What is Grid Parity?
The term “grid parity” is meant to describe the point in time, at which a developing technology will produce electricity for the same cost to ratepayers as traditional technologies. That is, when the new technology can produce electricity for the same cost as the electricity available on a utility’s transmission and distribution “grid”.
Remember that future costs and benefits are worth a little less than current costs and benefits, so their value is discounted in the calculation. This discounting process produces the “present value
” of the equation, which is usually expressed as the “levelized
” price, in $/kilowatt hour.
Discounted System lifetime costs (Capital + Finance + Operation and Maintenance)
÷ Discounted System lifetime benefits (kilowatt hours)
Now think about your current utility costs, along with likely future increases in those costs over the same time period. Because utility rates rise from year to year, the levelized cost of power from the grid will be higher than the current cost. If the renewable energy system’s levelized cost is equal to or lower than the utility levelized cost, the system’s cost is at or below grid parity.
Grid parity is one of the most misused terms in renewable energy discussions. Headlines frequently refer to wind or solar power “approaching grid parity” as the costs for these projects fall. A reader might assume that this event will occur at some particular price/megawatt or kilowatt hour. The truth is that grid parity for a particular technology differs widely from location to location. The reasons include:
- Electric rates vary widely from location to location. A technology that produces power at a given cost is likely to be above grid parity in some locations and below grid parity in others.
- Grid parity depends upon whether you are calculating from the point of view of a utility or of a retail consumer. Retail rates may be double the utility’s cost of production. For this reason, roof-top solar on a home or business may make sense when a utility-scale plant does not.
- Wind, Solar and Geothermal plants all produce power at different costs in different locations. Solar power is less effective in Germany, for example, than in Utah because Utah gets more sun than Germany. Solar power in Northern Utah may be less effective than solar power in Southern Utah. Look at our LCOE page for more information.
- Installation costs vary from location to location. Because of higher labor and permitting costs, it is more expensive to build a renewable energy plant in California for example than in Utah.
- The value of variable power sources like wind or solar depends in part on the amount of correlated capacity already installed in the region. If a distribution system has too much wind or solar located in the same place, cloudy or calm days will require significant standby capacity. These costs must be considered.
- Variables combine to produce grid parity or “break-even” points that, for PV solar at the retail level, vary by a factor of ten¹ within the United States. The following U.S. Department of Energy map, illustrates the variability by estimating the “Grid Parity” price/installed watt for various U.S. locations :
- Environmental costs are counted differently by different communities. These costs are difficult to measure, but are very real. Environmental costs must be included in any meaningful grid parity discussion. Please check out our Greenhouse Gas page for more information.
- ¹ S. Ong, P. Denholm, and N. Clark, Grid Parity for Residential Photovoltaics in the United States: Key Drivers and Sensitivities www.nrel.gov/docs/fy10osti/46909.pdf