How Much Does Solar Energy Cost?

Since the introduction of photovolataic solar cells in the 1970s, proponents of solar energy have often avoided the issue of cost. After all, they argued, with all of the environmental benefits of solar energy – lower carbon emissions – why let a little thing like cost get in the way? “Embrace the force,” they seemed to urge, like Star Wars’ Obi-wan Kenobi.

More recently, when this “feel good” strategy was finding few adopters beyond true eco-zealots, solar advocates took another tack. After the introduction of subsidies like feed-in tariffs in Europe and tax credits in the United States, they tried to reduce cost to a non-issue. “Free energy from the sun,” they touted. “Enjoy solar for $0 down.”

Only in the small print did the skeptical consumer learn that the solar panels might be free but the solar energy would cost them. Far from being free the cost of the solar energy –which might be priced below competing utility costs at the time of installation – would probably escalate over time so that in a few years the cost of solar might exceed that of the local utility tariff.

The fact is that there is a cost to solar – a big cost. And although that cost is coming down rapidly consumers should understand the cost so that they are not caught by surprise.

To be clear, solar energy has enormous benefits. Among these are competitive pricing and protection from future electricity price volatility. Moreover, solar energy can improve the value of one’s real estate by lowering operating costs.

Solar energy is also cost-effective. As we discuss below, solar will deliver benefits immediately, unlike many investments that take years to pay off before a consumer begins to see a benefit.

But solar energy is not free. It is not cheap. It does entail some risks – risks that can be mitigated by contract and insurance but cannot be ignored.

In this article we discuss how solar is priced, what it costs today, and how you can structure a solar agreement that will save money in the short run and maybe even guarantee savings in the future.

In this article we sometimes refer to certain tax benefits that can accrue from investing in solar. We must issue this disclaimer, not just because our lawyers tell us to but because it is a word to the wise: Because each taxpayer’s situation is unique, you should consult with your tax advisors before relying on any tax benefits that we describe.

Calculating the Price of Solar. The cost of solar energy consists of three basic components:

  • The cost of photovoltaic solar panels.
  • The cost of inverters that convert direct current produced by the panels into alternating current that is fed into the utility grid.
  • The cost of installation.

In this section we discuss each of these separately.

Cost of Solar Panels. Solar panels are made throughout the world by hundreds of manufacturers. Most manufacturers price their panels based on a price per watt. The output of panels is somewhat standardized with minor variations; standard sizes are 245, 260 and 305 watts. The dimensions of a panel are also similar with variations, averaging about 15 square feet per panel, generally in a rectangular 3 x 5 configuration.

In recent years panels have become highly commoditized, i.e., consumers have begun to treat panels as interchangeable or “fungible,” ignoring variations in quality. This is unfortunate as we at Solomon Energy have found enormous variations in quality. Some panels are delivered with hairline fractures in the glass “sandwich” that encases the silicon wafers. Quality control in some manufacturing plants is so weak that wires are not soldered properly and strings of panels can prove unreliable.

The result of this blurring of distinctions among panel producers, consumers – i.e., the contractors who are hired to build a solar project – will often look at price only. As a result, price-on-price competition has resulted in a steady decline in solar panel prices over the past few years. In the last two years for example, we have seen the price-per-watt of solar panels drop by some 25%. The attached chart illustrates this trend.

As this articles goes to print in July 2015, new 305 watt solar panels can be purchased for as little as $.80/watt. Some older, 245 watt panels can be purchased for as little as $.40-.50/watt.

One would expect that with price competition based on a common denominator of cost per watt a panel selling for $.50/watt would be more attractive than one for $.80/watt. That may be so to a contractor who aims to lower its costs and increase its profit margins. However, bear in mind that a 305 watt panel will cost the same to install as a 245 watt panel. Since installation costs, discussed below, are a major cost component in the overall cost of solar panels, a higher cost 305-watt panel could prove more cost-effective than a cheaper but lower wattage panel.

A consumer may also wish to take advantage of the space available for solar panels by increasing solar production; the higher wattage panels will be more attractive because they will generate more power per square foot of space.

Despite the commoditization of solar panels, quality is important to banks and other institutions that finance solar panels. This is because lenders will generally take back a lien on panels to secure them against the possibility of default by the borrowers. If a borrower fails to pay the lien holder can repossess the panels the way an automobile finance company would repossess a car. Of course, solar panels are not as mobile as other assets but lenders nevertheless consider them valuable; if necessary they can be removed from a structure and resold if necessary.

To help distinguish the quality of solar panels, industry experts have come to refer to top quality panels as Tier 1 panels. Within the category of Tier 1 panels pricing will be relatively constant. At the same time, Tier 1 panels will command a somewhat higher price to Tier 2 or Tier 3.

Some people will argue that the distinctions between solar manufacturers are largely arbitrary and irrelevant. However, as long as finance companies favor Tier 1 companies the categories will be important for consumers.

A number of other factors besides Tier status can affect pricing. The length of warranty behind the panels – 20-25 years is standard nowadays – can be a factor; a warranty from a strong credit like Hanwha will be superior to that of a warranty from a weak credit that may not be around to support the product in the event of a bankruptcy. (Think Solyndra.) Another factor that can affect price is supply. Only about 2% of all solar panels manufactured are classified as Tier 1, according to Pike Research. Accordingly, there will likely be a premium for Tier 1 as long as demand outstrips supply.

Tier 1 manufacturers have certain characteristics: Their systems are highly automated, they have been in business for at least 5 years (an eternity in the solar industry), and they invest heavily in research and development. Tier 2 manufacturers are generally smaller and have been in business for 2-5 years. Tier 3 panels, comprising 90% of the market, are generally assembled by hand by companies that do not do their own manufacturing.

Examples of Tier 1 manufacturers are Trina from Australia, First Solar (US), Yingli (China), Kyocera (Japan), Hanwha (China), SunPower (US), LG Solar (Korea), and RenaSola (China).

Cost of Inverters. Solar cells generate direct current from the sun’s rays; utility systems, on the other hand, require alternating current at a frequency of 60 hertz (on the east coast). Inverters are required to convert direct current to alternating current.

Like solar panels, inverters are made throughout the world and have generally become consistent in quality with common 10 year warranties. In contrast to solar panels, however, inverters come in a wide range of shapes and sizes, depending on the application. Household installations require inverters with a capacity of no more than 5-10 kilowatts whereas industrial size inverters may convert as much as 100 kilowatts. The price range for inverters for system-wide applications is generally about $.50-90/watt. As with solar panels a number of other factors can affect pricing such as the length of the warranty.

Manufacturers have also segmented the market. The largest manufacturers – SMA, PowerOne (owned by ABB), and Kaco – have specialized in large utility-scale installations where as other companies like Enphase have focused on residential markets.

Since about 2012 some solar panel manufacturers and assembly plants have begun to ship panels with integrated inverters. These so-called micro-inverters are attached to each individual panel (e.g., 250-305 watt) and may cost from $150-200/panel (i.e., $.60-.80 per watt). At the low end the price is virtually the same as the panel itself. Interestingly the range in prices for micro-inverters is virtually identical to that of the larger system-wide inverters.

Cost of Installation. The third major factor in pricing is installation. The cost of installation is generally a function of the labor market. Labor costs have been steadily dropping as crews have become more experienced, installation times have dropped, and competition in some markets has driven contractors to cut the costs in the only place they control, namely, their labor costs. (After all, panel and inverter costs are largely market driven and out of the control of the contractor unless he – and ultimately the consumer – is willing to sacrifice quality.)

In recent years, the factors noted above have steadily eroded installation costs. In 2011, when Solomon Energy was launched, installation ran $1.50-2.00 per watt. Today, in mid-2015, installation has dropped to as low as $.50-1.00 per watt, depending on where in the country our clients are located.

Additional Cost Factors. In addition to panels, inverters and labor, contractors may incur a number of other costs but these are generally minor. Such costs may include local permitting (e.g., a building inspector may require a set of stamped engineering plans, or a state like Massachusetts may require a licensed electricity to be put on the job). Some roofs may require repair; other roofs may be so steep as to require special equipment to ensure crew safety.

One factor that may be consequential is sales and marketing cost. Most contractors include this cost in their price models and pay it out of margin. Others may treat it as a separate cost and seek to pass it on to customers. For example, SolarCity recently disclosed in its quarterly report to investors that its sales costs had increased to more than $.55/watt. These costs are presumably necessary to attract and retain good sales people. But if they are high they can impact the cost-effectiveness of solar installations.

Putting it All Together. So what does solar cost? The sum of the three major factors alone could range from $1.50 (cheapest panels, low-cost inverter, very low installation costs) to as high as $2.35 per watt. In recent months we have worked on a number of deals that have priced out in the $2.10-2.20/watt range. In many states with high utility tariffs for electricity, these solar costs will compare very favorably and will provide significiant savings to consumers.

In another article we examine the alternatives for financing solar costs, including self-finance, traditional bank lines, and tax equity finance that takes advantage of a third-party ownership model.