Discover The True Cost Of Solar

To add some much needed transparency to the industry, the cost of solar power will be completely explained here.

Average Cost

The current average low-end cost of solar power As of early 2022,is approximately $2.00 per watt, installed. The average sized solar panel system is 5,000 watts, so this brings the total cost to $10,000. That 10k figure is just an average amount. Systems can cost more or less mostly depending upon a homeowner’s energy usage.

The typical solar installer does not make the price of solar easy to find online. This is unfortunate, as more homeowners would go solar if they knew how much they could save over the long term. The average homeowner would save at least $25,000 over 25 years by investing in a solar panel system.

Here is summarized solar cost information found on this page (4 different ways to measure the cost) –

Pre Tax Incentive Cost

  • As low as $2.00 per watt.
  • Average total cost – $10,000.
  • 6 cents per kilowatt hour.
  • $106/mo for a $10,000 ten year loan at 5% interest.

Solar pricing is significantly lower taking into account the 26 percent solar Investment Tax Credit. Here’s the pricing accounting for the tax credit –

Post Tax Incentive Cost

  • As low as $1.48 per watt.
  • Average total cost – $7,400
  • 4 cents per kilowatt hour.
  • $78/mo for a $7,400 ten year loan at 5% interest.

That $2.00 per watt is, again, on the low side for the average installer. According to the Solar Energy Industries Association, the average price for a residential system is approximately $2.84/watt. Pricing can vary due to specific brand of panels used, inverter brand, and regional pricing differences. Most installers can achieve sub $3.00/watt pricing. Some are now installing for less than $2.50/watt, though this pricing is not widely available yet. Marketing and other “soft costs” have prevented many installers from offering even cheaper prices for their solar installation services.

There is still a federal tax credit and many states have incentives that will bring this cost down a few thousand less. Plenty of no money down financing options are also available. An average non-financed system payback time period is about 5-8 years.

What is the cost from a payment point of view? Monthly payments on a ten year solar loan are NOW LESS than the average homeowner pays for a typical utility bill. Of course, after the loan is paid off, you’ll get to benefit from free solar power.


While the cost of solar power has fallen drastically in recent years, the pace of that change is slowing. A common misconception is that a reduction of the price of the panels themselves will result in a significant overall reduction in the total cost of an installed system. This is not true because an installed system has three main cost categories;

1. Cost of equipment – panels, inverter, wiring, etc.
2. Cost of installation service.
3. Cost of permitting, inspection, and interconnection.

The “soft costs” of solar – items 2 and 3 above – will also decrease in the coming years, but not as substantially as the historical reduction in the cost of solar panels. Solar contractors and installers will still need to make a reasonable profit, as seen in the cost of solar installation, and utilities will most likely continue to charge connection fees. A high percentage of the total cost of going solar is attributed to the cost of equipment and installation service. See this post for more reasons why now is a great time to buy solar panels.

Another misconception is that the price for residential solar power is still more than what utilities are charging their customers across America. This is no longer true. The effective rate for solar power spread across the life of a system is $0.06/kWh. The average cost for conventional energy is $0.12/kWh and rising.

Now let’s consider the four primary ways in which the cost of solar power is typically analyzed. This will explain how we arrived at some of the previously mentioned numbers.

Levelized Cost Of Energy (LCOE)

The levelized cost of energy is simply the cost of the solar panel system over its useful lifespan divided by the total amount of energy that it will produce. It’s a simple analysis because it does not take into account the “net present value of money.” The end result of this LCOE analysis gives us a dollars per kilowatt hour figure. We’ve already discussed that a 5kw system costs on average $10,000 before incentives. In a relatively sunny locale, a 5kw system can generate an average of 20 kWh per day or 180,000 kWh over its 25 year warrantied lifetime. So $10,000/180,000 kWh = $0.055/kWh. 6 cents per kilowatt hour beats conventional electricity charged by utilities in just about every single American city.

Simple Payback Period

This way to measure cost describes how many years it will take for your electricity bills to add up to the cost of your solar panel system. Again, the cost of money over time and other factors are not discussed. Here’s the formula: Simple Payback Years = (Net Cost) / (Annual kWh Produced) x (Production Value) Here are the figures for our example:
  • System Price: $10,000
  • Life of System: 25 Years
  • Annual Average kWh Produced: 7,200
  • Assumed Value of Energy Produced: $0.20/kWh
  • Simple Payback Years = $10,000 / (7,200 kWh)($0.20/kWh) = 6.94 years.
It should be noted that this is a somewhat conservative example because the 26 percent federal tax credit was not accounted for and some homeowners pay more than $0.20/kWh, which can lead to payback periods closer to 4 years.

Cash Flow

  • Acquisition method: Purchase
  • System Price: $10,000
  • Life of System: 25 Years
  • Annual Average kWh Produced: 7,200
  • Assumed Value of Energy Produced: $0.20/kWh
The first item to be considered is the annual savings. We take the average yearly kWh generated, 7,200 kWh, and the value per kWh, $0.20 to come up with the average annual savings of $1,440 (7,200x$0.20). This is the amount of positive cash flow each year. However, we start off at $10,000 negative cash flow. See the following chart:
Year

1
Annual Cash Flow

-$15,000 + $1,440
Equals

Cumulative Cash Flow

-$13,560
2+$1,440=- $12,120

3+$1,440=-$10,680
4+$1,440=-$9,240
5+$1,440=-$7,800
6+$1,440=-$6,360
7+$1,440=-$4,920
8+$1,440=-$3,480
9+$1,440=-$2,040
10+$1,440=-$600
11+$1,440= $840
12+$1,440=$2,280
13+$1,440=$3,720
14+$1,440=$5,160
15+$1,440=$6,600
16+$1,440=$8,040
17+$1,440=$9,480
18+$1,440=$10,920
19+$1,440=$12,360
20+$1,440=$13,800
21+$1,440= $15,240
22+$1,440= $16,680
23+$1,440=$18,120
24+$1,440=$19,560
25+$1,440=$21,000
As can be seen, the cash flow turns positive between years 10 and 11 as we determined previously in the simple payback period calculation. After year 11, this is essentially displaying the profit that the solar system is generating.

Return On Investment (ROI)

This is defined as Gain from Investment – Cost of Investment / Cost of Investment) x 100. It’s typically expressed as a percentage. Let’s look into a return on investment based on our previous example.
Year
1
Net Savings (Profit)
-$13,560
ROI
-90%
2-$12,120 -81%

3-$10,680 -71%
4-$9,240-62%
5-$7,800-52%
6-$6,360-42%
7-$4,920-33%
8-$3,480-23%
9-$2,040-14%
10-$600-4%
11$8406%
12$2,28015%
13$3,72025%
14$5,16034%
15$6,60044%
16$8,04054%
17$9,48063%
18$10,92073%
19$12,36082%
20$13,80092%
21$15,240102%
22$16,680111%
23$18,120121%
24$19,560130%
25$21,000140%
As can be seen, the positive return on investment really starts to become significant just a few years after the break even point. Unlike the stock market, this ROI with solar power production is as guaranteed as the sun rising every day.

Conclusion

While there are many different ways to measure the cost of solar power one thing remains true, solar power is considerably more affordable than continuing to purchase electricity from a utility. Savvy homeowners will choose the power ownership model that solar offers instead of being renters of electricity forever.

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