Financial

Levelized Cost of Energy (LCOE)

Levelized cost of energy (LCOE) is the total lifetime cost of a solar system divided by the total lifetime energy it produces, expressed as a cost per kilowatt-hour. It reduces the complex economics of a solar investment — upfront costs, incentives, maintenance, degradation, financing — into a single number that can be directly compared against the cost of grid electricity.

The LCOE calculation includes all costs over the system's expected life: equipment purchase, installation labor, permitting, financing interest, inverter replacement (typically once during a 25-year panel life), maintenance, insurance, and any monitoring subscriptions. These total costs are divided by the total kilowatt-hours the system is projected to produce over its lifetime, accounting for annual panel degradation.

If a solar system costs fifteen thousand dollars after incentives, produces 9,000 kWh per year, degrades at 0.5% annually, and lasts 25 years with one inverter replacement, the total lifetime production is approximately 213,000 kWh and the total lifetime cost (including the inverter replacement) might be around seventeen thousand. The LCOE would be roughly eight cents per kWh — likely well below the current and future retail electricity rate.

LCOE is the most rigorous way to evaluate whether solar is a good investment at your location. If your solar LCOE is lower than your utility rate (and your utility rate is expected to rise over time), solar saves money over its lifetime. The wider the gap, the better the investment.

At the utility scale, solar LCOE has dropped below fossil fuel generation costs in most markets worldwide, making solar the cheapest source of new electricity generation in human history. Residential LCOE is higher due to smaller system scale and installation costs but still beats retail electricity rates in most US markets.

Frequently Asked Questions

What is a good LCOE for residential solar?

As of the mid-2020s, residential solar LCOE in the US typically falls in a competitive range per kilowatt-hour, varying by location, system size, and financing method. If your LCOE is below your current utility rate — and utility rates historically increase 2-3% annually — solar is a sound financial investment. Use the LCOE to compare against your actual utility rate for a clear picture.

Does LCOE account for the federal tax credit?

It should. A proper LCOE calculation uses the net system cost after all incentives including the federal ITC, state rebates, and SREC income. The pre-incentive LCOE is useful for understanding raw economics, but the post-incentive LCOE reflects your actual cost of solar electricity and is the number to compare against utility rates.