Cost: Regular Electricity vs Solar Electricity


Electricity prices vary by location due to type of power plants, cost of fuels, and state pricing regulations. As shown on the chart on the left, 2009 electricity prices are highest in Hawaii, because most of their electricity is generated using fuel oil. The lowest prices are in North Dakota. The average residential household uses about 1,000 kilo-watt hours yearly and the average monthly electricity bill is about $100.

Elec Cost By State

Prices are higher for residential and commer-cial customers than industrial customers because it costs more to distribute the electricity and step the voltages down. Industrial customers use more and can take their electricity at higher voltages so it does not need to be stepped down. These factors make the price of power to industrial customers close to the wholesale price of electricity (the price from one utility to another).

Average Electricity Prices – 2009
Residential 11.5¢/Kwh
Commercial 10.3¢/Kwh
Industrial 6.7¢/Kwh

Cost Make Up Regular Electricity

The 2010 the average residential costs are expected to be about 12 cents per kilo-watt hour. Electricity costs in the US have been rising about 4% per year for the past ten years, primarily because of the increase in costs of fuels. The pie chart on the right shows the make up of the “average” 2009 US electricity price (9.8 cents per kilo-watt hour).  Top

What Does Solar Electricity Cost?

Module Learning Curve

As can be seen from the chart at the left, panel (module) prices for solar electricity have been coming down significantly for over 30 years. (The reason for the “bump” beween 2005 and 2008 was because of a silicon shortage.) Since follow on costs after installation are minimal for solar electricity, the relevant costs are for purchase and installation of the system (capital costs).

In 2010 installed residential solar prices are more than competitive with residential electricity prices after incentives. See cost example of a southwest house below. In 2013, solar residential prices are expected to reach “grid parity” with conventional utility systems. Cost components that make up a residential solar system are: system design, solar arrays, and the balance of system (BOS) which consists of an inverter, bi-directional billing meter, connection devices, and installation labor.

Installed Capital  Costs –  Mid 2010 Cost Per   Watt (DC)
Residential Rooftop $5.00
Large Commercial $4.00
Utility Scale $3.00

The average residential household in the southwest installs a 5 kwh system and in mid 2010 it cost about $5.00 per DC watt or $25,000 (5000 times $5.00) before incentives. Utilities on the other hand typically install systems in the 100 mega-watt or greater range. The installed utility system cost in 2010 was about $3.00 per watt (average) and is expected to drop to $2.15 to $2.40 by 2012.   Top

When Will PV Solar Reach Grid Parity?

Price per Watt

There is no one cost number that defines grid parity. There are different levels of parity depending on what the generation system is. Solar has already penetrated the most expensive generator – the “peaking plant”, also known as a “peaker”. Peakers are rather small plants, ranging from 50MW to 300 MW in size, normally about 100 MW. Peakers are mainly used in the summertime during “peak” electrical use for air conditioning late in the afternoon. They are normally single-cycle natural gas generators. Peakers have to be able to come up to speed on 10 to 15 minutes notice. They are very inefficient and expensive to run, but are great sources of electricity when utilities are on the verge of rolling blackouts. At that point, operating expenses are down the list of priorities.

Above is a chart showing the Levelized Cost Of Energy, LCOE, for various sources of electricity. The LCOE is a method of comparing different energy technologies. It is explained in detail in the Utility Section below. The LCOE for peakers is $.18 per kilowatt hour per the California Energy Commission (CEC). Nuclear is at $.10, coal is $.08, and natural gas is $.064. In 2010 the LCOE for PV was $.15 as calculated by cost expert Ken Zweibel of George Washington University. In 2009 the California CEC rejected a contract for a new peaker in favor of a solar system in San Diego. Unless there are unusual circumstances, there probably will be no more peakers approved in California. Also shown in the graph is a projection that PV costs will be reduced by 15% per year and catch up to combined cycle natural gas by the year 2015 as forecast by aggressive analysts. If costs only come down by 10% per year, PV will catch natural gas by 2018. A pessimistic forecast of a 7% decrease would have PV catching natural gas by the year 2022.

When we say that PV will be at parity with natural gas and coal, that does not mean there will not be any coal or natural gas generators thereafter. Because the sun only shines during daylight hours, and wind is most prevalent at night, and both are variable, we can not be totally dependent on renewables in the foreseeable future. A target of 20% solar and 20% wind seems reasonable and is endorsed by quite a few organizations. This could change if there were some dramatic cost improvements in grid storage, notably large battery systems. However, battery storage at the grid level looks a long ways off at the moment. In addition, more than 20% of either solar or wind would require significant investments in transmission lines. Not only are transmission lines expensive, but they are hard to permit because of the NIMBY effect. Transmission lines require three to four years to build versus solar or wind which can be easily built in two years. If by 2050 40% of our electricity came from renewables, most people would be happy with the situation.  Top

Why are PV solar costs coming down rapidly?

Price per Watt As can be seen from the graph at the left, both systems prices and solar cell prices have a similar slope. Generally solar panels make up about 50% of the cost of a system (40% for thin film), the inverter is 10%, and the balance of system is 40%. Solar panels of course are made up of solar cells. Since solar cells are the major cost of a system it follows that system prices should decrease at about the same rate as solar cells. So why are solar cells decreasing in price about 15% a year? This decline is being driven by a) increasing efficiency of solar cells (ratio of electrical energy produced to sunshine energy) b) dramatic manufacturing technology improvements, and c) economies of scale. The PV solar industry globally has been growing about 25% per year including the recession year of 2009. These incredible growth rates have allowed manufacturing efficiencies that are unheard of in other industries. In addition, there are many, many competitors (probably too many) jousting for major contracts and driving prices down. However, the major players are rapidly growing and are making reasonable profits.   Top

Long Run Solar Cost

Long Run Cost Of PV The graph on the left is very interesting. Most cost analyses are run over a 20 year period. Ken Zweibel of George Washington University says that is not the correct way to evaluate long life assets like PV systems, nuclear plants, or other large long lasting utilities. PV systems can last maybe up to a 100 years! There is only a small degradation of performance – about a half of one percent per year. So a PV system after 50 years will still produce electricity at 75% of its original performance. 50 years is perhaps a better time frame over which to evaluate the cost of this type of asset. Once installed PV systems need very little maintenance so that the total lifetime cost is mostly just the initial price of the equipment and land. This is conceptually how we think of an investment in bridges or roads. The chart uses a weighted average (weighted by annual output performance) for the cost for the current year plus all previous years for each data point. Once the initial cost of the system is paid for (assumed to be 20 years) the cost of running a PV system is almost zero, whereas for coal and other fossil fuels there is the cost of fuel each and every year. In addition, costs for fossil fuels may creep up due to raw material costs, shipping costs, and possibly carbon dioxide taxes. At $1.25 per watt, the cost of PV solar is always cheaper. At $2 per watt, it is cheaper after year 40. At $3.00 per watt, it is cheaper about year 80. As mentioned above (grid parity), an aggressive cost estimate (-15% per year) would have PV solar at parity with coal by 2014, a less aggressive forecast (-10%) would reach coal parity by 2017. As a result, very few “new” coal plants are expected to be initiated, although current coal plants will likely be upgraded.   Top

Solar Learning Curves As shown in the chart above, cadmium telluride thin film panels are inherently cheaper to make than crystalline panels. These classical learning curves plot “module cost” on the Y axis vs. “cumulative quantity” produced on the X axis. Both axes are logarithmic scales. The chart illustrates that current crystalline panel costs will likely never catch cadmium telluride thin film costs – they are on distinctly different curves not dependent on time. However, there is a lot of research in university and company labs to develop “silicon” and other thin film materials that “will likely” be able to compete with cadmium telluride. The chart also shows that cadmium telluride (mainly First Solar) will likely reach the one dollar price per watt point (price not cost) when about 20 giga-watts have been produced. On the other hand, crystalline producers will have to hit the 120 giga-watt mark in order to achieve a one dollar per watt price. For reference, there have been approximately 33 giga-watts of all types of PV solar installed world wide by the end of 2010.   Top

Cost Example – Typical Southwest House

So let us see what all this means as a residential solar cost example in the southwest United States in 2010:

    • Residential house – Phoenix metropolitan area
    • Electricity provider – AZ Public Service Corp. (APS)
    • Average system size – 5 kw (5,000 watts)
    • Roof space required – 500 square feet
    • Installed fully loaded cost at $5.00/watt – $25,000 before incentives
    • APS 2010 incentive of $1.95 per watt – ($9,750 federally taxable)
    • Federal tax incentive 30% of total cost – ($7,500)
    • AZ State tax credit – ($1,000)
    • Sum of all incentives – ($18,250)
    • Sub-total after incentives – $6,750
    • Add back federal income tax on APS incentive (assume 22% incremental tax) – $2,145
    • Total cost to consumer – $8,895
    • Estimated monthly savings – $76/month average over 20 years (see note below for monthly savings calculation)
    • Break even months – 117 months ( 9.75 years)
    • Net savings over 20 years – $9,348 (excluding inflation)

What is the breakeven price (residential parity)?

The breakeven price would be 12 months x 20 years x $76 monthly savings, or $18,240. Dividing $18,240 by 5,000 watts yields a cost per watt of $3.65. This is the installed price (down 27%) that residential PV would have to meet to elimimate subsidies. If residential prices decrease 9% per year, parity would be reached sometime during 2013.

Note: The above calculations are approximate and for illustration purposes only. Actual costs will depend on the exact location of the home, the angle to the sun (north-south vs. east-west), the amount of shade if any, the type and angle of roof, electrical connections, additional options, etc. For an accurate estimate, please contact a local solar installation contractor and your tax accountant.

Monthly Savings Calculation: A south facing roof top solar system with no shading, and with a normal yearly dessert sunlight radiance of 2,400 would produce 1840 kwh/kw-yr of electricity (assuming 23.3% losses for DC to AC conversion and other system losses). With a 5 kw system installed, the first year production would be 9,200 kwh (5 x 1840). Assuming a system degradation of 0.5% per year times 20 years yields a net 8280 kwh yearly average electricity savings (9,200 x .90). Assuming an average 2010 residential electricity price in AZ of $.11 per kwh yields a yearly savings of $911 (8280 x $.11 not counting future inflation). The monthly savings would then be $75.90 ($911 divided by 12). This was then rounded to $76.00 even.   Top

Utility Cost Of Electricity

The cost calculations for a utility installation are quite complex. In principle they are simple:

Where: LCOE is the Levelized Cost Of Electricity. The LCOE approach allows different technologies to be compared, not only solar approaches, but fossil fuels and nuclear as well. The Total Life Cycle Cost is the present value of all the components of cost over the useful life of the installation minus the depreciation tax benefit and residual value. The Total Lifetime Energy Production is all the useful energy produced by the installation over its total life.

The table below lists the estimated cost of electricity (LCOE) for several different energy sources. No subsidies are included in the calculations. The table is from a paper by noted energy cost expert Ken Zweibel of George Washington University (GWU) in Energy Policy, July, 2010.

Energy Plant Type Lifetime Cost  ¢ per Kwh
Natural Gas 6.4
Wind Turbine 7.5
Conventional Coal 8.0
Advanced Nuclear 10.0
Solar PV 15.0
Solar Thermal 16.0

Total Life Cycle Cost Components For Solar Electricity

  • Initial capital investment

    • The cost of all the equipment involved in the project
    • Land related costs which depend on the number of panels, site preparation and security protection.
    • Grid connection costs such as inverters, transformers, and transmission to the nearest grid
    • Interest at 6%. All capital costs are assumed to be financed by obtaining a loan (for LCOE purposes only).

    (Note: The above costs are very sensitive to panel efficiency. Panels that are 12% efficient versus those that are 18% will need 50% more panels, 50% more inverters, 50% more land, etc.)

  • Initial Labor Cost

    • Site design, installation labor, sales and marketing, and other overhead expenses
  • Annual Costs

    • Operating costs, maintenance costs, panel cleaning, insurance, and general overhead are included
  • Depreciation

    • The present value of the depreciation tax benefit is subtracted
  • Residual Value

    • The present value of the residual price at the end of the projects life is also subtracted

Total Lifetime Solar Energy Production

The value of the electricity produced over the total life cycle of the system is calculated by estimating the initial annual production, called Peak Capacity, and then discounting it for future years based on previously observed annual degradation rates for the particular technology of the site. A typical degradation rate is 0.5% per year, although some rates are as high as 1.0% and as low as 0.25%. The first-year energy production of the system is expressed in kilowatt hours generated per kilowatt peak of capacity per year.

Factors Affecting Peak Capacity:

  • How the system is mounted and oriented (i.e. flat, fixed tilt, tracking, etc.)
  • The spacing between PV panels as expressed in terms of system ground coverage ratio (GCR)
  • The energy harvest of the PV panels (i.e. performance sensitivity to high temperatures, sensitivity to low diffuse light, etc.)
  • System losses from soiling, transformers, inverters and wiring inefficiencies
  • System availability largely driven by inverter downtime

The LCOE is highly sensitive to small changes in input variables and underpinning assumptions. For this reason, it is important to carefully assess and validate the assumptions used for different technologies when comparing LCOEs.


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