In a previous post I talked about the advantages of solar electricity compared to other renewable source of electricity. In this post I’ll move away from my normal scientific topics and discuss the costs of small scale solar energy and how it compares with other renewables.
Whats is ‘the LCOE’?
When comparing the relative costs of different methods of electricity generation, a key measure is the levelised cost of energy (LCOE). This is defined as the total costs divided by the total amount of electricity produced.
However, LCOE is a technical term not used in everyday language. So in this post I will use the term average unit cost instead. If costs are measured in dollars and energy produced is measured in kilowatt hours (kWh) (the units domestic electricity meters use) then the average unit cost will be in $ per kWh.
(Throughout this post I will talk about costs for a US consumer, but they would be similar for a consumer in any country in the developed world)
Calculating the average unit cost of solar electricity- for a small domestic installation in the US
To work out the total costs, we need know the maintenance costs in addition to the initial cost of the panels.
The Solar Estimate Organization provides a free service providing information on the costs of solar panels to the US public. On their website they state that a system which can generate up to 5 kWh of electric power costs around $15,000 to purchase and install. The annual maintenance costs are fairly low at $112 per year (less than 1% of the initial cost). If we assume a thirty-year lifetime the total costs are:
$15,000 + (30 x $112) = $18,360
These costs ignore any government subsidies which may be in place to promote the use of solar energy.
To work out the total amount of electricity produced we need to know:
- the efficiency of the panels
- the amount of sunlight they receive and
- their expected lifetime,
The most efficient solar panels on the market have an efficiency of 22%. However these tend to be the most expensive and it is normally a more cost-effective option to buy slightly less efficient panels. Although more efficient panels require less roof space For the purpose of this post I will assume the 5 kW panels have an efficiency of 16%. If we average over an entire year the amount of sunlight at a location depends on its latitude and the amount of cloud cover. At a location with latitude 40 degrees North having a typical amount of cloud cover our 5 kW solar system would generate 6,900 kWh of electricity per year.
If the system lasts 30 years, then you might expect it would generate 30 x 6,900 kWh = 207,000 kWh of electricity over its lifetime. In reality, the output of solar panels falls gradually with time. For modern solar panels this degradation rate is typically 0.5% per year and, as technology improves, it will get even lower. Assuming a degradation rate of 0.5%, the panels would produce 191,500 kWh over 30 years
Based upon these figures the average unit cost of solar electricity for the system is
$18,360/191,500 kWh = $0.096 per kWh.
If the system had a forty-year lifespan then the total costs would become $19,480 and the system would generate 248,400 kWh. The average unit cost would then be:
$19,480/248,400 kWh = $0.078 per kWh.
Another factor – storage costs.
For consumers who are off grid, most of the solar energy generated will be stored to be used when it is needed. This is done by using rechargeable batteries and the costs of these need to be factored in as well. Currently, the costs of a rechargeable battery pack which can store 20 kWh of energy is around $4,000 Such a battery pack should have a lifetime of 10 years. So, over thirty years, three battery packs would need to be bought, costing a total of $12,000 at today’s prices. However, prices of rechargeable batteries are falling rapidly – driven by the demand for electric vehicles
In addition, battery lifetimes are improving all the time. So, in 10-15 years’ time we would expect high capacity rechargeable batteries to last longer than ten years. Therefore, a figure of $5,000 is a better estimate for the total rechargeable battery costs over a thirty-year lifespan. This gives our total costs of $23,360. The average unit cost for an off-grid consumer is therefore:
$23,360/191,500 kWh = $0.122 per kWh.
Comparison with the costs of other renewables
The costs of hydroelectricity depend on where the plant is and its scale. A review by the International Renewable Energy Agency in 2012 came up with the following conclusions
- The average unit cost for small hydropower projects (i.e. generating between 1 and 15 MW of electricity) in developing countries is between $0.02 per kWh and $0.10 per kWh, making them a very cost competitive option to supply electricity to the grid, or to supply off-grid rural electrification schemes.
- Very small systems known as pico-hydro, which generate less than 10 kW, have average unit cost $0.27 of per kWh or higher and (as discussed in previous post [put link here] ) need a constant supply of water running downhill. In reality the opportunities for the vast majority of domestic consumers to generate hydro-electricity are very limited!
- For large hydropower projects the average unit costs covers a large range between $0.02 per kWh and $0.19 per kWh. At the lower end of this cost band it makes hydroelectric power a cheap option. Although, as discussed in a previous post the environmental impact of large hydroelectric power stations can be massive.
- The weighted average electricity cost of new onshore wind farms in 2016 was between $0.05 per kWh. and $0.12 per kWh. Data from https://www.irena.org/costs/Power-Generation-Costs/Wind-Power.
- However, Small wind turbines are in general not cost effective. Unless an area has a very high average wind speed the average unit cost is significantly higher than solar energy. A small domestic installation will have an average unit cost of $0.213 per kWh
Average unit cost of electricity from small installations. In reality domestic hydro is impractical for the vast majority of consumers.
I hope you have enjoyed this post, which has strayed away from my normal topics. It is certainly clear that solar energy is cost competitive with other renewables and, given the continuing fall in the price of solar panels, it will be even more so in the future.
- LCOE Calculation
In this post the calculation of the LCOE for solar energy has been simplified. To calculate the LCOE more rigorously you also need to consider the following factors.
- The discount rate. This allows for the fact that over time the value of money decreases.
- The maintenance costs may vary from year to year
- The amount of electricity generated may vary in a more complex way than a simple 0.5% drop each year.
For the purposes of this post I made the following assumptions.
- All calculations are in 2019 dollars.
- The investment expenditure all occurs at the start (year 1). There is no investment expenditure in subsequent years.
- For simplicity I have taken the discount rate to be exactly equal to the rate of inflation. So, because the calculation in real 2019 dollars, it is zero.
- The operation and maintenance expenditure are the same in 2019 dollars every year, i.e. they increase at exactly the rate of inflation
2.Definition of solar energy
There are two different ways of generating electricity from sunlight.
- One way is to concentrate the Sun’s energy using mirrors onto a small area and use the heat generated to produce steam to turn a turbine which generates electricity. This is known as Concentrated Solar Power (CSP)
- The other way is use arrays of photovoltaic cells (more commonly known as solar panels) to generate electricity directly from sunlight. Around 98% of solar electricity is generated this way and throughout this post when I talk about ‘solar energy’ or ‘solar electricity’ I mean electricity generated using solar panels.
- Lifetime of solar panels
As a general solar industry rule of thumb, solar panels are expected to last about 25-30 years. However, this doesn’t mean that they suddenly stop producing electricity after 25-30 years. It means that energy production has declined by what manufacturers consider to be a ‘significant amount’. Solar panels can continue to work for many decades, if they aren’t weakened by wind, debris, or any other external factors. This is primarily because solar panels don’t have any moving parts and are usually only damaged by outside forces like a poor racking setup or inclement weather. https://news.energysage.com/how-long-do-solar-panels-last/
4.Off grid storage
The off-grid calculation ignores the fact that when electricity is stored in rechargeable batteries the charge/discharge process is not 100% efficient
- Average unit cost of domestic wind turbine
According to the Renewable energy hub website [
a domestic 5 kW wind turbine costs around $32,000 and can generate around 8,900 kWh of electricity per year, provided it is installed in a suitable windy location. If we assume that the system lasts 20 years and has maintenance costs of $300 per year, which are higher than a solar system because it has moving parts, then the total costs are $38,000. The total amount of electricity generated over the lifetime of the system is 20 x 8,900 kWh = 178,000 kWh. The average unit cost is therefore
$38,000/178,000 = $0.213 per kWh
This is roughly double that of a solar system.