Calculating the Cost of Solar Electricity
To compare solar and grid electricity fairly, you need to calculate the levelized cost of energy (LCOE) for your solar system. The LCOE divides the total lifetime cost of the system by the total lifetime energy production. For a $20,000 system (after the 30% ITC) that produces 10,000 kWh per year over 25 years, the LCOE is approximately 8 cents per kWh. For a financed system with interest, the LCOE might be 10 to 12 cents per kWh.
Compare this to the average US residential electricity rate of approximately 16 cents per kWh, and solar is already cheaper in most scenarios. In high-rate states like California (30+ cents), Massachusetts (28 cents), or Connecticut (27 cents), solar electricity costs one-third to one-half what grid electricity costs.
The Escalation Factor
Grid electricity prices have increased an average of 2 to 4 percent per year historically. Solar electricity costs are locked in at installation — once you buy the system, the electricity is essentially free for the remaining lifespan. This means the savings gap between solar and grid electricity widens every year as utility rates rise while your solar cost stays fixed.
A system that saves $1,500 in year one might save $2,500 by year ten and $4,000 by year twenty as utility rates escalate. Over 25 years, the cumulative savings from locking in low-cost solar electricity versus paying escalating grid rates can reach $40,000 to $60,000.
Where Solar Beats the Grid Most Dramatically
The best solar economics exist where high grid electricity rates meet strong solar resources. Hawaii ($0.43/kWh grid vs. ~$0.07/kWh solar) offers the most dramatic savings. California, New England, and the Mid-Atlantic combine high rates with enough sun to produce excellent solar returns. Even in the Pacific Northwest, where sun is limited, high electricity rates in some areas make solar competitive.
Where the Grid Still Wins
In states with very cheap electricity (under 10 cents per kWh) from hydropower or abundant natural gas — Louisiana, Oklahoma, Washington — solar savings are smaller and payback periods longer. The math still works in many cases, but the return is less compelling, and the breakeven point may extend to 12 to 15 years rather than 6 to 10.
Future Projections
Solar panel costs continue to decline slowly, while grid electricity costs continue to rise. Both trends favor solar economics. Battery storage costs are also dropping, making solar plus storage increasingly competitive with grid-only electricity even in markets with reduced net metering. Use our electricity cost calculator to compare your current grid costs against estimated solar costs for your location.