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# green econometrics

## Understanding the Cost of Solar Energy

#### August 13th, 2007 · 35 Comments

In comparison to conventional hydrocarbon fuels such as coal or oil in generating electricity, the cost of solar energy is significantly higher. To compare energy cost, a common equivalent is required. Back in our previous post, Coal: Fueling the American Industrial Revolution to Today’s Electric, we developed a framework to measure energy costs by converting costs to kilowatt-hours (KWH).

In our example, a ton of coal on the average produces approximately 6,182 KWH of electric at a cost of about \$36 per short ton (2,000 pounds). Under this measure coal cost less than\$0.01 per KWH. In comparison, a barrel of oil at \$70/barrel produces 1,700 KWH at a cost approximately \$0.05 per KWH. Let’s provide some measures to understand energy costs.
Energy Units and Conversions KEEP

Energy Comparison
1 ton of coal = 6,182 KWH
1 barrel of oil = 1,699 KWH
1 cubic foot of gas = 0.3 KWH

Energy Costs
1 ton of coal costs \$36 = \$0.006 per KWH
1 barrel of oil costs \$70 = \$0.05 per KWH
1 cubic foot of gas \$0.008 = \$0.03 per KWH

In comparison to solar energy, the hydrocarbon fuel costs are significantly lower without rebates, tax benefits nor the cost of carbon emissions. A two–Kilowatt (KW) solar energy system costs about \$45,000 and covers roughly half of a typical American household’s energy needs. At \$45,000, a solar energy system equates to \$9,000 a kilowatt. The \$9,000 per KW for solar is not very helpful in comparing electric generation costs to other fuels like coal or gas. Since coal, oil, and gas can be measured on a cost per KWH, we should measure solar costs on a KWH basis.

Some of the considerations for a solar energy system include the 20-to-30 year lifespan of the system and the hours of available sunlight. The hours of available sunlight depends on latitude, climate, unblocked exposure to the sun, ability to tilt panels towards the sun, seasonality, and temperature. On the average, approximately 3.6 peak sunlight hours per day serves as a reasonable proxy to calculate the average annual output of electric from solar energy panels.

Solar Energy Costs
Average system costs = \$95 per square foot
Average solar panel output = 10.6 watts per square foot
Average solar energy system costs = \$8.95 per watt

In order to compare the solar energy costs to conventional hydrocarbon fuels, we must covert the \$8.95 per into KWH. Let’s make two calculations to measure the total electric energy output over the lifespan of the solar energy system. The first adjustment is to convert solar direct-current (DC) power to alternating current (AC) power that can be used for household appliances. The conversion of DC to AC power results in an energy loss of 10 percent for a solar energy system. The second calculation is to approximate total electric output by multiplying the average peak hours of sunlight (about 3.63 hours per day) times 365 days times 20 years (the product lifespan).

For our 5-KW solar energy system costing \$45,000, the conversion to KWH is as follows:

5 KW times 90% = 4.5 KW – (Conversion of DC to AC power)
4.5 KW times 3.63 hours = 16 KWH per Day
16 KWH x 365 = 5,962 KWH – (Average Annual Output)
5,962 KWH x 20 years = 119,246 KWH – (Total output over 20 year lifespan)

So a \$45,000 5KW solar energy system produces about 119,246 KWH of electric over its lifespan meaning the average cost equals \$0.38 per KWH. (\$45,000 divided by 119,246 KWH)

Figure 1 Cost of Energy

The relatively high solar energy costs in comparison to conventional fuels should improve with utility rebates and government tax incentives. In addition, solar panel prices should continue to decline as volume production increases. Solar cell manufacturers employ similar production methods as semiconductor suppliers and benefit from economies of scale.

There are several components of a solar energy system. Solarbuzz provides some detailed information on solar industry pricing. Solarbuzz
The single largest cost is the solar panels themselves. The following figure provides an overview of the components of a solar energy system. Sharp Solar provides a very useful calculator for system costs and electric generation by geographical location along with utility rebates for your area. Sharp Solar Energy

Figure 2 Solar Energy Component Costs

We will explore the some of the advances in thin-film technologies, the declining costs of solar panels, and the improving solar conversion efficiencies that should continue to bring solar energy costs on par with hydrocarbon fuels. With the improving cost structure of solar and a better understanding of the cost of carbon emissions from hydrocarbon fuels, we may find a more level playing field in comparing energy costs.

### 35 responses so far ↓

• 1 Andolyn // Apr 29, 2011 at 8:18 pm

These costs for solar are old, you can buy a 2kW system for under \$10000 not \$45000 as mentioned here. That cost will continue to fall as the technology and volume of cells manufactured increases.

• 2 Osama Bin Laden // May 4, 2011 at 4:35 pm

cool bro.

• 3 Fred Henderson // May 11, 2011 at 10:02 pm

Thanks for the solar cost comparison information. However, I wonder though if you are not overestimating the performance of solar panels and batteries over time. I understand solar panel output decreases with weathering but I have not seen data on this.
But possibly more importantly, from personal experience I have found it difficult to keep deep cycle batteries (used on a small, streamlined RV), which are subject to frequent deep discharge and recharge over only a few weeks of travel a year to last more than a year or so.
My problems may be due to poor maintenance procedures during non-use storage periods (I know batteries degrade rapidly if not recharged quickly after discharge, but I have had problems manually staying with procedures over the long winter months. If you have invested a lot in batteries you might want to consider a backup house power based recharge system to maintain your batteries. I have never seen such for sale, but this should be in demand for the solar power community.

I hope all goes well with your system and you can report positive findings periodically. We definitely need viable energy alternatives.

Fred H.

• 4 yalocay // May 15, 2011 at 7:51 am

thanks guys this is exactly what i wanted

• 5 Roland Johnson // May 17, 2011 at 2:39 pm

You do not take into account depreciation of the power plants which are not needed in the case of solar. Also if you are taking into account DC/AC conversion losses for solar you should take into account transmission losses from power plants. Since solar is generally local these would not be incurred.

• 6 Matt stein // May 21, 2011 at 9:58 pm

Doing a school research project, the information on here helped so much, thank you!

• 7 Alan Dominique // May 24, 2011 at 3:36 pm

OK, let’s address some of the things this article leaves out. First, you supplied the customer cost of solar power but the ‘wholesale’ cost of fossil fuel power, why? The cost of fossil fuel generated electricity is very low, but it also can’t be done at home so the power must travel great distances where there are great losses and MASSIVE infrastructure costs. This article completely leaves that part out.
Second, your estimation of how much a solar system costs is way off, a 2 KW system would not be \$45k for the average homeowner because your average homeowner would not buy the battery bank to go with it so take at least \$10k off the price. I did see the link to another site to get the tax credits estimated, but that should have also been a note on the bar chart.
Third, your estimate of 3.63h of peak output power is correct, but you’re leaving out the non-peak output power generated every day. Outside those 3.63h solar panels still produce power as a factor of the Sun’s angle to them and what if any filter/covering is on the panels. I admit that I don’t know exactly what this figure is (though I would have found out if I was going to publish an article on it) but I know that my tiny 40 W solar panel array still produce a Watt or two AFTER the sun is below the horizon!
Finally, I see no mention of the fringe benefits. Solar power is produced at the point of demand, which means there would be less need for huge power lines all over the country and if the power grid goes down, like in natural disasters, solar panels can still provide at least emergency power to keep food frozen, run lights, radios, and fans. I don’t think every house should produce all it’s power locally, but reducing grid dependency just a little benefits the environment, the economy, the homeowners, and even the power companies (by reducing their liabilities when the grid fails).
In conclusion, without the tax incentives, solar power is still more expensive that fossil fuels. However, tax incentives can pay for as much as 80% (federal + state)of all the costs of buying and installing solar panels which makes it actually cheaper than the alternatives. Currently the average house does not have enough sunny roof space to power the entire house off of solar power, but the combination of cost savings and piece of mind from having emergency backup outweigh the drawbacks for me.

• 8 Doug Brice // May 28, 2011 at 10:23 pm

Solar Cost
I just found this site and I could not believe no one had commented on this. I am an Electrical and Electronic Engineer. I have worked on power generation programs at Bonneville Dam, McNairy Dam and others on the Snake River. It has given me insight into the generation of electric power. Energy in, to get energy out, is what it is all about.
Even with your abundant generosity of figures “Solar” looses out as not being cost effective. Your 20 years of service is far from accurate. Batteries and inverters are only good for four or five years. Basic maintenance of the system is ignored and panel damage is to be expected also.
Most of all, solar panels don’t do well out is the sun and rain. The power generation declines rather rapidly as the solar panels age. I truly believe the solar generated electricity will never prove to be cost effective if solar panels are used.
Realize that all electricity generated at our dams is truly solar powered. The sun evaporates the water, it then rains, the water collects in our rivers, and runs our turbines. Now there is a solar cycle of almost free energy.

• 9 HomemadeSolarPanels // Jun 6, 2011 at 9:32 am

I have bookmarked, Dugg, and I joined the RSS subscription. Thanks! ….

• 10 maxxx // Jun 8, 2011 at 3:25 pm

With all due respect I disagree with:
“high solar energy costs in comparison to conventional fuels should improve with utility rebates and government tax incentives”

Subsidies are nice for the manufacturers but they end up costing the consumer more in taxes than they save in costs. It’s just a shell game.

We all have noted the “renewable energy tragedy in Europe, Spain in particular with huge investments in solar panels were also a huge financial bust.

• 11 Andrew // Jun 20, 2011 at 5:50 pm

The cost information is very much outdated and any comparisons incorrect. It is understood since it was written in 07, but still 45k for a 2kW (22.5k/watt) is about 3 times the cost at the time (2007)

I believe a revisit is due, recently saw an article smentioning solar as cheaper than nuclear

• 12 John Codega // Jun 27, 2011 at 9:08 am

Update of 2011:

a 5 KHW solar system, instead of 45,000 US\$, now cost 15,000-20,ooo US\$

batteries and inverters are now warranted for min 10 years, cost of replacement is max 5,000 US\$

so total cost on 20 years is max 25,000 US\$, so solar cost is now 0,21 US\$ / khw, a reduction of 80% in 4 years

no oil cris will affect this cost!

Solar is coming, you might be in or you might be out, but the revolution will take 10 years only!

• 13 Peter // Jun 29, 2011 at 8:46 pm

This is a very helpful analysis- and I think you’re spot on about the cost per kilowatt-hour of rooftop panels.

-But-

The comparison to oil, gas and coal prices is totally apples and oranges.

Rooftop solar panels are marketed directly to consumers- not to utility companies. So the proper comparison would be to the rates CHARGED to consumers- which average ~\$0.12/ kwh in the US. That is the base rate- heavy consumers are charged more as they hit higher usage tiers.

Akeena, specifically, operates in California. Want to guess what the power cost per kilowatt-hour is for the highest tier energy consumers in that state? You guessed it- \$0.40/ kwh. So if you are a high-volume energy user in California, who can use the tax credit, then solar panels are a decent investment- if you aren’t then they aren’t worth it yet.

So what does that tell you about the efficiency of solar vs. other types of power?

Nothing, absolutely nothing. Akeena simply sells the solar panels at the exact price point that it makes sense for their target customers to buy them. As the market dictates they should, regardless of what it costs to produce them. This is particularly true since Akeena is more of a reseller then a manufacturer.

To compare efficiencies vs. the price of oil/natural gas/coal you would have to look at what it costs a company to actually manufacture the solar panel. Preferably for a utility application. I’m not sure what that is. But First Solar, the industry cost leader, makes panels for about \$0.75/watt. Much, much less than what a retail-level consumer would pay.

• 14 Ben // Jul 8, 2011 at 12:33 am

Great work, thank I’ve been doing a lot of research for this topic for some time just what I needed.

• 15 Jesse // Jul 8, 2011 at 12:38 am

Very informational post here I found it quite interesting on the comparison.

• 16 MorinMoss // Jul 27, 2011 at 12:55 pm

Subsidies are pretty much always required for startup technologies, especially for them to compete with well-established incumbents.
And, the “renewable energy tragedy” was caused by the FINANCIAL MELTDOWN, not by the stupid greens and their communist agenda. Even some established and huge corporations needed help. How many of the world’s biggest car companies came to the brink of collapse?

• 17 Mohan Prabhu // Aug 23, 2011 at 2:29 am

The best way to save earth is neither solar nor wind or the conventional system.
It is Binary Cycle Power Generation System.
We supply 3KWH for US\$ 18,000 & US\$ 36,000 for a 10KWH Unit. what is the benefit?

Using your piped gas @ 0.13M^3 per hour if you live in a city or use 450 Gms(about 1pound) per hour – agro-waste ( fallen leaves, twigs, barks, stems, stalks, etc) you generate 10KWH power.

Compare this system with any other, you have a winner here.Contact mizunorc(at)ymail dotcom to get more information.

Best wishes,
Mo

• 18 Carl // Aug 31, 2011 at 10:58 am

Roland,

The depreciation and transmission line loss are all accounted for in the 10 cents per KwH I’m paying today for electricity at the plug. The company I buy it for pays that costs and they even take a small profit on top of that. Thus, it is very accurate to compare the 38 cents for solar to the 10 cents I pay today for my electricity generated by natural gas and nuclear. The best estimate I have made with my research was 22 cents for home solar panels, but we have a whole lot of sunshine where I live. I factored in the cost over 30 years with commercially available panels with ME doing the installation at no cost. Home solar energy is simply not competitive at this time. Also, considering they generate the energy for far less than we pay for it, with large markups for sales, billing costs and so on, solar is even worse than the numbers presented here. Imagine if there was a centralized solar facility sending electricity over transmission lines… the costs would be far greater than these estimates.

• 19 M // Sep 14, 2011 at 8:06 am

Love it how some people argue with your numbers.
A 5-10% price difference in the market decides weather a product/solution makes it.
When it comes to Energy: Physics and real economics beats out marketing, politics, rebates and artificial price rigging (i.e. Carbon Footprint tax).
Guys/Gals: Cost per KW /HR of solar isn’t 5-10% more than current sources … it’s 5-10 times more!!! (And you need batteries and/or evil coal plant as backup when the sun goes down).
Batteries only last 5-6 year.. You think your Lithium Camera batteries are expensive to replace? Wait till you drop \$10K to replace the battery pack (I won’t go into what happens to NicAd/NiMH old batteries)
Would you pay \$100,000 for a \$10,000 Car that only works when it’s sunny? No? What if I throw in floor mats and Shiny wheels with spinners on ‘em paid for by the government using your tax dollars.

• 20 dave // Sep 17, 2011 at 8:38 pm

everyone assumes that the cost of solar panels will come down, but no one provides any proof that it will happen. It’s not happening. The only way solar panels will become affordable is if oil and gas prices rise significantly, by 2 or 3x. then and only then will solar become viable.

• 21 Krumtralla // Sep 24, 2011 at 5:48 pm

Appears to be a typo in the article; the sample 5kw solar system was described as 2kw earlier in the piece and this has confused some readers, including me.

At the time of this comment (August 2011) Installed solar prices are ~\$5/w for residential and <\$3/w for large scale solar farms. The actual solar panels themselves are \$80 though it is volatile and has swung north of \$100 over the past 4 years for long periods of time. Right now it’s a 15% increase over Aug 2007 although these dates are a bit arbitrary.

Coal is now \$76/ton; 100% increase from the article.

Natural gas prices have cratered due to new fracking techniques and are now roughly \$0.004/cf; a 50% decrease from 4 years ago.

Also as Alan Dominique pointed out the whole fuels comparison is invalid. It may cost an electric utility \$76 to purchase a ton of coal, but that doesn’t directly yield a \$/kwh price of electricity!

You can’t just assume that the entire heat content of a ton of coal is going to be converted at 100% efficiency to electricity and delivered to your house without any losses or costs in actually transforming heat to electricity or transmission.

Fact is that coal power plants are about 33% efficient at transforming heat content into electricity, while modern natural gas cogen plants are roughly 50%.

Average transmission losses in the USA are >6%.

You stepped through all the conversion steps and losses in solar, but omitted all of these from traditional thermal generation.

The solar price was amortized over 20 years while there was not amortization done for the fossil fuels. Thermal plants don’t last forever, they also have an expected lifetime and O&M costs.

20 years for solar is reasonable, though a bit arbitrary. Panels are warranteed for 25 years and there’s no reason they wouldn’t keep on chugging for decades after that. Adding another 5 years of operation time for the solar in this analysis increases the lifetime production by another 25%. Reroofing and inverter replacements will add to O&M costs eventually, but the panels themselves are extremely durable. Most financial models have a -0.5% degradation factor on power output and then routinely over produce in real life.

The 50% price reductions in installed solar power and natural gas prices and 100% increase in coal prices over the past 4 years are each big stories.

The process of breaking down the costs of solar were very interesting to see in this article and we can see the effects on pricing that a few years have made as well as how simple definitions on operating life can affect the final numbers. Unfortunately the comparison with fossil fuels was not handled as rigorously as the solar side.

• 22 Krumtralla // Sep 24, 2011 at 5:58 pm

My comment was written a month ago, but it wasn’t posted successfully until now. Also seems to be a bit garbled in a few parts. In particular the 3rd paragraph should have read:

“At the time of this comment (August 2011) Installed solar prices are ~\$5/w for residential and <\$3/w for large scale solar farms. The actual solar panels themselves are \$80 though it is volatile and has swung north of \$100 over the past 4 years for long periods of time. Right now it’s a 15% increase over Aug 2007 although these dates are a bit arbitrary.”

• 23 Krumtralla // Sep 24, 2011 at 5:59 pm

Dang it, I reposted the section correctly but it got garbled again!

Try again:

The actual solar panels themselves are \$80 though it is volatile and has swung north of \$100 over the past 4 years for long periods of time. Right now it’s a 15% increase over Aug 2007 although these dates are a bit arbitrary.

• 24 Palak // Sep 26, 2011 at 4:14 pm

A typo in the third paragraph, it says A TWO-KILOWATT solar system costs 45,000. It should be a FIVE-KILOWATT, right?

• 25 warranty // Oct 2, 2011 at 3:44 pm

researching, i find it difficult to understand why a manufacturer would only give a 10 year warranty, when the return on investment requires 26years. This tells me after manufacture’s research they expect extensive repairs or replacements are needed after 10 years. Why would I invest in anything the manufacture estimates is 10 years, when it requires 26.6 years return on investment.

• 26 Tjhunter // Oct 14, 2011 at 10:31 pm

First of all I appreciate the review and analysis. I do find it incredible that many of the comments provide that taking into account the many tax incentives and energy company rebates somehow help reduce the cost of this energy. Where do you think the rebate money and the tax incentives replacement money comes from…the solar energy money fairy? Although I’d love to see cheap solar energy in the future the truth is as of right now it is simply not a viable option for 99.9% of Americans. Most of you that tout the benefits and capabilities of these solar systems (and in particular the ones without battery banks) would not last a week without the backup of fossil/nuclear fueled energy sources when your solar power turns off at night. Try that almost anywhere in the middle of the summer or winter. And if you use fossil fuels for your heat do you really think that’s any better for the environment than using them for generating electricity. I fully support continuing to explore/research and work towards better solar options but at best for the next 20-30 years solar will only be able to augment fossil/nuclear power. New Nuclear technology is all together the best option for the near future in minimizing the damage to the environment while still producing enough power for all of our air conditioners…tv’s…etc to keep us all happy.

• 27 clifford file // Oct 28, 2011 at 11:17 am

It doesn’t matter what coal, oil, or natural gas costs or how much energy it produces. What matters is what it costs for the consumer to buy that energy for his house. Right now that ranges from 12 to 25 cents per kilowatt hour, depending on location and your provider. If solar only costs 36 cents per kilowatt, we aren’t that far away from hitting a point where it is competive, and with the rebates it already is in some areas. Batteries should not be needed if you are feeding the grid when not using the electricty produced by solar. And those peek hours just happen to hit when everyone is using AC and the power companies are stugglijng to produce enough energy.

• 28 Johnny Appleseed // Oct 28, 2011 at 5:21 pm

Two notes:

1. Given that the original article was written in 2007, it makes sense that costs would have changed.

2. While I think that you can debate the calculation based on differences in technology, this article fundamentally isn’t making an apples-to-apples comparison. For fossil fuel generation, the article looks at fuel costs. Evaluating solar on that basis would lead to a \$0.00/kWh, as there is no cost to sunlight. That illustrates why fuel cost is not a great metric.

Instead, I agree that levalized cost of energy (total cost of equipment, maintenance, fuel and disposal over the lifetime of the generation asset) is a more accurate comparison. To do that, we’d need to include the cost to mine and transport coal, the cost to build the coal plant, the cost of environmental remediation, the cost of transmission lines etc. You’d also have to add the cost of transportation to solar, as well as any end of life recycling/clean up. At that point you have a more accurate comparison of the costs of electricity generation, and my gut is that solar would be pretty close to fossil.

• 29 Average Cost Of Solar Energy – GREEN ENERGY // Oct 29, 2011 at 1:39 am

[...] such as coal or oil in generating electricity, the cost of solar energy is significantly higher.http://greenecon.net/understan ..Solar Cost FAQ – The Solar Guide | Your Complete Guide to Solar EnergySolar Cost FAQ What [...]

• 30 Prof. A. Roy // Nov 1, 2011 at 7:13 am

Current sources of information indicate for turn-key solar electricity power plants:
a. Customary thermal, linear focusing, \$5-6000/kW
b. Customary PV panels \$4-5000/kW

• 31 Prof. A. Roy // Nov 9, 2011 at 10:44 am

I’d appreciate readers’ comments on my findings (derived from published information on recent installations of solar power plants) :
Current sources of information indicate for turn-key solar electricity power plants:
a. Customary thermal, linear focusing, \$5-6000/kW
b. Customary PV panels \$4-5000/kW. Thanks/

• 32 Muhammadali Al Harazy // Nov 11, 2011 at 3:48 pm

Many thanks.

• 33 Rahul // Nov 19, 2011 at 10:09 am

When was the last time you checked solar panel prices i can understand that this article was written in 2007 maybe the costs are reflective of what it cost then , now you can get panels for under 1\$/watt(if you are buying 10KW) and BOS inverter(97% efficient) etc for (0.5\$/watt) the batteries prices have also come down by half (1\$/watt) and installation charges are pretty much the same by as you can see the overall cost has come down by 1/3rd

• 34 Pacific Tool Co // Jan 4, 2012 at 5:37 am

We can get you a much larger system than 2KW for \$45,000 visit http://pacifictoolcompany.com , we have a 12KW System for less than 30,000. Install will be far less than \$15,000 also

• 35 nsommer // Jan 30, 2012 at 11:57 am

This is good stuff for the project I’m working on!!! I hope this site gets good reviews!!!!!!
nsommer

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