Otis Singleton
The cost of electricity varies depending on the method of generation, location, and time. Wholesale electricity prices are influenced by the cost of natural gas, with prices fluctuating across different regions. For instance, in May 2025, wholesale electricity prices in most regions of the United States were at the lower end of their yearly range, except for Texas (ERCOT), which experienced a heat wave that caused prices to surge beyond $127.00 per megawatt-hour. The cost per megawatt of electricity is impacted by various factors, including initial capital, operations and maintenance, transmission, and decommissioning. Solar energy is often considered the cheapest form of energy due to the relatively low cost of solar panels, and advancements in technology are expected to further drive down costs.
| Characteristics | Values |
|---|---|
| Unit | megawatt-hour (MWh) |
| Factors affecting cost | Source, location, time, interest, capacity factors, and intermittency of power sources |
| Wholesale costs | Initial capital, operations & maintenance (O&M), transmission, and decommissioning |
| Solar energy cost | Lowest due to the low cost of building panels |
| Cheapest form of energy in the US | Solar |
| Wholesale electricity prices in May 2025 | Less than $10.00/MWh in Southwest (Palo Verde), up to $127.00/MWh in Texas (ERCOT) |
| Lieberose Photovoltaic Park cost per kW | €3,031 |
| Bhadla Solar Park cost per kW | 43681 rupees or €480 |
| Þeistareykir Geothermal Power Station cost per kW (first phase) | US$4,444 |
| Þeistareykir Geothermal Power Station cost per kW (both phases) | US$3,667 |
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What You'll Learn
Solar is the cheapest form of energy
The cost of a megawatt of electricity varies depending on the source of energy generation and the region. For instance, wholesale electricity prices in Texas (ERCOT) spiked as high as $127.00/MWh during a heat wave in May 2025, while the Southwest (Palo Verde) region saw prices less than $10.00/MWh during the same month.
Solar energy has become the cheapest form of electricity, offering the "cheapest electricity in history", according to the International Energy Agency's World Energy Outlook 2020. The outlook predicts a major rise in renewables, with solar power expected to increase by 43% by 2040 compared to its 2018 estimate. This significant shift is due to solar electricity being 20-50% cheaper than previously estimated, with the range depending on the region.
Solar energy is far more cost-effective than fossil fuel generation, with coal LCOE (levelized cost of electricity) ranging from $69 to $169 per MWh, nearly double the average LCOE of utility-scale solar. Natural gas peaker plants are even less efficient, ranging from $110 to $228 per MWh, while nuclear energy has the highest LCOE at $182 per MWh. The Lazard annual report analyzing LCOE found that onshore wind and utility-scale solar have the lowest LCOE by a large margin.
The installation cost of solar electricity has decreased significantly over the years, with prices falling by 64-84% since 2010. PV panel manufacturing costs have also dropped, from $5 per watt in 2000 to less than $0.25 in 2023. These cost reductions, along with tax credits and incentives, have made solar energy highly attractive for renewable energy goals.
However, it is important to note that relying solely on solar energy can create volatile market conditions due to its intermittent nature. Adequate energy storage solutions and baseload power sources are crucial to balancing the variability of solar energy and ensuring grid stability.
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Wholesale electricity prices vary across US regions
The cost of a megawatt of electricity depends on various factors and varies across different regions. In the United States, there are several regional wholesale electricity markets, and prices can differ significantly from one region to another. This variation in wholesale electricity prices across US regions is influenced by multiple factors, including local demand, generation capacity, fuel costs, and the mix of power sources used for electricity generation.
For example, in May 2025, Texas (ERCOT) experienced a heat wave that caused wholesale electricity prices to surge to $127.00/MWh, significantly higher than the average price in other regions during that period. The high demand for cooling and air conditioning during the heatwave likely contributed to this spike in prices. Conversely, the Southwest (Palo Verde) region witnessed wholesale electricity prices at the lower end of their yearly range, with prices dipping below $10.00/MWh on certain days in May 2025.
Regional Transmission Operator (RTO) markets, such as ISO New England (ISO-NE), New York ISO (NYISO), PJM Interconnection (PJM), Midwest ISO (MISO), and Electric Reliability Council of Texas (ERCOT), play a crucial role in setting wholesale electricity prices in their respective regions. These RTO markets consider factors like generation capacity, transmission infrastructure, and local demand when determining electricity rates. Additionally, wholesale electricity prices are often closely tied to wholesale natural gas prices, as natural gas is frequently used for electricity generation.
The variation in wholesale electricity prices across US regions has significant implications for both electricity providers and consumers. It can influence the profitability of power generation companies, the cost of electricity for households and businesses, and even impact economic development within a region. Understanding these regional differences in electricity pricing is essential for making informed decisions about energy usage, infrastructure investments, and energy policy.
It is worth noting that residential electricity rates, which are the prices paid by households, can also vary across different states. For instance, as of June 2025, residential electricity rates ranged from 10.21 cents per kilowatt-hour in North Dakota to 42.34 cents per kilowatt-hour in Hawaii. These rates reflect the cost of electricity purchased by individual consumers and are influenced by factors such as local utility company pricing, transmission and distribution costs, and state regulations.
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The cost of electricity by source varies
Several internal cost factors come into play when calculating the LCOE. Capital costs, for example, tend to be low for gas and oil power stations, moderate for onshore wind turbines and solar photovoltaics (PV), higher for coal plants, and even higher for waste-to-energy, wave and tidal, solar thermal, offshore wind, and nuclear. Fuel costs are high for fossil fuels and biomass sources, low for nuclear, and non-existent for many renewable sources. However, fuel costs can vary unpredictably over the lifetime of the equipment due to political and other factors.
The LCOE is often presented as the minimum constant price at which electricity must be sold to break even over the lifetime of the project. However, this type of cost analysis is controversial because it requires assumptions about the value of various non-financial costs, such as environmental impacts and local availability. Additionally, the cost of storing electricity due to inherent inefficiencies and increased CO2 emissions if the primary source is not 100% carbon-free must also be considered.
In the United States, the cost of electricity varies across different regions and is influenced by wholesale natural gas prices. For instance, in May 2025, wholesale electricity prices in the Southwest (Palo Verde) region were less than $10.00/MWh, while Texas (ERCOT) experienced a heatwave that caused prices to spike as high as $127.00/MWh.
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The cost of electricity generation methods differ
The cost of electricity varies depending on the method of generation, and these costs can be divided into three categories: wholesale costs, retail costs, and external costs. Wholesale costs refer to the expenses incurred by utilities in acquiring and distributing electricity to consumers, while retail costs are the prices paid by consumers. External costs, also known as externalities, are the societal impacts, such as environmental and health consequences.
The levelized cost of electricity (LCOE) is a metric used to compare the costs of different electricity generation methods. It considers the net present value of all costs over the lifetime of an asset, divided by the discounted total energy output. However, LCOE has limitations as it requires assumptions about non-financial factors, and its calculation can be controversial. To address this, the IEA introduced the value-adjusted LCOE (VALCOE), which takes into account the contribution of a technology to the secure operation of an electricity system.
The cost of electricity generation differs based on the energy source. For example, coal has the highest external costs in the EU due to its impact on global warming. Carbon pricing initiatives, such as carbon taxes or permit purchases, aim to address these external costs by charging those who emit carbon dioxide. Nuclear power, on the other hand, has varying external costs depending on the probabilities of potential accidents, ranging from 0.2 to 200 ct/kWh. Gas-fired CCGTs are well-suited for different generation levels due to their relatively low investment and moderate variable costs.
The cost of renewable energy has been decreasing rapidly. Photovoltaic electricity generation costs, for example, have dropped by approximately 75% as of 2017. This trend towards more affordable renewable energy options is significant as countries strive for a reliable, affordable, and low-carbon electricity supply.
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Calculating the cost of electricity involves various factors
The cost of electricity varies depending on a multitude of factors. One of the key factors is the method of electricity generation, which can include solar power, onshore wind power, coal, or natural gas. Each of these sources has different costs associated with acquiring and distributing electricity to consumers, known as wholesale costs. These costs may include initial capital, operations and maintenance, transmission, and decommissioning. The levelized cost of electricity, or the average cost per unit of energy, can be lower for utility-scale solar power and onshore wind power compared to coal and gas-fired power stations. However, this can vary based on location.
Geographical location plays a significant role in determining electricity costs. For example, the Lieberose Photovoltaic Park in Germany had a cost of €3,031 per kW, while the Bhadla Solar Park in India had a cost of approximately €480 per kW. Additionally, wholesale electricity prices can differ across regions, such as the varying prices observed in the United States' Regional Transmission Operator (RTO) markets. External factors such as weather conditions can also influence electricity costs, as seen in Texas (ERCOT) where a heat wave caused wholesale electricity prices to surge.
The capacity factor of a power plant also impacts electricity costs. The capacity factor represents the ratio of actual output to maximum possible output. Certain power sources, such as wind and solar, may have lower capacity factors, while nuclear power plants can achieve capacity factors above 90%. Peaking power plants, which sell electricity at high prices during periods of high demand, have low capacity factors.
Interest rates and financing costs can further complicate the calculation of electricity costs. For instance, the often-cited figure of CA$4,077 per kW of capacity includes interest costs, which can vary depending on market rates and construction delays. Additionally, the comparability of different sources of power should be considered, as some sources may have higher capacity factors or be more reliable than others.
It is worth noting that the cost of electricity is not solely limited to monetary values. External costs, also known as externalities, are imposed on society and the environment. These external costs can arise from the use of certain electricity sources and may include the release of naturally occurring radioactive materials, such as radon, into the atmosphere.
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Frequently asked questions
The cost of a megawatt of electricity depends on the source of electricity, location, and time. The cost of electricity from solar photovoltaic, onshore wind, and advanced natural gas combined cycle sources has decreased the most from 2010 to 2019.
The wholesale cost of electricity refers to all costs paid by utilities associated with acquiring and distributing electricity to consumers. Wholesale electricity prices are closely tied to wholesale natural gas prices.
The Lieberose Photovoltaic Park in Germany, with a nameplate capacity of 52.79 megawatts, cost €160 million to build or €3,031 per kW. The Bhadla Solar Park in India, with a total nameplate capacity of 2255 MW, cost approximately €480 per kW. The cost per kW of capacity for the Þeistareykir Geothermal Power Station in Iceland is US$4,444 for the first phase.
Wholesale electricity prices vary across different regions. For example, in May 2025, the Southwest (Palo Verde) region experienced wholesale electricity prices less than $10.00/MWh, while Texas (ERCOT) saw prices spike as high as $127.00/MWh due to a heat wave.
Solar energy is the cheapest form of energy due to the low cost of building panels to capture energy from the sun.
