Solar energy is growing in popularity as more and more homeowners decide to do away with high utility bills and help the environment at the same time by producing their own clean energy. Perhaps you have also been considering solar panels for your roof and are wondering if they make financial sense for you?
Ultimately, to answer that question you need to know if the cost of solar electricity is the same or cheaper than electricity from the utility. If the answer is yes, then solar energy makes financial sense. Finding the cost of electricity from your utility is not too difficult – you can check your most recent bill or you can use the state average in a savings calculator. But how do you determine the cost of solar electricity?
To do that, we calculate the levelized cost of solar energy (LCOE), which is essentially the cost of electricity at the point of connection to the grid, including both the initial installation costs, as well as the ongoing expenses such as fuel and maintenance over the expected lifetime of the investment.
Location, Location, Location
Where you are located greatly impacts the cost of solar electricity, or LCOE. Not only is the amount of sunlight that falls on your panels’ location dependent, but so are the available financial incentives, such as rebates and tax credits.
Because there are so many different incentive programs at the municipal and state level, for simplicity, we will only consider the federal investment tax credit (ITC) of 30%, because that is available nationwide. Sunmetrix Discover takes these factors into account and calculates the levelized cost of solar energy for you.
Let’s look at an example:
Solar system installation cost: An average-sized residential solar panel installation with 5-kW capacity would cost about $14,000 ($20,000 minus the 30% federal investment tax credit) based on the estimates of the Solar Energy Industries Association. Other available rebates would decrease this cost further.
Operating and maintenance cost: A relatively conservative estimate for the operation and maintenance costs over the expected 20-year lifetime of your panels would be about 20 percent of the initial installation cost before rebates — in this case, about $4,000 for a 5-kW system.
Fuel cost: In the case of solar, the fuel comes from the sun, and so there is no additional cost.
So our total lifecycle cost is composed of the installation and operation and maintenance costs: $14,000 + $4,000 = $18,000.
We’re almost done! But we still need to determine how much electricity you can produce with your system to determine the levelized cost.
Using Discover, we can see that a 5-kW system installed in San Diego (with a Solar Score of 79) would generate about 8,300 kWh of electricity per year. By comparison, the same system installed in Portland (where the Solar Score is 40) would yield about 5,500 kWh per year.
Because, as we mentioned, most solar energy installations have an expected lifetime of 20 years, we multiply the annual average generation by 20 to get 166,000 kWh over 20 years for San Diego or 110,000 kWh over 20 years for Portland.
The final step is to divide the life-cycle cost ($18,000) with the amount of electricity the system will generate over its lifetime. In the case of San Diego: $18,000 divided by 166,000 kWh equals about 11 cents/kWh, whereas in Portland, we are looking at about 16 cents/kWh.
We were considering the same system, with the same life-cycle cost, but because of vastly different numbers for the expected electricity generation, we find that the levelized cost is significantly different for the two example locations.
Solar Grid Parity Sums it Up
Once you have the levelized cost of solar electricity where you live, all that is left to do is compare that number to what you are currently paying for electricity from your local utility. If the LCOE for solar where you live is the same or lower than the utility rate, then you’ve reached grid parity and switching to solar will save you money over the lifetime of the panels.
While the LCOE will remain the same over the lifetime of your panels,
the cost of electricity from your utility is almost certain to rise.
To see how your state compares when it comes to residential solar, you can check out our interactive grid parity map. You can even adjust the cost of solar panels to reflect falling prices. If your state hasn’t reached grid parity yet, you can see at what cost per watt it does.
But it’s important to note that the federal investment tax credit of 30% makes a big difference (you can also use our grid parity map to see what happens when there is no ITC). It’s helped residential solar take off in many locations.
However, the ITC is set to expire at the end of 2016, and it’s unclear whether it will be extended. If you’re considering solar energy for your home, you may want to get going with the installation before the ITC is no more.
It’s not too difficult to figure out whether solar energy will save you money in the long run, and Discover can help you with the calculations. If solar electricity is already the same or cheaper than electricity from your utility, now is the time to investigate further, by talking with qualified installers where you live.
With solar energy, you will save money AND help our planet using a clean, green source of electricity.
Simone Garneau is the co-founder of Sunmetrix, an online consumer education and customer acquisition platform for residential solar energy. The goal of Sunmetrix is to help homeowners go solar. In addition to the 200+ articles about solar energy, Sunmetrix offers homeowners two main tools: Discover and GO.
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