The complete guide to solar cost terminology

What should you look at to determine if you're getting a good deal on solar? There are many things to pay attention to when deciding on a solar energy system. Two of the most useful metrics for evaluating the cost and value of a solar power offer are price per watt, measured in dollars per watt of energy ($/W), and 'levelized cost of energy' (LCOE).

You can use cost per watt ($/W) to compare solar energy system installation prices and solar power costs. At the same time, LCOE is great for comparing the average per-unit cost of the electricity the system will produce. We discuss both $/W and LCOE in detail in this article.

Solar pricing terminology can be confusing to understand. Metrics such as $/W and LCOE will be used frequently, so it's crucial to understand what solar installers are talking about.

Solar system sizes are usually described in kilowatts (kW, where 1kW = 1,000 watts). If you plan on purchasing your solar panel system (either with cash or a solar loan), you'll want to know how much a system will cost per watt.

A solar system's $/W cost is unimportant if you plan to go solar under a solar leasing or power purchase agreement (PPA) program. Under these programs, a third party owns your solar system, selling you only its electricity.

How do you calculate $/W for a solar panel system?

To calculate $/W, take the total out-of-pocket cost of the system you are considering and divide it by the number of watts of capacity in the system. For example, a 5kW solar system has 5000 watts. If that system costs $15,000, then the cost per watt is ($15,000 / 5000W =) $3/W.

When comparing figures, make sure you understand whether the price you're looking at incorporates the Investment Tax Credit (ITC) incentive. The ITC reduces your solar energy system's total cost by 30%). For example, the $/W cost of the system described above is $15,000 before the ITC. After you consider the ITC, it will be about ($15,000 x 70% =) $10,500 (around $2.10/W). Additional state tax credits and other rebates may further reduce the price.

Why is $/W a useful metric?

Once you have a $/W figure for a solar system, you can easily compare its basic value to other systems, regardless of size differences. For example, imagine you're considering a 7kW solar system costing $20,300 and a 6kW solar system costing $17,400. How do you know which offers more value (more 'bang for your buck')?

Because they are differently sized systems, at first glance, you might think that you cannot meaningfully compare them by their price tags alone. But in fact, both systems cost $2.90/W - meaning that either system offers the same value in terms of its maximum power output.

Remember that cost is not the only factor to consider when considering going solar: We have compiled a list of other essential metrics here: "Don't just focus on dollars per watt when you evaluate quotes."

What is levelized cost of energy?

Levelized cost of energy (LCOE) is the average amount you will pay for each unit of electricity that your solar energy system will produce over its lifetime. LCOE is usually displayed as a 'cents per kilowatt-hour' figure (¢/kWh). You might recognize ¢/kWh from your monthly electricity bill - the amount you are charged for each unit of electricity delivered to your home.

LCOE is helpful to consider whether you're considering purchasing your system or planning on going solar with a solar lease or PPA arrangement. 

LCOE is calculated by dividing the total out-of-pocket cost of your solar energy system by the estimated total amount of energy your solar system will produce over a given period. It is typical to look at 20 years when calculating LCOE, although a system will actually continue to produce power for over 30 years.

LCOE is more complicated to calculate than $/W because more factors are involved - and because it estimates future production.

To roughly calculate LCOE, you should know (or be able to estimate):

• The system's total cost, after tax incentives and rebates, are considered.

• The amount of sunlight the panels are likely to receive daily. An annual average is usually sufficient for this. E.g., 5kWh of pure solar energy per square meter of area per day, on average throughout the year (note that this number will be higher in summer and lower in winter).

• The overall efficiency of your system. It is common practice to assume that a system will have an overall efficiency rate of 80% - but it could be greater or lesser depending on things like the tilt angle and orientation of your panels, the efficiency of your inverter, and whether or not there is partial shading on your panels.

To calculate the LCOE of a solar system, it's also helpful to know:

• The annual rate of degradation for your solar panels. All solar panels gradually grow less and less efficient over time. (This isn't very easy to calculate without a spreadsheet program. You can read more about degradation in our article, "Key metrics for comparing solar panels.")

• Any SREC benefits you may be eligible for. SRECs payments are usually counted as a 'bonus' on top of the electricity bill savings associated with going solar. However, not all states have SREC markets, so check if there is one where you live.

As an example, if you live in Los Angeles (where there is 5.26kWh of sun daily on average throughout the year) and you're looking at a 5kw system with a net cost of $9,000, you can estimate its LCOE accordingly:

• Solar energy produced over 20 years: 5kW x 5.62kWh of sun daily x 365 days x 20 years x 80% efficiency = 164,000kWh

• Cost of the system divided by solar energy produced: $14,500 / 164,000kWh = 9¢/kWh.

For simplicity's sake, we have excluded 'annual degradation' and 'SREC benefit' from our calculations in the Los Angeles example above. However, if you'd like to see more detailed LCOE figures for your location, you can get an Instant Estimate or shop on our Solar Marketplace. 

LCOE is handy because:

• It allows you to compare the cost of electricity produced by two different solar energy systems side-by-side, thus allowing you to see which will likely save you more money on your power bills. For example, the LCOE of one solar system might be 5.5¢/kWh, while another may have an LCOE of 8¢/kWh.

• You can use it to compare the average energy cost produced by your solar energy system vs. the amount you would pay for electricity from your utility. Utility rates are higher than solar rates in many states. (Hawaii, for example, has some of the highest electricity rates in the nation, at over 30¢/kWh.) Knowing the LCOE of a system, therefore, allows you to estimate how much money it will save you over its lifetime.

Remember: LCOE is an estimate

While LCOE is a useful metric for comparing the cost of solar electricity from your system over its lifetime, be aware that actual figures will vary. For example, if your solar panel system produces more electricity than expected over its lifetime, the LCOE at the end of 20 years will be lower than the initial estimate. Conversely, if your system produces less electricity over its lifetime (e.g., due to a malfunction that results in significant downtime), the actual LCOE will be higher.

What does this mean for you as a solar shopper? It means you should research the quality of your system's components and the warranties that back them up. Most solar panel systems will have no issues during operational life, but knowing exactly what you're signing up for will help minimize future problems and disappointment.

This table shows examples of $/W price, total price, and LCOE for three system sizes (3kW, 5kW, 10kW) in two cities (New York and LA).

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