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When Will Rooftop Solar Be Cheaper Than the Grid?

In asking that question, people often compare apples to oranges, forgetting that the answer varies from place to place

To comparing the cost of electricity produced by rooftop photovoltaic panels with the cost of electricity delivered by the grid is more complex than it may seem. Start with local electricity costs and local net-metering rates.
Image Credit: Wallheater / CC BY 2.0 / Flickr

The National Renewable Energy Laboratory said recently that rooftop solar panels have the potential to generate nearly 40% of electricity in the U.S. But what about the cost of going solar?

Many people ask when the cost of producing power from photovoltaic (PV) panels will be equal to or less than buying from the grid — a point called “grid parity.” Reaching grid parity could accelerate solar adoption.

But in asking the question, they often compare apples to oranges and forget that the answer varies from place to place and from one type of installation to another.

For example, electricity from utility-scale solar systems (typically large arrays, some of which have tracking mechanisms that slowly change tilt and orientation so that panels face the sun all day) usually costs less than electricity produced from solar panels fixed on someone’s home. Also, residential electric rates, on average about 12 cents per kilowatt-hour (kWh) in the U.S., are much higher than wholesale electric rates — the price utilities pay to power generators — which are usually less than 4 cents per kWh.

At the same time, different states have more or less sun — solar power in Florida is typically more economic than in Alaska, for instance. All of these factors make the question more complicated than people might anticipate.

How, then, can we compare the cost of rooftop solar to the cost of buying power from the local electricity grid and thereby find when which states will hit the point of grid parity?

Putting a number on solar cost

The levelized, or average, cost of electricity from a PV array is derived from all the money spent to buy, install, finance, and maintain the system divided by the total amount of electricity that system is expected to produce over its lifetime. We call this value the Levelized Cost of Electricity (LCOE) and it’s expressed in terms of dollars per kilowatt-hour ($/kWh). The same metric can be used to determine the cost for a coal or natural gas plant. Planners like it because it reduces the cost of a power plant over a span of many decades into a single number.

Despite the strengths of LCOE as a metric — it is easy to understand and widely used — it has some shortcomings, too. Namely, it leaves out geographic variability and changes with seasons. It usually ignores the cost of environmental impacts such as the cost of carbon emissions. This metric is a bit too simple when comparing variable wind and solar generators to power plants that you can turn on and off at will, such as those fueled by uranium, coal, and natural gas.

Today the average cost of energy from PV in U.S. is reported to be 12.2 cents per kWh, which is about the same as the average retail rate.

Those who keep close tabs on electricity prices might think that it is about on par with what they are paying for their own electricity at home. This number can be misleading, however, because it represents the average price of utility-scale solar across the U.S., not necessarily the cost to produce electricity from solar panels on our homes.

So how do you know how close residential solar is to grid parity where you live? Ultimately, that depends on two things: how much you pay for the electricity you buy from the local grid, and how much can you get paid for the electricity you can produce from PV. Let’s take a look at both of them.

How much sun do you get?

The Energy Information Agency (EIA) has created a map of average electricity rates by zip code, averaged to the county level and remade by the author in the map below. The deep red (or darker) colors indicate higher average residential electricity rates.

Map of average electricity rates across the U.S (EIA)

Electric rates vary a great deal across the country, and these differences are caused by a number of economic, historical, and regulatory reasons. Likewise, the costs of solar and the availability of the solar resource (i.e., how often and how strong the sun shines) also are not homogeneous throughout the U.S. The figure below shows the LCOE of residential solar across all counties nationwide.

LCOE of residential solar across the U.S.

The data on the residential solar costs were pulled together from an ongoing large-scale campus-wide research project at the Energy Institute at The University of Texas at Austin. The main assumptions behind the data are a total cost of $3.50/watt for the solar PV installation for a fixed array pointing south with a tilt of 25 degrees. Solar production data are based on a 2013 National Renewable Energy Laboratory study.

That southern orientation and tilt represent a rule of thumb and might not be the optimal solar placement in every locale.

The U.S. Department of Energy SunShot Initiative has a stated goal of lowering residential solar PV system installations to $1.50/watt. Cheap PV panels from China have driven down the hardware costs to the point where the price of a total PV system is now dominated by “soft costs” — namely, customer acquisition, installation, supply chain, permit, etc. Still, total installed system costs continue to fall.

While those cost cuts are impressive, the major driver in the cost of energy produced is the amount of solar radiation that strikes the solar panels. Obviously, some locations are sunnier than others, so a solar array in Arizona will produce more energy than one in Washington state, making the system more economic for the homeowner.

And the prevailing cost of electricity varies nationwide. Some of the areas with the lowest cost of grid power (e.g., Washington) have some of the highest solar costs because of low levels of sunshine. It will be difficult to make solar reach parity in those locations.

On the other hand, there are other locations where the price of grid electricity is high and the solar LCOE is relatively low, including New Mexico, California, and Hawaii; these places are prime locations for solar to be at grid parity sooner.

Moving target

To illustrate this point, we take the same information that underlies the solar cost map and reduce the total installed cost of installed solar in $0.25/Watt increments — from $3.50/Watt to $1.50/Watt (the SunShot goal). We can then subtract the electricity rate from the solar LCOE in every county. Where this difference is zero or negative (electricity rates > LCOE), we can estimate when that county will be at grid parity for residential PV.

Below is a graphic that shows the estimate of the point of parity as the price of installed solar falls. Note that the total installed costs include the federal investment tax credit and any local rebates and tax incentives.

These calculations and estimates come with several caveats. First, the above calculation assumes that PV owners are paid for their generation at standard electric rates in their area. This arrangement is typically known as net metering.

But there is a wide range of ways that utilities interact with customers who have installed PV systems. Some utilities may pay homeowners wholesale market rates for the excess electricity they feed into the grid from their panels; these wholesale rates tend to be considerably lower than retail rates. If utilities pay homeowners based on the wholesale rate, rather than the retail rate, solar is less economic.

But that’s not all. One could add in the cost benefits of reducing CO2 emissions and other pollutants. On the other hand, there are costs associated with “firming up” the solar power when it’s nighttime or cloudy.

Keeping these factors in mind, the answer to the question, “Does it make economic sense for me to install solar?” is: it depends. As the map demonstrates, the crucial thing to watch, apart from any changes in electricity costs, is how quickly the overall costs of solar go down.

Joshua Rhodes is a postdoctoral researcher of energy at the University of Texas at Austin. This post originally appeared at The Conversation.

7 Comments

  1. Ven Sonata | | #1

    Superb article!
    The article is brief, concise and accurate. It took me 25 pages of messy ink and notebooks to arrive at identical conclusions. I should have stood in bed!

  2. User avater
    Dana Dorsett | | #2

    THE major driver in the US is indeed soft costs, not insolation.
    In both Germany and Australia the average cost of rooftop PV using the same panels, racking and inverters is under $2/watt, yet the average cost in the US as of Q4 2015 is about $3.50.

    http://www.seia.org/sites/default/files/2-5-ModeledResidentialTurnkeyRooftopPVSystemInstalledCostsQ12014-Q12015.jpg

    http://www.greentechmedia.com/articles/read/US-Solar-PV-System-Prices-Continue-to-Decline-in-Q3-2015

    The $1.50/watt difference is a measure of both policy support, and to some degree the maturity/competitiveness of the local markets. At $2/watt the LCOE of rooftop solar is below grid-retail for the vast majority of Americans, and $1.50/watt rooftop solar has a LCOE competitive with grid wholesale power. That day is coming sooner than most people in the US think.

    Meanwhile, LCOE of utility scale solar is now at the threshold of competitiveness in unsubsidised markets in most of the US, and is beating all comers in high-insolation/low-labor cost countries like India and the Arabian Peninsula countries. Very recently in Dubai in open bidding a PV proposal came in at a contract price of 2.99 US cents/kwh:

    http://reneweconomy.com.au/2016/solar-prices-plunge-to-new-lows-as-dubai-auction-nets-under-3ckwh-84894

  3. Vince Caruso | | #3

    Gerrymandering and Net Metering
    Our Great State Of Michigan is about to do away with Net Metering in a real sense. The current state government is lopsided to one party while our Senators have overwhelmingly been on the other side. Gerrymandered. The state leaders are taking huge sums from our utilities and pushing to do away with real net metering, and the utilities are paying about 20% returns to investors. This is now happening in many states. This has had a very chilling effect on solar and wind on our state in the last year or so.

    We could be net energy exporters with solar and, to a large extent, wind on the Great Lakes! A huge draw for businesses who would know the cost of energy is lower and very stable for a very long time and, much less pollution in our state (mercury and air pollution are major issues here from coal fired plants, and huge amounts of precarious nuclear waste storage on the shores of our Great Lakes).

    You may want to add that to your energy computer and see what comes out. Thanks for the effort, very useful information.

  4. Wes Stewart | | #4

    Reply to Vince Caruso
    "the utilities are paying about 20% returns to investors"

    Seems to me that you should be investing in your utility. Invest enough to pay your utility bill with the dividends and you've reached utopia; net zero!

  5. D Dorsett | | #5

    Different states, different regulations (response to #5)
    Not all states are under a "decoupled" regulatory environment, where merchant generators and electricity brokers/contractors/aggregators are allowed to compete directly for retail business. Many states do have those options however, and where bundled all-renewables contracts are available, it's a fine way to reduce one's carbon footprint and finance the growth of the utility scale renewables biz.

    It doesn't have all the same benefits of local PV however. With local PV the power is generated near the load, taking up minimal (or no) grid capacity. If you buy 100% wind or 100% solar the contracted-for energy may not necessarily even be going onto your regional grid, depending on how your state regulates those deals. Community solar is the next-best thing to having PV directly on your house, since it's always located within your local distribution grid, not a large solar farm three states away. That produces net benefits for the long haul transmission grids and our local distribution grid by relieving load, freeing up throughput capacity on the substation by supplying power directly to your side of it, etc. The less power moving through the grids & substation the cooler they run, and the longer they last. In NJ the annual peak grid loads (and highest equipment temperatures) are from air conditioning loads, which are substantially reduced by PV local to the loads.

    Solar policy is all over the place, and evolving rapidly state by state. This short critique of the states with the least distributed PV-friendly policy structures lays out some of the issues being debated/legislated:

    http://www.biologicaldiversity.org/programs/population_and_sustainability/energy/pdfs/ThrowingShade.pdf

    BTW: The powerprofiler.com domain is currently for sale- there's no "there" there. Want to buy it?

  6. Jonathan Lawrence CZ 4A New Jersey | | #6

    I saw an ad the other day
    I saw an ad the other day from Green Mountain Energy selling 100% hydro, solar or combo thereof as an alternative to my current incumbent. In my market the incumbent's non-TOU tariff rate has varied over the past year from about $.16/kwh to $.175/kwh for supply only. Despite being somewhat consistent with the article, I was still surprised to a see a contracted rate of $.1145/kwh for 100% hydro and $.1391/kwh for 100% solar for a 1-year contract. Rates are cheaper without the contract, but you take the risk of rates rising. There are a lot of other companies I could use offering similar pricing and some have interesting software that allows me to see usage by source like the Sense product.

    So what is the catch? Why would this not make sense for people who want to reduce their carbon footprint, but for whatever reason do not have access to rooftop solar? Why wouldn't it make sense for anyone who is paying more from their incumbent regardless of a desire to reduce carbon.

    Btw, according to the Power Profiler tool (https://www.epa.gov/energy/power-profiler), the mix of electric generation for my area is as follows:
    40.9 Nuclear
    30.8 Gas
    23.9 Coal
    2.3 Non-Hydro Renewables
    1.1 Hydro
    .4 Oil
    99.4 Total - Not sure why they are missing.

  7. Jonathan Lawrence CZ 4A New Jersey | | #7

    Dana,
    Good catch. The tool

    Dana,

    Good catch. The tool is called Power Profiler and it is available at multiple websites. I fixed my text above and put a link to the tool at the EPA's website.

    My new house is going to have solar panels on the roof, but I would rather keep my current house solar free and let the next owner make that call. In the meantime, I figured this a good way to make a difference. There is a lot of solar activity going on in NJ, so I would hope that if I switched to the 100% solar plan, I would be helping to keep the local REC prices up and encouraging further development. Probably not the case with hydro or wind around here.

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