? A look at the costs and performance of these heating systems can help explain. I will take a best-case and worst-case scenario for homes in the US and calculate the time to payback for investing in a solar hot water heating system. The prices of solar water heating systems vary, but a typical system costs around $6000.  For the purposes of my calculation, I will assume a system with a price $5000 is being used in both scenarios. A federal tax credit is currently offered on solar water heating systems, which brings the effective price down to $3500. 
For the best-case scenario, the location with the largest insolation is Arizona, where the average daily insolation is about 6.5 kWh/m2.  A direct active system with a solar collector area of 3.6 m2 and an efficiency of 72% is used for this case.  The amount of energy saved per year with this system is
If we assume the alternative to solar hot water is an electric water heater and electricity costs $0.10 per kWh, the time to repayment is
For the worst-case scenario, the insolation for Minnesota and other northern states is approximately 4 kWh/m2.  An indirect active system with a solar collector area of 3.5 m2 and an efficiency of 60% is used for this case.  With this system, the amount of energy saved per year is
If we assume that natural gas hot water is the alternative at $0.04 per kWh, then the time to repayment is
In the best-case scenario the system is repaid in a reasonable amount of time, but in the worst-case scenario that I have chosen the homeowner will roughly break even since the lifetime of a solar water heating system is 20 to 30 years.  For this climate, a less costly system coupled with a gas water heater may be more appropriate. From this overly simplified calculation, one can see that solar hot water has trouble competing with natural gas water heaters as long as natural gas remains inexpensive.
Solar water heating systems may not be as popular as one would think due to the relatively long time to breaking even on the investment. However, savings can be seen instantly by refinancing a mortgage to pay for the system or installing the system when building a new house. This way the increased monthly mortgage payment is offset by lowered energy bills. The current tax incentive may convince some to install solar hot water systems, but it still takes a long time to see a profit. A more effective program might be to offer interest-free loans to those who install these systems. That way, homeowners begin saving money right away.
Alex Contryman is the author of this article.
 “Ratings Summary OF SRCC Certified Collectors,” Solar Rating and Certification Corporation, 7 Dec 10.
 B. Ramlow and B. Nusz, Solar Water Heating: A Comprehensive Guide to Solar Water and Space Heating Systems (New Society Publishers, 2006).
 B. Del Chiaro and T. Telleen-Lawton, “Solar Water Heating: How California Can Reduce Its Dependence on Natural Gas,” Environment California Policy and Research Center, April 2007)
 “Residential Energy Credits,” Internal Revenue Service (2009).
 W. Marion and S. Wilcox, “Solar Radiation Data Manual for Flat-Plate and Concentrating Collectors,” (Red Book), National Renewable Energy Laboratory.