Is Solar the Cheapest Form of Energy

According to authoritative data from the International Energy Agency (IEA), solar energy has indeed become the cheapest new source of electricity in history in most countries.

Over the past decade, the cost of utility-scale solar power has plummeted by approximately 80%.

Currently, costs in many places are as low as 0.03 to 0.05 USD per kilowatt-hour (kWh), which is far lower than the cost of new coal or natural gas power plants.

Although residential rooftop solar requires upfront installation fees of tens of thousands of dollars, it typically pays for itself within 5 to 8 years, after which one can enjoy nearly free clean electricity.

The Big Picture

Calculating the Details

A residential rooftop photovoltaic system with a rated power of 7.5 kW, estimated based on a standard peak sunshine duration of 4.2 hours per day, will have a total power generation of approximately 11,497 kWh in its first year.

Considering the 0.5% annual rated output power degradation rate of monocrystalline silicon panels, the equipment can cumulatively output 268,500 kWh of electricity over its 25-year physical lifecycle.

Based on a market average price of 3.00 USD per watt, the total expenditure for upfront hardware procurement and labor costs amounts to 22,500 USD. After deducting the 30% Federal Investment Tax Credit (ITC), the net book cost drops to 15,750 USD.

In the 12th year, a payment of 2,500 USD is required to replace the DC-to-AC string inverter.

Combined with an annual maintenance fee of approximately 150 USD for a single panel cleaning and circuit inspection, the total 25-year operation and maintenance (O&M) budget accumulates to 6,250 USD.

By adding the net hardware cost of 15,750 USD and the subsequent maintenance cost of 6,250 USD, and dividing by the total electricity output of 268,500 kWh, the Levelized Cost of Energy (LCOE) is locked at 0.081 USD/kWh.

The average residential grid electricity price in the United States, as calculated by the U.S. Energy Information Administration (EIA), is 0.16 USD/kWh, resulting in a price difference of 0.079 USD per unit of electricity.

Hidden Bills

Using financial installment loans to purchase hardware significantly increases the cost of capital. Currently, annual fixed interest rates for specialized solar loans in the U.S. range from 7.5% to 9.99%.

Loan providers will add a dealer upfront fee of 15% to 30% on top of the 22,500 USD principal, causing the actual loan principal for interest calculation to swell to 28,125 USD.

Distributed over a 240-month (20-year) repayment cycle at an annual percentage rate (APR) of 7.99%, consumers must pay a fixed monthly amount of 234 USD, with the total principal and interest paid over 20 years reaching 56,160 USD.

Re-evaluating based on the total credit expenditure of 56,160 USD, the allocated cost per kWh rapidly climbs to 0.209 USD, exceeding the national average grid price of 0.16 USD/kWh.

Thirty-six U.S. states offer a 100% property tax exemption for solar energy; however, in the remaining 14 states, installing 7.5 kW equipment can increase the assessed value of a home by approximately 15,000 USD.

Based on an average annual property tax rate of 1.2%, this increases the annual tax payment by 180 USD, accumulating a holding cost of 4,500 USD over 25 years.

Home insurance rates also fluctuate accordingly. Adding rooftop power generation equipment typically leads to a premium increase of 50 to 100 USD per year, resulting in an additional capital drain of 1,250 to 2,500 USD over 25 years.

Price Hike Hedge

The inflation rate of retail grid electricity prices is the most significant variable parameter in calculating the Internal Rate of Return (IRR).

Based on statistical analysis of the past 20 years, the Compound Annual Growth Rate (CAGR) of U.S. grid terminal prices has remained at 2.9%.

In 2022, the year-on-year increase in residential electricity prices across the U.S. reached 10.7%, and it continued to rise at a rate of 4.3% in 2023.

Assuming electricity prices maintain an average annual growth rate of 3.5% over the next 25 years, the current starting price of 0.16 USD/kWh will reach 0.22 USD/kWh by the 10th year and hit a peak of 0.37 USD/kWh by the 25th year.

Matching the total electricity demand of 268,500 kWh with a 3.5% price growth model, the total 25-year expenditure for continuing to purchase electricity from the grid is 63,450 USD.

Subtracting the 22,000 USD total lifecycle investment for solar, the absolute net profit of a single 7.5 kW system over 25 years is locked at 41,450 USD.

The variance in regional electricity prices drastically affects the payback period. In Massachusetts, the grid unit price is as high as 0.28 USD/kWh, compressing the static payback period for full-payment purchases to 4.5 years;

In North Dakota, the grid unit price is only 0.10 USD/kWh, stretching the payback timeline to 14.2 years.

Comparing Energy Prices

Various Electricity Prices

When assessing the book expenditures of various energy sources, the 2023 Levelized Cost of Energy (LCOE) report released by Lazard provides the most granular reference values.

Currently, the unsubsidized generation cost range for large-scale utility solar plants is locked between 24 USD and 96 USD per megawatt-hour (MWh), with a median value of approximately 60 USD.

In contrast, the cost distribution for new combined-cycle natural gas plants ranges from 39 USD to 101 USD per MWh, with a median of about 70 USD.

This means that in utility-scale competition, the initial generation cost of solar is already approximately 14.2% lower than the most advanced fossil fuel generation methods.

If narrowed down to coal power, the cost range is as high as 68 USD to 166 USD per MWh, with a median of approximately 117 USD, which is nearly double the cost of solar generation.

Over the past 15 years, the cost per kWh for utility-scale solar has dropped by nearly 90%, while the costs of coal and nuclear power have risen by approximately 7% and 25% respectively due to strict environmental compliance requirements and high labor maintenance costs.

· Globally, the median LCOE for new solar has fallen below 0.06 USD/kWh.

· Fuel procurement and waste residue treatment costs account for more than 40% of the total operating expenses of coal power generation.

· The construction cycle for a solar power plant typically only takes 12 to 24 months, whereas a coal power plant requires a construction time cost of 60 to 96 months.

Gas and Coal Volatility

Taking natural gas as an example, the price of natural gas at the Henry Hub has fluctuated by more than 300% over the past 36 months, with prices once soaring from 2.50 USD to over 9.00 USD per million British thermal units (MMBtu).

This transmission mechanism of fuel prices means that the marginal cost of natural gas power plants will oscillate violently as a result.

In contrast, the fuel cost for solar systems is permanently fixed at 0 USD.

In a 25-year Power Purchase Agreement (PPA), solar providers can offer long-term locked prices fixed at 0.03 to 0.05 USD/kWh, which allows large industrial users to avoid financial premiums caused by inflation and resource shortages.

Data from the U.S. Energy Information Administration (EIA) shows that the annual non-fuel operation and maintenance (O&M) expenditure for fossil fuel power plants is approximately 0.005 to 0.015 USD/kWh, while this indicator for solar power plants is typically below 0.003 USD/kWh.

This long-term advantage in fixed expenditures allows solar to demonstrate extremely high certainty in financial models of 20 years or more, with a standard deviation much lower than that of traditional energy sources dependent on global supply chains.

Wind and Nuclear Comparison

The median levelized cost of onshore wind power is currently about 42 USD per MWh, which is even slightly more price-competitive than solar, but the siting of wind power is limited to specific wind resource classes (e.g., the average wind speed must be greater than 7 m/s).

The cost per kWh for nuclear power is currently at its highest, with the LCOE range for new nuclear power plants between 141 USD and 221 USD per MWh.

The high premium of nuclear power stems primarily from its extremely high initial capital expenditure (CAPEX), with construction costs per kilowatt of installed capacity typically between 6,000 USD and 10,000 USD, while the unit price for utility-scale solar has dropped to 800 USD to 1,100 USD per kilowatt.

Although nuclear power has an average capacity factor of over 90%, far higher than the 20% to 30% of solar, solar combined with cheap lithium cell storage (costing approximately 150 USD/kWh) can provide a more flexible asset response speed during peak-shaving periods than nuclear power.

· The average installation cost for onshore wind power is approximately 1,200 USD to 1,500 USD per kilowatt.

· Budgets for nuclear power plant decommissioning and nuclear waste disposal typically account for more than 15% of the total investment.

· Solar panel quotes per watt have dropped another 15% in the last 12 months, touching a low of 0.12 USD.

Location Impact Analysis

Relying on the Weather

Calculations from the National Renewable Energy Laboratory (NREL) database indicate that a residential solar system with a rated capacity of 10 kW in Phoenix, Arizona, has an average daily peak sunshine duration of 6.5 hours, and its cumulative annual power generation can reach 23,725 kWh.

The same 10 kW hardware configuration moved to Seattle, Washington, sees daily peak sunshine duration plummet to 3.2 hours, with a total output of only 11,680 kWh over 365 days.

The output efficiency variance between these two latitudinal coordinates leads to a 50.7% drop in power generation. In a sample of 50 U.S. states, the standard deviation of average annual power generation reached 4,200 kWh.

If a 400 W monocrystalline silicon panel with a conversion efficiency of 21.5% is installed at 30°N latitude, its annual yield per watt is approximately 1.8 kWh; however, moving it north to 45°N latitude causes the average annual output per watt to drop by 24% to 28%.

In the Pacific Northwest, during the 6-month winter cycle, heavy cloud cover has a 70% probability of weakening solar irradiance penetration by 45% to 60%.

To compensate for the 30% power loss caused by insufficient light, users in high-latitude regions usually need to increase the number of rooftop panels from 20 to 28, which leads to a 40% surge in upfront procurement costs.

In Nevada, which ranks in the top 5% of the U.S. for sunshine conditions, the average annualized power generation return per kilowatt of installed capacity is 1,850 kWh, while in Maine, which ranks last, this indicator is only 1,120 kWh, representing an absolute difference of 730 kWh.

Assuming a panel lifespan of the standard 25 years, a Nevada system can produce 182,500 kWh more electricity over its full lifecycle than a Maine system.

At a national average median electricity price of 0.15 USD/kWh, this 182,500 kWh difference represents a hidden wealth revenue loss of 27,375 USD.

Temperature Loss

Ambient temperature has a clear negative inhibition ratio on the physical load of semiconductor materials. Rated power under Standard Test Conditions (STC) is determined in a constant temperature laboratory at 25 degrees Celsius (77 degrees Fahrenheit).

P-type monocrystalline silicon solar panels, which have an 80% market share, typically have a median temperature coefficient fluctuating between -0.35%/°C and -0.45%/°C.

When ambient temperatures in Arizona reach 40 degrees Celsius during midsummer, the actual operating temperature on the surface of black rooftop panels has a very high probability of climbing to 65 degrees Celsius.

The panel surface temperature exceeds the 25 degree Celsius standard line by 40 degrees Celsius. Multiplying this by the -0.40%/C decay rate leads to a 16% cliff-like drop in the instantaneous output power of the entire system.

An 8 kW rated device, under the scorching heat of 65 degrees Celsius, can only maintain its maximum available peak power at a level of 6.72 kW.

In contrast, in the high-altitude regions of Colorado, where the average annual temperature is 10 degrees Celsius, although air density has dropped by approximately 15%, the panel operating temperature remains in the optimal range of 20 to 30 degrees Celsius year-round, with a power degradation rate of less than 1.5%.

Certain expensive panels using N-type Heterojunction (HJT) technology have temperature coefficients optimized to -0.25%/°C. Compared to traditional P-type panels, these can recover about 6% of power loss under a high temperature difference of 45 degrees Celsius.

The upfront budget for purchasing N-type panels needs to increase by 15% to 20%; however, in Texas, where average daily temperatures exceed 30 degrees Celsius for up to 120 days, the annual 7% generation growth from this extra investment is enough to break even on the initial premium within 6.5 years.

Angle and Orientation

Installing at a slope that deviates from the optimal physical angle can cause a 3% to 12% loss in generation efficiency. The most ideal orientation within the U.S. is absolute true south (azimuth 180 degrees).

If panels are installed facing due east or due west to accommodate an existing roof structure, the efficiency of the equipment in capturing photons will be 15% to 20% lower than if facing true south.

To accurately calculate the loss amount caused by this tilt: a 5 kW system installed on an east-facing roof with a tilt angle of 15 degrees (approx. 3/12 pitch) produces only 6,200 kWh annually;

The same 5 kW equipment installed on a south-facing roof with a tilt angle of 30 degrees (approx. 7/12 pitch) can see its annual output soar to 7,400 kWh.

The annual production deviation of 1,200 kWh, under a local electricity price model of 0.18 USD/kWh, represents a loss of 216 USD in arbitrage space per year.