What is the Levelized Cost of Electricity?

With today’s solar market it seems like just about everyone offers solar electric systems as one of their services.  From roofers and HVAC companies to giant installers and local small businesses focused strictly on solar energy, you can easily get a half dozen different quotes with each quote offering a different solar module made by a different manufacturer.   How is a homeowner supposed to make sense of all the information let alone compare various proposals?  One excellent metric to use to compare solar, along with several others not discussed here, is levelized cost of electricity.  The following article will help teach you about this metric and what it means.
Levelized Cost of Electricity or LCOE for short is a great way to help compare various solar electric quotes from different installers.  TerraSol Energies uses this metric to help capture the true benefit of a top quality solar system for homeowners.  The following equation is used to calculate the LCOE for a solar electric system:
Levelized Cost of Electricity Formula
The total kWh produced by a solar energy system is determined based on the manufacturer’s power production guarantee and can vary widely from manufacturer to manufacturer.   Power production guarantees vary from 20 years to 30 years and some of those have linear deration and others offer step change deration of the modules.  TerraSol Energies offers a solar module with a 30 year power production guarantee which is the best in the industry compared to traditional 25 year guarantees.  This extra power, kWh, helps reduce the LCOE.
The second important factor this calculation takes into account is the initial varying power ratings of solar modules.  Some companies offer a -0%/+5% tolerance meaning a 250W solar module under standard testing conditions would output 250Wp to 262.5Wp.  In comparison many companies still offer tolerances with as much as -5% and only +3%.  This would mean this same 250W solar module will output 237.5Wp to 257.5Wp at STC.
In order to calculate the overall kWh generated by the system you need to assume the module will operate at the lower end of the tolerance range as you cannot guarantee the modules will operating any higher.  Customers should be mindful to take a good look at the products that are specifically being quoted and if the products vary between installers they should ask what are the differences.  The more power the module has to start with, the more power the system will generate over 20, 25, or 30 years.
The net cost of a solar system is the purchase price minus any incentives, such as the 30% federal tax credit and any local state or utility rebates.  If the solar inverter for the system has a warranty shorter than the solar module power production guarantee you need to assume it will have to be replaced during the life of the system.  This adds future costs to the system and needs to be factored into the system’s LCOE.   A final item to make note of is if the installer is including potential revenue from SRECs (Solar Renewable Energy Credits) when calculating the net cost of a system.  TerraSol Energies feels it is prudent not to factor in potential SREC revenue in a LCOE calculation due to the uncertain nature of the SRECE market.  It is important to know if installers include this in the LCOE calculation because they could be using an overly optimistic price for SRECs which would mean they are able to provide an artificially low LCOE for their system.
If calculated correctly the LCOE provides significant help in determining which solar system is a better purchase.  A company may offer an extremely low cost for installing a solar system; however if they install inferior quality components the LCOE will be much higher compared to a company offering quality products with exceptional performance ratings.  Not every solar module is made equal and low installation costs may not equal a better return on your investment.

An Example

Mr. Jones has two companies quote a 5kW solar system comprised of 20 – 250Wp solar modules.  TerraSol Energies’ proposal is for $25,000 and has solar modules that have a 30 year production guarantee of 90% in year 12 and 80% in year 30 with a tolerance of -0%/+5%.  Company B’s proposal is for $23,750 and has solar modules that have a 25 year production guarantee of 90% in year 10 and 80% in year 25 with a tolerance of -5%/+3%.  Which system has a better LCOE assuming the location for the system averages 1200kWh/year for every 1000WDC of solar installed?  Each system gets a 30% federal tax credit and a state rebate of $1.25/WDC installed.
Levelized Cost of Electricity Example
As you can see a slightly more expensive system would actually save a homeowner 15% on the price per kWh and in the process generate 31,500 more kWh over its life or 26% more power.  Knowing the levelized cost of electricity is one important way to help compare different quotes from different installers.  The table below captures the various assumptions used in the example.
TerraSol Energies Company B
Solar System Size (kWDC) 5.0 5.0
Solar System Cost $25,000 $23,750
30% Federal Tax Credit ($7,500) ($7,125)
State Rebate ($6,250) ($6,250)
Net Cost $11,250 $10,375
Module Rating 250 Wp 250 Wp
Tolerance -0%/+5% -5%/+3%
Minimum Power Rating Based on Tolerance Range 250 Wp 238 Wp
Guaranteed Power Production Based on Manufacturer’s Warranty 151,200 kWh 119,700 kWh