What should you look at to determine if you’re getting a good deal on solar? There are lots of things to pay attention to when deciding on a solar energy system; but two of the most useful metrics for evaluating the cost and value of a solar power offer are price per watt, measured in dollars per watt of energy ($/W), and ‘levelized cost of energy’ (LCOE).
You can use cost per watt ($/W) to compare solar energy system installation prices and solar power costs, while LCOE is great for comparing the average per-unit cost of the electricity the system will produce. We discuss both $/W and LCOE in detail in this article.
We understand that Solar pricing terminology can be confusing to understand. Metrics such as $/W and LCOE will be used frequently so its crucial that you understand what solar installers are talking about.
Solar systems sizes are usually described in kilowatts (kW, where 1kW = 1,000 watts). If you are planning on purchasing your solar panel system (either with cash or a solar loan), you’ll want to know how much a system will cost per watt.
To calculate $/W, take the total out-of-pocket cost of the system that you are considering and divide it by the number of watts of capacity in the system. For example, a 5kW solar system has 5000 watts. If that system costs $15,000, then the cost per watt is ($15,000 / 5000W =) $3/W.
When you’re comparing figures, make sure that you understand whether the price you’re looking at incorporates the Investment Tax Credit (ITC) incentive. The ITC effectively reduces your solar energy system’s total cost by 30%). For example, the $/W cost of the system described above is $15,000 before the ITC. After the ITC is taken into account, it will be about ($15,000 x 60% =) $9,000, (around $1.80/W). Additional state tax credits and other rebates may further reduce the price.
Once you have a $/W figure for a solar system, you can easily compare its basic value to other systems, regardless of size differences. For example, imagine you’re considering a 7kW solar system costing $20,300 and a 6kW solar system costing $17,400. How do you know which one offers more value (more ‘bang for your buck’)?
Because they are differently sized systems, at first glance you might think that you cannot meaningfully compare them by their price tags alone. But in fact, both systems cost $2.90/W – meaning that with either system offers the same value in terms of its maximum power output.
Levelized cost of energy (LCOE) is the average amount that you will pay for each unit of electricity that your solar energy system will produce over its lifetime. LCOE is usually displayed as a ‘cents per kilowatt-hour’ figure (¢/kWh). You might recognize ¢/kWh from your monthly electricity bill – it’s the amount you are charged for each unit of electricity delivered to your home.
LCOE is calculated by dividing the total out-of-pocket cost of your solar energy system by the estimated total amount of energy your solar system will produce over a given period of time. It is typical to look at a 20-year period when calculating LCOE, although a system will actually continue to produce power for over 30 years.
LCOE is more complicated to calculate than $/W because there are more factors involved – and because it is an estimate of future production.
To roughly calculate LCOE, you should know (or be able to estimate):
To calculate the LCOE of a solar system, it’s also useful to know:
As an example, if you live in Los Angeles (where there is 5.26kWh of sun daily on average throughout the year) and you’re looking at a 5kw system with a net cost of $9,000, you can estimate its LCOE accordingly:
LCOE is handy because:
Remember: LCOE is an estimate
While LCOE is a useful metric for comparing the cost of solar electricity from your system over its lifetime, be aware that actual figures will vary. For example, if your solar panel system produces more electricity than expected over its lifetime, the LCOE at the end of 20 years will be lower than the initial estimate. Conversely, if your system produces less electricity over its lifetime (e.g. due to a malfunction that results in significant downtime), the actual LCOE will be higher.
What does this mean for you as a solar shopper? It means that you should do your research into the quality of your system’s components as well as the warranties that back them up. Most solar panel systems will have no issues during their operational lives, but knowing exactly what you’re signing up for will help to minimize problems and disappointment in the future.