How Much Cheaper Is Solar Energy Than Fossil Fuels?

The costs of solar energy have declined dramatically over the last decade, making it cheaper than fossil fuels in most parts of the world. The levelized cost of energy (LCOE) for solar photovoltaics is now averaging 3-6 cents per kilowatt-hour, compared to 5-17 cents for electricity from fossil fuels like coal and natural gas (https://www.consumeraffairs.com/solar-energy/solar-vs-fossil-fuels.html). In the United States, building new renewable energy is cheaper than continuing to operate 99% of existing coal plants, with solar costing around $24 per megawatt hour and coal averaging $36 (https://www.theguardian.com/us-news/2023/jan/30/us-coal-more-expensive-than-renewable-energy-study). This cost advantage makes solar energy the cheapest option for new electricity capacity in most places. The decline in solar costs is driven by technological improvements, manufacturing scale and favorable policies. As costs continue to fall, solar is reaching “grid parity” and becoming cost competitive with fossil fuel electricity without subsidies. Though challenges remain, solar energy’s dramatic price drops demonstrate it can outcompete fossil fuels in many markets around the world.

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Declining Costs of Solar

Prices for solar panels and installation have dropped dramatically in the last decade. According to the National Renewable Energy Laboratory (NREL), solar module costs have fallen by 85% since 2010. In 2010, the average cost of a solar panel was around $4 per watt. By 2021, that cost had dropped to about $0.60 per watt. Much of this price decline can be attributed to economies of scale, improved manufacturing processes, and increased competition in the solar industry (NREL).

The total installed cost of residential solar power systems has followed a similar downward trajectory. According to EnergySage, the average cost of a home solar system has fallen from $12.20 per watt in 2002 to just $3.82 per watt in 2021. This represents a nearly 70% reduction over the past two decades. In real terms, the average price of a 6 kW solar system for a home has decreased from around $73,000 in 2010 to around $22,000 today (EnergySage).

Levelized Cost of Energy

The levelized cost of energy (LCOE) is a key metric for comparing power generation costs across different technologies. The LCOE represents the per-kilowatt hour cost of building and operating a power plant over an assumed financial life and duty cycle. It factors in all costs over the system lifetime, including initial capital and investment, financing, siting, fuel, operation and maintenance, and incentives. The LCOE allows an apples-to-apples comparison of the cost of different energy technologies like solar, wind, fossil fuels, and nuclear.

According to a 2022 report by the International Renewable Energy Agency (IRENA), the global weighted-average LCOE of utility-scale solar PV has fallen by about 85% since 2010 to $0.053/kWh. In comparison, the LCOE of gas-fired power was $0.059/kWh and coal was $0.069/kWh. This means the cost of solar power is now fully competitive with fossil fuels in most of the world. The LCOE of solar is forecast to continue decreasing while fossil fuel costs will remain volatile. By 2025, IRENA predicts the global average solar LCOE could fall to $0.039/kWh.

Grid Parity

Solar energy has reached grid parity in many regions across the U.S. and around the world as costs have fallen dramatically in recent years. Grid parity occurs when solar can generate electricity at a cost that is equal to or less than buying power from the grid. According to the Sunmetrix grid parity map, most states in the southern half of the U.S., including California, Texas, Florida and many others are at or near parity. In states with high electricity rates like California and Hawaii, solar is now 20-30% cheaper than grid power. As solar costs continue to decline and electricity rates rise, more regions will cross the grid parity threshold.

Government Incentives

Governments around the world have implemented various incentives like subsidies and tax credits to accelerate the adoption of solar energy. These financial incentives help reduce the upfront costs of installing solar panels, making them more affordable for homeowners and businesses.

For example, in the United States, the federal solar investment tax credit (ITC) offers a 26% tax credit for systems installed in 2020-2022, which will step down to 22% in 2023 before expiring in 2024 [1]. Many U.S. states and utilities also offer additional rebates and incentives on top of the federal ITC.

In Europe, feed-in tariffs that guarantee long-term payments for solar power fed into the grid have been instrumental in enabling the rapid growth of solar PV capacity, especially in Germany, Italy and Spain. Countries like the UK and France also offer tax credits or rebates for installing solar panels [2].

The declining costs of solar technology coupled with supportive government incentives have been key drivers in the exponential growth of solar adoption worldwide.

Fossil Fuel Externalities

Environmental and health costs of fossil fuels are not accounted for in market prices. These external costs arise from activities such as mining, transporting, and burning fossil fuels. They include air and water pollution, environmental degradation, and impacts on public health. According to the Union of Concerned Scientists, the unpriced externality costs of fossil fuels in the United States could be over $740 billion annually (Source:https://www.ucsusa.org/resources/hidden-costs-fossil-fuels).

A report by the U.S. Environmental Protection Agency estimated the external environmental costs of petroleum usage at $2.29 per barrel from emissions like CO2, NOx, SOx, volatile organic compounds, and particulate matter. Health costs were estimated at $0.46 cents per kilowatt-hour generated from petroleum (Source:https://afdc.energy.gov/files/pdfs/2743.pdf). The International Renewable Energy Agency estimated global external costs related to fossil fuels at around $3.6-5.6 trillion annually, or an average of $0.18/kWh of electricity generation (Source:https://www.irena.org/-/media/files/irena/agency/publication/2016/irena_remap_externality_brief_2016.pdf).

These unaccounted costs disproportionately affect marginalized communities located near fossil fuel operations. Transitioning to renewable energy could avoid a significant portion of these external damages.

Future Projections

Solar technology costs continue to decrease dramatically, and projections indicate they will only get cheaper in the coming decades. According to the U.S. Department of Energy, solar costs have fallen by more than 70% over the last decade. The DOE has set aggressive solar cost reduction targets, aiming for 4-5 cents per kWh for utility-scale solar by 2030. Industry experts predict costs will fall further as technology improves, economies of scale increase, and supply chains mature.

One analysis found that solar prices are decreasing more quickly than even optimistic projections. The ongoing cost declines mean solar power will soon be cheaper than fossil fuels virtually everywhere. According to Statista, average global utility-scale solar costs could reach around 2 cents per kWh by 2050, a massive reduction from over $4 per kWh in 2010. As solar nears and passes widespread grid parity with traditional energy sources, its competitiveness and adoption will grow exponentially.

Challenges for Solar

While solar energy has many benefits, it also faces some challenges that need to be addressed. Three big ones are intermittency, storage, and grid integration.

Solar energy is intermittent – it generates electricity when the sun shines but not at night or when it’s cloudy. This can make it more challenging to integrate into the grid compared to “baseload” power sources like fossil fuels that provide consistent power. However, intermittency is a manageable challenge. Areas with sunshine most daylight hours, like the American Southwest, are well-suited for solar. Even cloudy areas can combine solar with other renewables like wind that generate at different times. With smart grids and storage, the intermittency of solar becomes even less of an issue ^[1].

Storage via batteries can address solar’s intermittency, but batteries remain expensive. Continued declines in battery costs will help make solar plus storage more competitive with conventional power. Even without storage, solar can supply grid power during peak daylight hours when electricity demand is highest.

Integrating solar onto the electric grid also presents challenges since supply needs to match demand instantaneously. However, utilities have gotten better at forecasting solar output and adjusting other generation sources. Grid operators are also implementing more demand response programs, energy storage, and smart grid technologies to balance the system. So while solar integration is an issue, there are many potential solutions ^[2].

Policy Support Needed

Smart policies can accelerate the solar transition by continued cost declines and increased deployment (https://energy.mit.edu/news/the-future-of-solar-energy-a-summary-and-recommendations-for-policymakers/). Solar power on the grid still competes with heavily subsidized fossil fuels. While costs have declined, policies like production and investment tax credits, renewable portfolio standards, and net metering help provide a level playing field (https://www.thirdway.org/memo/solar-power-policies-to-help-america-lead). Governments should focus on outcomes like GHG reductions, grid modernization, and universal electrification over specific solar incentives. Market-based policies like carbon pricing can account for externalities and allow solar to fairly compete. Removing fossil fuel subsidies and internalizing pollution costs supports renewable growth. Streamlining solar permitting, grid upgrades, and access removes non-market barriers. Policy support has driven rapid growth and can continue solar’s rise as a mainstream energy source.

Conclusion

Based on the levelized cost of energy and accounting for externalities of fossil fuels, solar power is now cheaper than coal and natural gas in most cases. Solar costs have declined rapidly in the last decade while fossil fuels have remained relatively flat. Grid parity has already been achieved in many regions. With continued innovation in solar technology and manufacturing, costs are projected to continue falling in the years ahead. Meanwhile, implementing carbon pricing would make fossil fuels reflect their full costs to society. While solar still faces challenges around intermittency and storage, the economic advantages of solar over fossil fuels will likely continue to grow. With the right policy support, solar power can become the dominant energy source globally in the coming decades.