How Do I Calculate Solar Cost Per Kwh?

Solar cost per kWh refers to the total cost to generate a single kilowatt-hour (kWh) of electricity from a solar energy system. Calculating the solar cost per kWh allows homeowners and businesses to determine if solar power will save them money compared to utility rates.

Understanding solar cost per kWh is critical for evaluating the financial viability of installing a solar photovoltaic (PV) system. By calculating the solar cost per kWh, you can compare it to the utility’s retail electricity rate to determine if you will save money over the lifespan of the solar panels. Most homeowners and businesses find that solar costs less per kWh than utilities in the long run, allowing solar to provide decades of cost savings.

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Factors That Affect Solar Cost per kWh

One of the most important factors that affects the cost per kWh of solar energy is the size of the solar system. The size of the solar system is determined by two main considerations: the amount of electricity usage of the home or business, and the physical space available for solar panels.

The average size of a residential solar system in the United States is between 6-8 kW (kilowatts) (Source). This provides enough capacity to offset about 60-80% of an average home’s electricity usage. Larger homes with higher electricity demands may need 10 kW or more. Commercial systems are often 100 kW or larger.

The physical size of solar panels required depends on the system size. Typical residential solar panels are 65 inches by 39 inches. So for a 6 kW system with standard 250W panels, you would need 24 panels which would cover about 400-500 square feet (Source). Available roof space and ideal solar orientation are considerations when determining system size.

The larger the solar system, the higher the total costs. But larger systems also produce more solar energy and savings over their lifetime. So the optimal system size depends on the particular home or business’ needs and goals. Proper sizing is important for maximizing value.

Local Electricity Rates

The first major factor in calculating solar cost per kWh is your local electricity rate from the utility company. According to ElectricChoice, the average electricity rate in 2024 for residential customers across the U.S. is around 14.93¢ per kWh, but rates vary significantly by state and region.

For example, in February 2024 the average electricity rate in California was 19.90¢/kWh, while in Colorado it was 12.28¢/kWh. Rates also differ based on your utility company. Even within the same city, residents may pay very different rates per kWh depending on their provider and plan.

To calculate solar savings, you’ll need to know your local utility’s price per kWh, which is usually listed on your monthly electricity bill. This serves as a baseline to compare potential solar electricity costs against. The higher your local rates, the faster solar can pay for itself through utility bill savings.

Solar Panel Equipment Cost

The cost of solar panel equipment, including modules, inverters, and racking, makes up a significant portion of the overall system cost. According to the National Renewable Energy Laboratory (NREL), module prices have declined dramatically over the past decade, from around $2.50 per watt in 2011 to under $0.40 per watt today (NREL). This is largely due to improvements in manufacturing and economies of scale as the solar industry has grown.

In addition to modules, inverters and racking add to the equipment cost. Inverters convert the DC electricity generated by solar panels into usable AC power and typically cost $0.20-$0.30 per watt. Racking holds solar panels in place and costs around $0.10-$0.20 per watt installed. Together, module, inverter, and racking costs add up to $0.70-$0.90 per watt for a complete set of solar equipment.

Equipment costs have fallen so much that they now make up less than half of a total solar installation’s price. But selecting high-efficiency, high-quality equipment is still important for maximizing solar production and return on investment.

Installation Cost

Installation costs make up a significant portion of the overall expense for a solar panel system. This includes the labor fees for the installation crew, as well as costs for permits and inspections. According to the Solar Energy Industries Association, installation costs account for about 15-25% of the total system price on average.[1]

Labor fees vary greatly depending on the complexity of the installation and local labor rates. Roof mount systems generally cost more to install than ground mounts. The number of solar panels and overall system size will impact labor hours as well. Expect to pay anywhere from $1,500 to over $4,500 in labor fees alone for a typical residential solar array.[2]

Permitting and inspection costs can range from a few hundred dollars for a small installation up to over $1,000 for larger systems, depending on local permit fees. Most jurisdictions require an electrical permit, building permit, and final inspection. Some locations may also require structural engineering approval or additional permits related to zoning and land use regulations.[3]

Solar Tax Credits and Incentives

There are federal and state tax credits and incentives that can help reduce the cost of going solar. The biggest is the federal Investment Tax Credit (ITC). The ITC allows you to deduct 30% of the cost of installing a solar energy system from your federal taxes through 2032 (Forbes). This can lead to thousands of dollars in savings.

Many states also offer additional incentives like rebates, tax credits, property tax exemptions, and renewable energy credits (RECs). Incentives vary widely by state. For example, North Carolina offers a property tax exemption on solar systems (Bankrate). Other top solar states like California, New York, New Jersey, and Massachusetts also have generous state tax credits and rebates.

When calculating solar costs, be sure to research federal and state/local incentives available where you live. Incentives can reduce your out-of-pocket costs by thousands of dollars over the system lifetime.

Operations and Maintenance

Ongoing operations and maintenance (O&M) costs are necessary to keep your solar panels functioning efficiently. Key O&M costs include:

Cleaning: Solar panels need to be kept clean and free of debris like leaves, bird droppings, pollen, etc. This can be done by the homeowner or through a professional cleaning service, which may cost $100-250 per year.
Repairs: Solar equipment can sometimes require repairs, like inverter replacement or fixing broken panels. Budget around $100-300 per year for potential repairs.

Insurance: Homeowner’s insurance will cover solar panels, but additional equipment breakdown insurance can provide extra protection. This may cost $100-200 per year.

When calculating lifetime solar costs, budget around $150 per year on average for operations and maintenance based on typical cleaning, repair, and insurance costs.

Financing Costs

Solar panel systems often require financing, as the upfront costs can be high. There are several options for financing solar panels, including solar loans, solar leases, and power purchase agreements.

Solar loans allow you to borrow money to purchase and install a solar system. You’ll make monthly payments over a set repayment term, typically 10-25 years. Interest rates on solar loans range from 3-8%, with an average around 5-6%. Lower interest rates mean lower lifetime financing costs.1

When calculating lifetime solar costs, you’ll need to factor in the total interest paid over the loan term. You can use an online solar loan calculator to estimate your monthly payments and total interest costs.2 Be sure to account for any loan fees as well.

The financing costs will depend on the loan amount, interest rate, fees, and term length. Choosing a loan with a lower interest rate and shorter term will minimize financing costs and reduce the solar cost per kWh over the system lifetime.

Net Metering Savings

Net metering allows solar system owners to export any excess electricity they generate back to the grid. This essentially runs the electricity meter backwards and offsets electricity that would otherwise need to be purchased from the utility provider. The specific net metering policies vary by state and utility.

According to Solar Power World (2020), net metering policies allow system owners to receive credits for excess generation at the retail electric rate in many states. However, seven states offer alternate compensation schemes. The states that offer full retail rate net metering include Alaska, Arkansas, Colorado, Connecticut, Delaware, Georgia, Hawaii, Louisiana, Mississippi, New York, and Utah (Solar Power World, 2020).

Net metering enables solar system owners to maximize the value of their solar investment by reducing their electricity bills through solar energy export. Carefully evaluating the net metering policies in your area is an important part of assessing the value proposition of installing solar panels.

Calculating Total Lifetime Cost and Solar Cost per kWh

The total lifetime cost of a solar system includes the upfront costs as well as ongoing costs over the system’s lifespan. To calculate the total lifetime cost:

Add up all upfront costs: solar equipment, installation, permits, etc.

Estimate ongoing annual costs like operations, maintenance, insurance, etc.
Multiply the annual costs by the lifespan of the system (typically 25-30 years).
Add the upfront costs and the total ongoing costs to get the total lifetime cost.

To find the solar cost per kWh, also estimate the total lifetime production of the system in kWh. This depends on the system size, panel efficiency, azimuth/tilt, and estimated annual degradation. Then divide the total lifetime cost by the total lifetime production to get the cost per kWh.

For example, a 5 kW system with total upfront costs of $15,000 and $200 in annual costs over 25 years would have: