How is the Cost of Solar Energy Calculated?

By Philip Trapp
April 06, 2017
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So, you’re pretty sure you want to make the switch to clean energy by installing solar panels on your home, but you’re evaluating all your options, that’s great! You’ve taken a look into the types of solar modules, inverters, and you have a fairly good grip on performance warranties, manufacturer’s warranties, and workmanship warranties. Now, you want to get down to business and compare the cost of energy from your utility versus all of your solar options. How “much” are you truly saving?

First, how do you determine the cost of energy that you buy from your utility? That’s pretty easy… To figure this out, take a look at your most recent electricity bill (as rates tend to increase over time):

sce bill

For this month’s electric bill, the homeowner was charged $358.06 and consumed 1,446 kWh, so the “all-in” cost-per-kWh for her electricity from the utility was $358.06 divided by 1,446 kWh. The result is approximately $0.25/kWh. Note that for homeowners that are currently billed on a tiered rate system, this cost will be skewed toward the higher rate, the more electricity one uses. Similarly, if you’re on a Time-Of-Use or TOU rate, your “all-in” cost-per-kWh will be higher the more on-peak electricity you consume. Historical evidence shows (see graph below) that electricity rates tend to rise over time. How has your electricity bill changed over the last 5 years? 10? 20? 25? What do you think your electricity bill will look like in 10, 20, 25 years?

Now that you have a handle on what your utility is charging you for electricity, you’ll need to know how solar companies calculate your solar cost per kWh.

Let’s start with some easy cases. It’s important to note that as the residential solar PV market matures, more and more folks - a majority, in fact, are choosing to own their systems rather than lease or sign a PPA (power purchase agreement), according to a recent study by Greentech Media.

Power Purchase Agreements (PPA)

A PPA is simply an agreement to purchase power at an agreed-upon price ($/kWh). A reputable solar company offering you a PPA should very clearly inform you what the price per kWh is for your agreement. Be mindful that many companies offer fairly low “starter”-rates, for example, $0.155/kWh, with no money down if you qualify, BUT the contract includes an annual rate escalator, usually between 1-2.9% per year, for the entire 20 year PPA. While this may not sound like a lot, it can equate to thousands more than a flat-rate PPA over the course of the agreement. Note that monthly PPA payments are the product of your agreed-upon $/kWh rate and the kWh production of your system during that relevant month or period.

Example: $0.155/kWh PPA rate x 900 kWh produced = $139.50 monthly payment (+ fees - some solar companies add a surcharge if you’re not on automatic payment).

Figure 1 - Comparing PPA’s (assuming 900 kWh produced per month)

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Lease

A lease is a lot like a PPA, but technically you’re leasing the equipment (not purchasing kWh’s) and agreeing to make payments over the lease term - usually lease payments are “fixed monthly billing” - unlike a PPA monthly bill which will vary based on how many kWh the system produces! So while any fixed-tilt residential solar PV system is going to exhibit variable (yet predictable) monthly kWh production over the year, a good solar lease will come with a guarantee of minimum annual or biannual kWh production over the lease term. A good lease will also clearly inform you of the cost-per-kWh, which can be manually calculated by dividing your solar lease payment by the expected or guaranteed kWh production.

Example: Monthly solar lease payment: $150. Expected monthly kWh production: 1,000 kWh.

Cost-per-kWh = $150 ➗ 1,000 kWh = $0.15/kWh

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Cash Purchase

For a purchased system, determining the cost-per-kWh gets a little more complex. While solar PV systems, once installed, are expected to perform for 30+ years, the industry “lifetime” for solar is 25 years - which mirrors reputable solar panel manufacturer’s performance warranty. A huge benefit to owning your solar is that you’re eligible for the 30% solar ITC (investment tax credit). This drastically reduces the lifetime cost-per-kWh of your solar PV system. Your solar system’s annual kWh production is expected to diminish year-over-year at a rate equal to or less than the panel manufacturer’s listed degradation factor (usually on the order of 0.7%/year). So, to calculate your purchased solar system’s “lifetime” cost-per-kWh, have a qualified solar design-engineer, like the ones at Pick My Solar, lay out the expected kWh production of your system over its 25 year lifetime (even though it will last longer). Take the net cost of your system (gross cost less federal tax credit and any incentives) and divide by the total “lifetime” (25 year) kWh production.

Example for Anonymous 5 kW residential PV system, purchased with cash:

Gross Cost: $18,000  1st year expected annual production: 6,500 kWh
Federal tax credit: $5,400            25th year expected annual production: 5,492 kWh
Net Cost: $12,600  “Lifetime” expected kWh production: 149,555 kWh

“Lifetime” cost-per-kWh ($/kWh) = $12,600 ➗ 149,555 kWh = $0.08/kWh

Loan Purchase

Now, you’re probably interested in what it will cost (or, what the cost per kWh) will be if you finance your system with a loan - let’s take a look! Since you will own your system with a loan, consider the lifetime kWh production of the system again. Now, you’ll want to sum your loan payments over the term (every loan is different, so check out our article on solar loan options - which will take into account the federal tax credit as well as any incentives).

Example for Another Anonymous 5 kW residential PV system, purchased with a 2.99% APR, 12 year loan (assumed tax credit used to reamortize loan):

Gross cost: $19,565 1st year expected annual production: 6,500 kWh
Federal tax credit: $5,870 25th year expected annual production: 5,492 kWh
Total of loan payments over term: $16,414 “Lifetime” expected kWh production: 149,555 kWh

 

“Lifetime” cost-per-kWh ($/kWh) = $16,414 ➗ 149,555 kWh = $0.11/kWh

These numbers reflect a familiar concept in residential solar: in many cases, the cost-per-kWh of solar energy is quite simply less expensive than the cost-per-kWh of electricity from one’s utility - no matter how you “buy” solar (lease, PPA, cash purchase, finance).

Another concept worth noting is that utility electricity rates tend to rise over time. Don’t keep track of your old electricity bills? Take a look at this graph from the US Energy Information Administration:

price of electricity.jpg

One can see that electricity prices fluctuate throughout the year, but tend to rise over time. While solar equipment costs (panels primarily) have come down in cost substantially in the last few years, the cost of sales to solar companies - or “customer acquisition” costs have been more or less static as consumer tastes shift from the third-party-ownership of TPO model of PPA’s and leases to system ownership (cash purchases and financing), and homeowners are starting to do their homework:

  1. “Can I get a better deal?”
  2. “What type of inverter is best for my system?”
  3. “What does the warranty cover? What doesn’t it cover?”
  4. “Do you offer any other financing options?” 

With declining material costs, many folks ask: “Should I wait to go solar?” Ultimately, there’s no better time to go solar than now, because:

  • The solar ITC (investment tax credit) is still available - considerably improving project economics. With the current administration, its existence in future years is less than certain, although likely.
  • Electricity rates are still going up. By waiting until next year or the year after to go solar, you are missing out on saving money now - as utility rates increase, so do your savings.
  • You or your family can probably qualify for a low-interest loan to OWN your solar system today.
  • When you own your solar panels, you immediately add value to your home.
  • Technology is improving, however not drastically. In most areas, the rising price of electricity is outpacing marginal technological (solar panel and inverter efficiency gains) that are usually on the order of +.25-.5% per year. The EIA has compiled data showing average residential electricity prices have gone up about 4% per year over the last 10 years.
  • Finally - the science behind anthropogenic climate change is beyond dispute. You (we) can do something, investing as little as $0 upfront - to reduce the use of fossil fuel energy, stem carbon emissions, and start saving money now.

So, now that you can see that solar costs less than your utility’s electricity, what other questions do you have? Give us a call at 888-454-9979 or email us at info@pickmysolar.com to get started on a system design for your home and we’ll help you find the best-value solar offer in the marketplace.

If you aren't ready for a phone call, download our Solar Starter Guide below to get all the information you need to help you get started on your solar journey!

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Philip Trapp

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Philip Trapp

More articles by Philip Trapp

What's Pick My Solar? We empower our customers to adopt clean energy through transparency and choice. Our free, no-obligation platform provides competing solutions from top providers.

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