The long-term costs of solar energy systems depend on the fixed and variable costs of the solar system divided by the total energy production of this system during the warrantied lifetime. In the first few years, solar is significantly more expensive than grid-based power. However, the longer a household holds onto the solar asset, the cheaper solar energy becomes relative to future grid-based energy. Over a 25 year period in Southern California, a household pays approximately $0.10 per kilowatt-hour (kWh) for solar energy. This long-term cost represents almost one half the current grid price of $0.18, and almost one third the future grid price of $0.29.
It is important to note that a comparison between solar and grid power depends on geographic location. Power production by solar arrays is heavily dependent on unobstructed sunlight, and a cost per kilowatt-hour ($ / kWh) comparison depends on what the local utility charges. In this case study, we are restricting our analysis to the territory served by Southern California Edison (SCE).
However, the economic and physical calculations utilized in this case study can be applied to any location on the earth and compared to any source of power generation. Only a re-calculation of values is required based on the suitable geographic parameters. Then the user can decide if the long-term energy generation costs for solar arrays are economically practical.
Rooftop solar electric systems consist almost entirely of fixed costs: solar panels, racks to hold the panels to the roof, wire & electrical conduit, and grounding. There is also an inverter which converts the DC electrical current into AC grid current. However, the inverter is considered a variable cost since most manufacturers and resellers cannot guarantee a lifetime over 10 years under daily, repetitive use. While improvements have been made to extend the reliability of solar inverters and certain products like micro-inverters come with a 25 year warranty, this analysis remains conservative and allows a one-time replacement in the net installation cost.
Since solar panels have a warranty of 25 years and the balance of system components like racking, wire, conduit, and grounding are considered to have a similar lifetime, the long-term power production of the solar array is estimated over a 25 year period with an inverter replacement in year 11. It should be noted that due to the break-down of semi conductive material within the solar panels, manufacturers discount power production of the solar panel by 0.5% per year. This factor is controlled for in this analysis.
To begin the analysis, consider an installation of a 6 kilowatt (kW) solar array consisting of 24 solar panels rated to 250 Watts of energy under standard conditions. The net cost after a 30% federal tax credit is approximately $18,900.
The following table shows the cumulative production, savings, and return on investment (ROI) for a home in Southern California paying approximately $145 per month in electric bills.
In year 25, the solar system will have generated approximately 224,799 kWh of energy. In year 11, we budget an additional $2,860 for the replacement inverter. The total fixed and variable costs is therefore $18,900 + $2,860 = $21,760. Thus, the long-term costs of solar energy are $21,760 divided by 224,799 kWh, or $0.10 per kWh. At current grid prices with a 2% annual increase, the future grid price will be approximately $0.29 per kWh, or almost three times more expensive than the solar energy produced.
Cumulative savings are calculated since the first day of operation. Over the 25 year period, this home saves $65,566 which represents a 12.1% average annual return on the total investment of $21,760. To calculate,
$65,566 / $21,760 / 25 = 12.1%
The following graph shows how the average cost per kWh of the solar asset diminishes the longer a household holds onto it.
It should be noted that the analysis and assumptions in this model above are conservative. Relaxing some of the parameters such as utility rate increases, inverter lifetime, sunlight intensity, ambient temperature and solar cell degradation will only lower the long-term costs of solar energy and improve the ROI.
Suppose the inverter does not fail in year 11 and maintains performance through the entire 25 years. The Enphase micro-inverter is one such product with a 25 year warranty. Borrowing from the numbers above, the only cost is the fixed cost at $18,900, while both power production and savings remain the same at 224,799 kWh and $65,566 respectively. In this case, the average cost per kWh is,
$ / kWh = $18,900 / 224,799 kWh = $0.08 / kWh
And the ROI is,
$65,566 / $18,900 / 25 = 13.9%
A contentious issue in the broader American economy is government expenditures versus revenues. Solar benefits from a 30% federal income tax credit which certainly does not improve Uncle Sam’s tax revenue side of the equation. Should the fixed cost of solar remain the same in the near term and the tax credit expire, the fixed costs in this example jump to $27,000 or $29,860 with inverter replacement in year 11. Running this number through the calculations for the main analysis and Example 1 yield the following results,
$ / kWh = $29,860 / 224,799 kWh = $0.13 / kWh (inverter replacement)
$ / kWh = $27,000 / 224,799 kWh = $0.12 / kWh (no inverter replacement)
And ROI becomes,
$65,566 / $29,860 / 25 = 8.8% (inverter replacement)
$65,566 / $27,000 / 25 = 9.7% (no inverter replacement)
The long-term cost of energy derived from solar power has several advantages over grid-based energy. The primary drivers of this advantage boils down to low or zero variable costs over the lifetime of the asset and localized factors such as abundant sunlight which can produce energy immediately where it is needed. Grid-based energy derived from fossil or resource based fuels such as natural gas, oil, coal and nuclear experience variable cost components that increase due to scarcity, war, or degradation of existing delivery infrastructure. Additionally, grid energy is centralized and must be transmitted over long distances and into a complex matrix of stations, sub-stations and transformers which have a high degree of maintenance and overhead cost components.
However, it is vital to maintain a power grid for the growth and stability of our country. Currently, solar energy cannot be economically stored for future or evening use. And ironically, the manufacture of cheap solar panels that drive the ROI and cost advantages above rely on burning coal in China to produce enough energy to process the underlying raw materials in a solar panel; there is not enough solar energy concentrated in one geographic location to produce solar panels at the moment.
Solar energy is and will continue to play a key role in the global energy market, becoming more assimilated into grid-based power generation, because financial demand for stable annual returns of 9% or more exist, and solar energy satisfies this demand as outlined above.