What Does Regular Electricity Cost?
|US Electricity Prices - 2014|
The chart at the left shows the average cost of electricity for 2014 by consumer group per the EIA (the US Energy Information Administration). For 2014 the average residential cost was 12.50 cents per kilo-watt hour up 3.1% from 2013. Commercial was 10.75 cents and industrial 7.01 cents. Residential electricity prices in the US have risen by 3.2% per year over the past 10 years.
The pie chart, below left, shows the make up of the overall US electricity price.
Electricity prices vary by location due to type of power plants, cost of fuels, fuel transportation costs and state pricing regulations. The states with the highest average residential price of electricity in 2014 were:
- Hawaii (37.34¢ per kWh)
- New York (20.05¢ per kWh)
- Connecticut (19.59¢ per kWh)
Those with the lowest average prices in 2014 were:
- Washington (8.71¢ per kWh)
- North Dakota (9.25¢ per kWh)
- West Virginia (9.33¢ per kWh)
2014 residential electricity prices were highest in Hawaii, 37.34¢ per kilo-watt hour (kWh), because most of their electricity is generated using crude oil.. The lowest price was in the state of Washington with 8.71¢ per kWh.
The US average residential household used 909 kWh per month and the average monthly electricity bill was $125 before taxes and fees. Prices are higher for residential and commercial customers than industrial customers because it costs more to distribute the electricity and step the voltages down. Industrial customers use more and can take their electricity at higher voltages so it does not need to be stepped down. These factors make the price of power to industrial customers close to the wholesale price of electricity (the price from one utility to another). Top
What Does Solar Electricity Cost?
As shown in the chart at the left, photovoltaic (PV) solar cell prices have come down by a factor of 100 over the last 35 years; and down by a factor of 10 over the last 15 years. (The reason for the small increase between 2005 and 2008 was because of a polysilicon shortage.) The sharp drop in 2009 and 2010 was because of too much capacity, especially in China, which has caused prices to collapse. (See the Overcapacity Issues section.) The 2015 Q1 average solar cell price was $0.31 per watt and the average solar module price was $0.72 per watt.
Since costs after installation are minimal for solar electricity, the relevant costs are the purchase price, installation costs, and the cost of land (capital costs). Cost components that make up a residential solar system are: system design, solar modules, and the balance of system (BOS) which consists of an inverter, bi-directional billing meter, connection devices, and installation labor. In the southwest, installed residential solar prices are competitive with residential electricity prices after incentives.
|Installed Capital Costs - Q1 2015 (SEIA)||Cost Per Watt (DC)|
The average residential household in the southwest installs a 5 kWh system and during Q1 2015, it cost about $3.40 per DC watt or $17,000 (5000 times $3.40) before incentives. Utilities on the other hand typically install systems in the 100 mega-watt or greater range. The installed utility system cost during Q1 2015 was $1.58 per watt (average) and is expected to gradually drop some more. Top
Why did PV Prices Come Down So Rapidly?
As can be seen from the graph at the left, recent solar module prices have experienced a dramatic price reduction. From 2006 to 2014, an eight year span, worldwide average module prices have dropped about 78% from $3.25 per watt to about $.72 per watt, an incredible drop.
The main reason crystalline silicon module prices dropped so much was because the price of the raw material polysilicon, which makes up a very significant part of the total cost, dropped so tremendously. Back in 2007 there was a world wide polysilicon shortage and prices increased to about $400/kg. Polysilicon suppliers made a lot of money and added tons of capacity so that there was a huge polysilicon capacity oversupply by 2010. Over a three year period from 2008 to 2011, polysilicon prices dropped from $400 per kilogram to $25/kg - a 94% drop. There continues to be a major overhang of polysilicon supply which is expected to continue for a few more years.
In addition to the polysilicon issue, the decline is also being driven by a) the increasing efficiency of solar cells (ratio of electrical energy produced to sunshine energy) b) dramatic manufacturing technology improvements, c) economies of scale and d) intense competition which lead to module oversupply. The solar growth rate of 23% per year over the last 5 years allowed manufacturing efficiencies that are unheard of in other industries. In addition, there are way too many competitors jousting for major contracts, which is also driving prices down precipitously. Top
When Will PV Solar Reach Grid Parity?
There is no one cost number that defines utility grid parity. There are different levels of parity depending on what the generation system is. Solar has already penetrated the most expensive generator - the "peaking plant", also known as a "peaker". Peakers are rather small plants, ranging from 50 MW to 500 MW in size, normally about 100 MW. Peakers are mainly used in the summertime during "peak" electrical use for air conditioning late in the afternoon. They are normally single-cycle natural gas generators, meaning no boiling water; the burning natural gas directly fuels the turbine. Peakers have to be able to come up to speed on 10 to 15 minutes notice. They are very inefficient and expensive to run, but are great sources of electricity when utilities are on the verge of rolling blackouts. At that point, operating expenses are down the list of priorities.
Shown at the left is a photo of APS's Sundance peaker plant near Coolidge, AZ. The site consists of ten generators, and all ten can be on the grid within 10 minutes generating 450 MW of power. Each generator consists of a converted GE Boeing 747 jet engine powered with natural gas which can be turned on with a click of a mouse and will generate 45 MW of power.
The next level of power plant available are the "load following" plants. These are intermediate size plants that are normally turned off at night but follow the increasing electrical load as the day progresses. These are generally combined-cycle plants (natural gas with a steam turbine) that are expensive but easy to turn on and off.
Finally you have the huge "base load" plants that are operated continuously day and night except for maintenance down time. These are nuclear and coal type plants that are very efficient but can take many hours or even days, in the case of nuclear, to come up to speed and to shut down. They are the backbone of the electrical industry and will remain so for the foreseeable future.
So how big is the Peaker electricity market? The total US electricity market in 2014 was 4,093 million kilo-watt hours (m-kWh) according to US EIA. The peaker portion is generally accepted to be 5% of the total market. So 5% of the total is 205 m-kWh. The total amount of PV generated electricity in the US in 2014 was 15.9 m-kWh. This is only 8% of the peaker market. So, there is plenty of "peaker" market available to solar in the US in addition to some of the "load following" plant market.
In 2009 the California Energy Commission (CEC) rejected a contract for a new peaker in San Diego in favor of a PV solar system. Unless there are unusual circumstances, there probably will be no more peakers approved in California. Top
PV Solar Parity Has Begun
Levelized Cost Of Energy (LCOE)
The following table shows the Levelized Cost Of Energy (LCOE) for various sources of electricity. The LCOE is a "fair" method of comparing the cost of different complex energy technologies. It is the total life cycle cost of electricity for a given technology divided by the total life cycle electricity produced, expressed as cents per kilo-watt hour. (LCOE calculations are explained in more detail in the Utility Section below.) The table, derived from LCOE costs developed by the US Energy Information Administration (EIA) in June, 2015, "estimates" the raw LCOE over a 30 year period for different energy sources that are brought online in the year 2020. No subsidies are included in the calculations.
|Energy Plant Type||Lifetime Cost ¢ per Kwh|
|Peaker Natural Gas||18.0|
|Coal with CCS||14.4|
|Gas Combined Cycle with CCS||10.0|
|Natural Gas Combined Cycle||7.5|
|Land Based Wind||7.4|
Note: CCS stands for Carbon Control and Storage (Sequestration) in a remote underground location. The LCOE for Peaker Natural Gas (18.0¢) is per the California Energy Commission.
As indicated above, PV solar is considerably cheaper than Peaker Natural Gas. And, as mentioned previously, it is highly unlikely that any new peaker gas systems will be installed anywhere in the US. The "peaker market" is a prime target market for PV solar. PV solar is also cheaper than coal with CCS and it is unlikely that any new coal plants will be built in the US. At this point in time. the author is unaware of any CCS facility anywhere in the US, so even natural gas with CCS is unlikely. Solar costs have been coming down dramatically. They are expected to slow down a bit, but will continue to decline from the levels used in the LCOE calculations above.
Nuclear has many sideline issues besides cost and therefore very few new nuclear facilities are expected. Geothermal, hydro-electric, and biomass are not mainstream electrical production facilities, a few here and there. Therefore, as far as new electrical facilities are concerned, natural gas without CSS, wind, and solar will be the main new contributors. Wind is somewhat limited as an average of 20 miles per hour (mph) is needed to be economically feasible. Not many areas average 20 mph winds every day. However, the sun shines almost everywhere, making solar an almost universal candidate. Therefore, natural gas and solar will be the main sources of new energy production.
How Much Solar Power Is Reasonable?
When we say that PV will eventually be at parity with natural gas and coal, that does not mean there will not be any coal or natural gas generators thereafter. Because the sun shines only during daylight hours, and wind is most prevalent at night, both are variable. We can not be totally dependent on renewables in the foreseeable future. Currently, wind provides 4% and solar less than 1% of US electricity. An electrical generation target of 20% solar and wind by 2040 seems reasonable. (For reference, 20% of US electricity is the equivalent of the energy now used in 2015 by all the cars and light trucks in the US.) The solar and wind figures could be larger if there were some "dramatic cost improvements" in grid electricity storage, notably large battery systems. However at the moment, large battery storage at the grid level looks a long ways off.
In addition, more than 20% of solar and wind would require major investments in transmission lines. Not only are transmission lines expensive, but they are hard to permit because of the NIMBY (not-in-my-back-yard) factor. Transmission lines also require three to four years to build, versus solar or wind plants which can be easily built in two years. If by 2040, 20% of our electricity comes from solar and wind, almost everyone will be happy with the situation. Top
Long Run Solar Cost
The graph on the left is very interesting. Most cost analyses are run over a 20 year period. Ken Zweibel of George Washington University says that is not the correct way to evaluate long life assets like PV systems, nuclear plants, or other large long lasting utilities. PV systems can last maybe up to a 100 years! There is only a small degradation of performance - about a half of one percent per year. So a PV system after 50 years will still produce electricity at 75% of its original performance. 50 years is perhaps a better time frame over which to evaluate the cost of this type of asset.
Once installed, PV systems need very little maintenance so that the total lifetime cost is mostly just the initial price of the equipment and land. This is conceptually how we think of an investment in bridges or roads. The chart at the left uses a weighted average (weighted by annual output performance) for the cost for the current year plus all previous years for each data point. Once the initial cost of the system is paid for (assumed to be 20 years) the cost of running a PV system is almost zero, whereas for coal and other fossil fuels there is the cost of fuel each and every year. In addition, costs for fossil fuels may creep up due to raw material costs, shipping costs, and possibly carbon dioxide taxes.
At an installed price of $1.25 per watt, the cost of PV solar is always cheaper than coal. At $2 per watt, it is cheaper after year 40. At $3.00 per watt, it is cheaper about year 80. It is expected that PV solar costs will reach conventional coal parity by 2017. As a result, no "new" coal plants are expected to be initiated, although some current coal plants will likely be upgraded. Top
Solar Learning Curves
As shown in the learning curve chart above, cadmium telluride thin film panels are inherently cheaper to make than crystalline panels. These classical learning curves plot "module cost" on the Y axis vs. "cumulative quantity" produced on the X axis. Both axes are logarithmic scales. The chart illustrates that the two technologies are on distinctly different curves, not dependent on time but on volume. Although crystalline silicone is inherently more expensive, its production volume is much, much larger than cadmium telluride. At the end of 2014 crystalline silicone was at $.75 per watt while cadmium telluride was at $.70. Just looking at the curves, one would expect crystalline silicone to equal cadmium telluride in the near future.
However, the extreme polysilicone price decline is most likely behind us and future price reductions will probably be more modest. Note that the last two points for crystalline silicone are equal (no reduction). Most analysts believe First Solar, the leader in cadmium telluride, will continue to drive costs down. First Solar's stated goals are to be about $.40 by 2017. Most likely First Solar will recoup some of its price advantage in the near term. In the long run, this will continue to be a critical cost reduction race as crystalline silicone's volume is roughly 14 to 1 over cadmium telluride. Top
Residential Cost Example - Typical Southwest House
A roof top solar system has no moving parts, so it has a long expected lifetime exceeding 25 years (used in this example). However inverters (which convert the panel DC current into AC) have an expected lifetime of 10 to 15 years. In our example we add the cost of a replacement inverter to the system after 12 years. We assume no other maintenance costs as the panels are usually warranted for 25 years with a degradation clause. So let us calculate a south facing roof top residential cost example in the southwest United States in Q1 2015:
- Residential house - Phoenix metropolitan area
- Electricity provider - AZ Public Service Corp. (APS)
- Average system size - 5 kW (5,000 watts)
- Roof space required - 500 square feet, no shading
- Phoenix cost per installed watt in Q1 2015 ~ $3.40
- System fully loaded cost at $3.40/watt - $17,000 before incentives
- Federal tax incentive 30% of total cost - ($5,100)
- AZ State tax credit - ($1,000)
- Sum of incentives - ($6,100)
- Initial cost to consumer - $10,900
- Add replacement inverter in 12 years - $1,485 ($2,700 in 2015 less ~5% per year decrease)
- 25 year total system cost - $12,385
- Estimated monthly savings - $84/month average over 25 years (see note below for monthly savings calculation)
- Break even - 147 months (12.3 years)
- Net savings over 25 years - $12,815 (excluding inflation)
- Net savings over 25 years - $16,019 (assuming 2%/yr. inflation)
Note: The above calculations are approximate and for illustration purposes only. Actual costs will depend on the exact location of the home, the angle to the sun (north-south vs. east-west), the amount of shade if any, the type and angle of roof, electrical connections, additional options, etc. For an accurate estimate, please contact a local solar installation contractor and your tax accountant.
Monthly Savings Calculation: A south facing roof top solar system with no shading, and with a normal yearly dessert sunlight radiance of 2,400 per square meter would produce 1,840 kWh of electricity per year per nameplate kW capacity (assuming 23.3% losses for DC to AC conversion and other system losses). With a 5 kW system installed, the first year production would be 9,200 kWh (5 x 1,840). Assuming a system degradation of 0.5% per year times 25 years yields a net 8,050 kWh yearly average electricity savings (9,200 x .875). Assuming an average 2015 residential electricity price in AZ of $.125 per kWh (excluding taxes and fees) yields a yearly savings of $1,006.25 (8,050 x $.125 not counting future inflation). The monthly savings would then be $83.85 ($1,006.25 divided by 12). This was rounded to $84.00 even. Top
Utility Cost Of Electricity
The cost calculations for a utility installation are quite complex. In principle they are simple:
Where: LCOE is the Levelized Cost Of Electricity. The LCOE approach allows different technologies to be compared, not only solar approaches, but fossil fuels and nuclear as well. The Total Life Cycle Cost is the present value of all the components of cost over the useful life of the installation minus the depreciation tax benefit and residual value. The Total Lifetime Energy Production is all the useful energy produced by the installation over its total life. (See the Solar Parity section above for actual LCOEs for the various energy sources.)
Total Life Cycle Cost Components For Solar Electricity
Initial capital investment
- The cost of all the equipment involved in the project
- Land related costs which depend on the number of panels, site preparation and security protection.
- Grid connection costs such as inverters, transformers, and transmission to the nearest grid
- Interest at 6%. All capital costs are assumed to be financed by obtaining a loan (for LCOE purposes only).
(Note: The above costs are very sensitive to panel efficiency. Panels that are 12% efficient versus those that are 18% will need 50% more panels, 50% more inverters, 50% more land, etc.)
Initial Labor Cost
- Site design, installation labor, sales and marketing, and other overhead expenses
- Operating costs, maintenance costs, panel cleaning, insurance, and general overhead are included
- The present value of the depreciation tax benefit is subtracted
- The present value of the residual price at the end of the projects life is also subtracted
Total Lifetime Solar Energy Production
The value of the electricity produced over the total life cycle of the system is calculated by estimating the initial annual production, called Peak Capacity, and then discounting it for future years based on previously observed annual degradation rates for the particular technology of the site. A typical degradation rate is 0.5% per year, although some rates are as high as 1.0% and as low as 0.25%. The first-year energy production of the system is expressed in kilowatt hours generated per kilowatt of peak capacity.
Factors Affecting Peak Capacity:
- How the system is mounted and oriented (i.e. flat, fixed tilt, tracking, etc.)
- The spacing between PV panels as expressed in terms of system ground coverage ratio (GCR)
- The energy harvest of the PV panels (i.e. performance sensitivity to high temperatures, sensitivity to low diffuse light, etc.)
- System losses from soiling, transformers, inverters and wiring inefficiencies
- System availability largely driven by inverter downtime
The LCOE is highly sensitive to small changes in input variables and underpinning assumptions. For this reason, it is important to carefully assess and validate the assumptions used for different technologies when comparing LCOEs.