How to Financially Evaluate Solar – Levelized Cost of Energy

How to Financially Evaluate the Cost of Solar


Solar power presents one of the greatest opportunities for our world’s energy future. Drawing power from a truly unlimited source, a solar panel system provides you with this access for at least a quarter of a century.

So is solar power really that good? You still have to make the investment in your system, and you may not be sure that your solar panels will be able to soak up enough of the sun’s rays to provide you with all of the power that you need. To help lead to a more informed understanding about the financial benefits of solar power, we will show you how to financially evaluate solar through the Levelized Cost of Energy (LCOE) process.


What is the Levelized Cost of Energy?

The cost per watt measurement system wholly relies on generalized estimates based on the possible market value of energy in a given region. But this does not allow you to consider all factors relevant to the cost of energy. Also, it takes a short-term look instead of considering long term how much an energy resource will cost over the course of its lifetime. Therefore, it is not an accurate enough financial evaluation to allow you to effectively asses which energy resource is the most cost effective.

LCOE is the modern way to measure the relative cost of an energy resource. This is a more effective measurement system because it is designed to consider all relevant factors throughout the course of the production resource’s life cycle. To do this, it approaches the cost of energy from a holistic perspective, instead of trying to keep up with the often unpredictable variations that can occur in the energy market.

How can I determine the LCOE for solar power relevant to the alternatives?

Evaluating the financial aspects of solar power begins with considering all of the factors that affect the cost. This should, at the least, include all of the following:

Monies paid out of pocket

  • The initial investment cost of all equipment
  • The cost of interest for any equipment financing
  • Operation and maintenance costs for the life of the equipment
  • Insurance costs
  • Any and all taxes generated by the system, including property taxes due to an increased value of your home
  • The cost of removal or replacement of the equipment at the end of the life cycle

Cost reductions created by government incentive programs

  • Federal tax credits and investment grants
  • State tax credits and investment grants
  • Accelerated equipment value depreciation (under the MACRS depreciation system)
  • Additional incentive revenues

Energy produced by your solar power system

  • Estimated energy production during the first year of operation
  • Yearly power production capability degradation
  • Solar power system availability for use


These factors — and any additional factors that you have that will affect the cost of your solar power system — will be the foundation of your LCOE evaluation. The next step is to implement the correct LCOE equation to process the total cost of your solar power system during its life cycle.

In its simplest terms, the LCOE equation is as follows:


Total Life Cycle Cost / Total Lifetime Energy Production = LCOE

In this case, “Total Life Cycle Energy Cost” = (monies paid out of pocketcost reductions created by government incentive programs). Total Lifetime Energy Production = energy produced by your solar power system.


Calculating Correctly

Due to the fact that an LCOE calculation is made based on factors that will occur in the future, assumptions will naturally have to be made, so be as realistic as possible. For example, the anticipated degradation rate is not the same for all solar panel systems, and can vary greatly based on the materials used– cadmium telluride (CdTe)-based solar panels have nearly half the degradation rate of amorphous silicon (a-Si)-based solar panels.


All Calculations Will Undervalue

Keep in mind that even LCOE operates under certain assumptions, the greatest of which is the true life cycle of your solar panel system. How long solar panels can truly last has not been determined, as half-century old solar panels (which are extremely out of date at this point), are still producing energy at a high rate. As such, you should consider your LCOE calculations to be the minimum value of your solar panel system; each day that your system continues to effectively produce energy after its expected life cycle “end date” will reduce the LCOE.


An Informed Perspective

Solar power represents the greatest possible potential for long-term energy production right from the roof of your own home. Through the use of a thorough Levelized Cost of Energy calculation, you can accurately determine how much a solar panel system will save you for its anticipated life cycle — and beyond.


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