How does solar help you predict and control future energy costs?
The Levelized Cost of Energy (LCOE) is one of the most valuable tools for evaluating a solar investment. In simple terms, LCOE answers this question:
“What will each kilowatt-hour (kWh) of solar electricity actually cost me over the next 25 to 30 years?”
LCOE takes the total cost of a solar project – after accounting for incentives, maintenance, and financing – and divides it by the total energy it will produce over its lifetime. The result is a blended cost-per-kWh that reflects the true value of the energy you’ll generate on-site.
Want to revisit how incentives reduce the total cost used in LCOE calculations? See Section 4.2: What Solar Incentives Are Available, and How Do They Work?
Curious how different financing options affect the inputs for LCOE? Review Section 4.3: What Are My Options for Financing a Commercial Solar System?
Wondering how system maintenance impacts the LCOE equation? See Section 5.1: How Do I Track, Maintain, and Maximize My Solar System’s Performance?
Buying vs. Renting Energy #
Think of solar like buying a home instead of renting.
- Grid electricity is “rented” – you pay the utility month after month, and the price can change without warning
- Solar electricity is “bought” – you invest upfront, and in return, you get decades of fixed, predictable energy at a known cost
While utility prices are expected to rise 2–4% per year (historically ~3%), the cost of solar is locked in the day you sign the contract.
LCOE: The Formula #
Levelized Cost of Energy (LCOE) =
Total Net Project Cost ÷ Lifetime Energy Production
This formula factors in:
- Project cost after tax incentives (like the ITC and depreciation)
- Ongoing operations and maintenance (O&M) expenses
- Estimated production over 25–30 years
- Any financing costs (if applicable)
A lower LCOE means your system is producing electricity more efficiently and cost-effectively over time.
LCOE in Action: A Real Example #
Let’s compare a ground-mounted solar system against current utility rates:
| Energy Source | Cost per kWh (Over 30 Years) | Notes |
| Solar (Ground Mount) | $0.020/kWh | Based on total cost and energy production after incentives |
| Grid Power (Today) | $0.047/kWh | Typical commercial rate before future increases |
| Grid Power (2034) | $0.063/kWh | Projected with 3% annual inflation |
| Grid Power (2054) | $0.114/kWh | Continuing trend over 30 years |
Locking in solar now means paying less than half what you’ll likely pay per kWh 10, 20, or 30 years from now.
Why LCOE Matters #
- It allows you to compare apples to apples – solar vs. utility
- It shifts the conversation from upfront cost to long-term value
- It highlights how solar transforms an unpredictable expense into a controllable cost
- For many organizations, LCOE is the tipping point – the financial case that makes solar a clear yes
Want to see how incentives influence your LCOE?
Jump back to Section 4.2: Incentives for a breakdown of how tax credits and depreciation drive down net cost.
Curious how your financing choice changes LCOE?
Visit Section 4.3: Financing to compare ownership models and their long-term economic impact.