Grid parity

Grid parity is the point at which alternative means of generating electricity produces power at a levelized cost that is equal to or less than the price of purchasing power from the grid. Reaching grid parity is considered to be an important point in the development of new sources of power, the point at which it becomes a contender for widespread development without subsidy support. The term is most commonly used when discussing renewable energy sources, notably photovoltaics (solar panels), wind power and wave power. It is widely believed that a wholesale shift in generation to these forms of energy will take place when they reach grid parity.

Overview

The price of electricity from the grid is complex. Most power sources in the developed world are generated in industrial scale plants developed by private or public consortiums. The company providing the power and the company delivering that power to the customers are often separate entities who enter into a Power Purchase Agreement that sets a fixed rate for all of the power delivered by the plant. On the other end of the wire, the local distribution company (LDC) charges rates that will cover their power purchases from the variety of producers they use.

This relationship is not straightforward; for instance, an LDC may buy large amounts of base load power from a nuclear plant at a low fixed cost and then buy peaking power only as required from natural gas peakers at a much higher cost, perhaps five to six times. Depending on their billing policy, this might be billed to the customer at a flat rate combining the two rates the LDC pays, or alternately based on a time-based pricing polity that tries to more closely match input costs with customer prices.

As a result of these policies, the exact definition of "grid pricing" varies not only from location to location, but customer to customer and even hour to hour. For instance, wind power is generally considered to be a form of base load and connects to the grid on the distribution side (as opposed to the customer side). This means it competes with other large forms of industrial-scale power like hydro, nuclear or coal-fired plants, which are generally inexpensive forms of power. Additionally, they will be charged by the distribution operator to carry the power to the markets, adding to their levelized costs. In comparison, solar energy is considered to be a form of peaking power plant, and therefore competes against more expensive forms of power like natural gas. Additionally, solar has the advantage of scaling easily from systems as small as a single solar panel placed on the customer's roof. In this case the system has to complete with the post-delivery retail price, which is generally much higher than the wholesale price at the same time.

It is also important to consider changes in grid pricing on whether or not a source is at parity. For instance, the introduction of time-of-use pricing and a general increase in power prices in Mexico during 2010 and 2011 has suddenly made many forms of renewable energy reach grid parity. A drop in power prices, as has happened in some locations due to the late-2000s recession, can likewise render systems formerly at parity no longer interesting. In any event, fuel prices are on an upward swing, while renewable energy sources continue to reduce in up-front costs, sometimes dramatically. As a result, widespread grid parity for wind and solar are generally predicted for the time between 2015 and 2020.

Solar power

See also: Solar Power § Economics

Projection of levelized cost of PV energy in Europe

Grid parity is most commonly used in the field of solar power, and most specifically when referring to solar panels. This is due to a dramatic reduction in the capital cost of related equipment that took place between about 1990 and 2010, when the price of electricity from these sources dropped about 25 times. This rate of price reduction is accelerating; between late-2009 and mid-2011 the wholesale cost of solar modules dropped approximately 70%. This rapid reduction in price is unprecedented in the industry, and shows no sign of reaching bottom (late 2011).

Solar panels have a major advantage in terms of scalability. Compared to most sources, like wind turbines or hydro dams, PV can scale successfully to systems as small as one panel or as large as millions. In the case of small systems, they can be easily installed at the customer's location. In this case the LCoE competes against the retail price of grid power, which includes all upstream additions like transmission fees, taxes, etc, and are generally much higher than wholesale prices. In order to encompass all of these possibilities, Japan's NEDO defines the grid parity in three phases:

• 1st phase grid parity: residential grid-connected PV systems
• 2nd phase grid parity: industrial/transport/commercial sectors
• 3rd phase grid parity: general power generation

These categories are ranked in terms of the price of power they displace; residential power is more expensive than commercial wholesale. Thus, it is expected that the 1st phase would be reached earlier than the 3rd phase, which may never be reached.

As solar panels do not use fuel and are largely maintenance-free, the levelized cost of electricity is dominated almost entirely by the capital cost of the system. If one makes the not-unrealistic assumption that the discount rate will be similar to the inflation rate of grid power, then one can calculate the levelized cost simply by dividing the original capital cost by the total amount of electricity produced over the system's lifetime. Modules are generally warranted for 25 years and suffer only minor degradation during that time, so all that is needed to predict the generation is the local insolation. According to PVWatts a one-kilowatt system of panels (four typical panels) ideally placed in Matsumoto, Nagano will produce 1187 kWh of electricity a year. Over the 25 year lifetime, the system will produce about 29,675 kWh (not accounting for the small effects of system degradation, about 0.25% a year). If this system costs $5,000 to install ($5 per watt), the LCoE = 5,000/29,675 ~= 17 cents per kWh. This is lower than the average Japanese residential rate of ~19.5 cents, which means that, in this simple case, PV has reached grid parity for residential users, the "1st phase".

Predications from the 2006 time-frame expected retail grid parity for solar in the 2016 to 2020 era, but due to rapid downward pricing changes, more recent calculations have forced dramatic reductions in time scale, and the suggestion that solar has already reached grid parity in a wide variety of locations. The European Photovoltaic Industry Association (EPIA) defines the moment at which the value of PV electricity equals the cost of traditional grid power as dynamic grid parity. EPIA expects that PV power achieves this target in many of the European countries by 2020, with costs declining to about half of those of 2010. However, this report was based on the prediction that prices would fall 36 to 51% over 10 years, a decrease that actually took place during the year the report was authored. The line was claimed to have been crossed in Australia in September 2011, and module prices have continued to fall since then. By late 2011, the fully loaded cost of solar PV was projected to likely fall below $0.15/kWh for most of the OECD and reach $0.10/kWh in sunnier regions like the southern United States or Spain. This is below the retail rate for power in much of the OECD already.

As of 2011, the cost of PV has fallen well below that of nuclear power and is set to fall further. The average retail price of solar cells as monitored by the Solarbuzz group fell from $3.50/watt to $2.43/watt over the course of 2011, and a decline to prices below $2.00/watt seems inevitable:

For large-scale installations, prices below $1.00/watt are now common. In some locations, PV has reached grid parity, the cost at which it is competitive with coal or gas-fired generation. More generally, it is now evident that, given a carbon price of $50/ton, which would raise the price of coal-fired power by 5c/kWh, solar PV will be cost-competitive in most locations. The declining price of PV has been reflected in rapidly growing installations, totalling about 23 GW in 2011. Although some consolidation is likely in 2012, as firms try to restore profitability, strong growth seems likely to continue for the rest of the decade. Already, by one estimate, total investment in renewables for 2011 exceeded investment in carbon-based electricity generation.

The dramatic price reductions in the PV industry have been causing a number of other power sources to become less interesting. Nevertheless, there remains the widespread belief that concentrating solar power (CSP) will be even less expensive than PV, although this is suitable for industrial-scale projects only, and thus has to compete at wholesale pricing. One company stated in 2011 that CSP costs 12¢(US)/kWh to produce in Australia, and expects this to drop to 6¢(US)/kWh by 2015 due to improvements in technology and reductions in equipment manufacturing costs. Greentech Media predicts that LCoE of CSP and PV power will lower to $0.07 - $0.12/kWh by 2020 in California.

Wind power

Grid parity also applies to wind power where it varies according to wind quality and existing distribution infrastructure. ExxonMobil predicts wind power real cost will approach parity with natural gas and coal without carbon sequestration and be cheaper than natural gas and coal with carbon sequestration by 2025.

Wind turbines reached grid parity in some areas of Europe in the mid-2000s, and in the US around the same time. Falling prices continue to drive the levelized cost down and it has been suggested that it has reached general grid parity in Europe in 2010, and will reach the same point in the US around 2016 due to an expected reduction in capital costs of abut 12%. Nevertheless, a significant amount of the wind power resource in North America remains above grid parity due to the long transmission distances involved.

See also

• Cost of electricity by source
• Feed-in tariff
• Microinverter
• Net metering
• Ontario Green Energy Act, 2009
• Photovoltaics
• Solar America Initiative

External links

• Cost of solar energy will match fossil fuels by 2013, claims Solarcentury (the Guardian)
• Solar quickly approaching grid parity
• Sustainable Energy Transition
• Grid Parity Renewable Energy World. Sept 2011. p12-14