When determining the cost of a residential or commercial solar installation (as opposed to a centralized, utility-based installation) many of the traditional economic metrics must be reconsidered, as distributed, on-site solar generated electricity changes the cost analysis due to the fact that less longer-term investment should be required to maintain the overall system.

In this article, we’ll take a look at some of the common metrics used to estimate the costs of electricity generation. These metrics include cost per peak kW installed, cost per kWh generated, as well as external costs.

Cost per peak kW installed

The cost per peak kW installed refers to the cost required to generate a given amount of peak capacity electricity, where the peak capacity is defined as the maximum output an electricity generation source can produce at a given point in time.

When we’re talking about cost per peak kW installed (for any electrical generation installation, not just solar), operating costs such as financing, maintenance, fuel, and dismantling are intentionally excluded.

For an example calculation using the cost per peak kW installed method, Google’s solar panel project has a peak capacity of 1.6 MW (1,600 kW). If we assume Google spent $9,600,000 on their solar power system installation (note: this cost is merely a guess), the cost per peak kW installed would come out to:

$9,600,000 / 1,600 kW = $6000 per peak kW installed

This estimation gives a cost of $6 per Watt installed, which is probably slightly lower than the current industry average in the United States.

When discussing peak capacity electricity, it’s important to note that solar installations operate, on average, at a lower capacity than peak capacity during most of their operational hours because the sun’s rays are not always hitting the PV panels at full strength.

Some additional notes on peak capacity:

  • As of 2005, approximately 4,000 GW of peak capacity exists globally
  • An average of 150 GW of peak capacity have been added annually since 2000

Cost per kW/h generated

The cost per kW/h generated refers to the costs incurred to generate a given amount of electricity over the lifetime of the generator’s production. Cost per kW/h is often difficult to estimate because some uncertain variables come into play. For example, future fuel costs for a natural gas fired generator must be estimated well into the future, and costs related to construction financing methods are also assumed.

For larger-scale, centralized generators for which electricity must be transmitted from the production site (usually a utility company) to the consumption sites (residential homes and commercial buildings), there is an additional cost of maintaining the infrastructure (power lines, transformers, etc.). Some analysts, such as Travis Bradford, President and Founder of the Prometheus Institute for Sustainable Development, argue that utility industry deregulation has resulted in significant under-investment in this power transmission infrastructure. As a result, the real costs per kW/h generated (which would include maintenance costs of the current infrastrcture) have been under estimated among utility power providers.

It’s also important to note that on-site, distributed electricity generation (such as residential solar or wind-powered generators) do not necessarily incur the costs associated with larger-scale infrastructure maintenance typical of coal, natural gas, and nuclear power. However, we must note that solar power in particular cannot meet the demand for base-load energy consumption (a topic for another article), so consumers still depend on this infrastructure for at least some of their power consumption.

External costs 

External costs, which are typically not included in traditional cost estimation methods, include costs to the environment and welfare of the people. Some examples of external costs include the costs of:

  • Pollution (clean up, carbon taxes, property damage, health care)
  • Environmental damage resulting from activities such as strip-mining, deforestation, and reservoirs, which can displace many inhabitants and incur costs associated with resettlement and rehabilitation, as in the case of China’s Three Gorges reservoir
  • Security required to protect vulnerable sites such as nuclear facilities, oil pipelines, etc.
  • Power disruptions, such as the rolling blackouts experienced in California and elsewhere, which resulted in many millions of dollars lost in productivity