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Solar Grid Parity 101: How the Cross-Over Occurs

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"Solar Grid Parity 101: How the Cross-Over Occurs"

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by John Farrell, cross-posted from Energy Self Reliant States

Solar grid parity is considered the tipping point for solar power, when installing solar power will cost less than buying electricity from the grid.  It’s also a tipping point in the electricity system, when millions of Americans can choose energy production and self-reliance over dependence on their electric utility.

But this simple concept conceals a great deal of complexity.  And given the stakes of solar grid parity, it’s worth exploring the details.

The Cost of Solar

For starters, what’s the right metric for the cost of solar?  The installed cost for residential solar ($6.40 in 2011), or commercial solar ($5.20) or utility-scale solar ($3.75)?  Even if we pick one of these, it’s difficult to compare apples to apples, because grid electricity is priced in dollars per kilowatt-hour of electricity, not dollars per Watt.

Enter “levelized cost,” or the cost of a solar PV array averaged over a number of years of production.  For example, a 1 kilowatt (kW) solar array installed in Minneapolis for $6.40 per Watt costs $6,400.  Over 25 years, we can expect that system to produce about 30,000 kilowatt-hours (kWh), so the “simple levelized cost” is $6,400 divided by 30,000, or about $0.21 per kWh.

But people usually borrow money, and pay interest, to install solar power.  And there are some maintenance costs over those 25 years.  And we also use a “discount rate” that puts heavier weight on dollars spent or earned today compared to those earned 20 years from now.  A 1 kW solar array that is 80% paid for by borrowing at 5% interest, with maintenance costs of about $65 per year, and discounted at 5% per year will have a levelized cost of around $0.37.

That means that “solar grid parity” for this 1 kW solar array happens if the grid electricity price is  $0.37 per kWh.  But this calculation is location specific.

In Los Angeles, that same 1 kW system produces 35,000 kWh over 25 years, lowering the levelized cost to $0.31.  The timeframe also matters.

If we only look back at the Minneapolis project with a levelized cost of $0.37, but instead look at the output over 20 years instead of 25 years, it increases the levelized cost to $0.43 because we have fewer kWh of electricity over which to divide our initial cost.

We choose 25 years because solar PV panels have a good chance of producing for that long.

We also use a lower installed cost that the U.S. average.  Residential solar projects may average $6.40 per Watt, but there are some good examples of aggregate purchase residential solar projects costing $4.40 per Watt.   The levelized cost of solar at $4.40 per Watt in Minneapolis is $0.25; in Los Angeles it is $0.21.

The following map shows the levelized cost of solar, by state, based on an installed cost of $4.40 per Watt, averaged over 25 years (click for a larger version).

This map shows half our grid parity equation, the cost of solar.  But what about the other half, the grid price?  It’s another complicated question.

The Grid Price

Utilities like to compare new electricity production to their existing fleet, which means comparing new solar power projects to long-ago-paid-off (amortized) coal and nuclear power plants that can produce electricity for 3-4 cents per kWh.  But this is apples to oranges, because utilities can’t get any new electricity for that price, from any source.

A more appropriate measure of the grid price is the marginal cost for a utility of getting wholesale power from a new power plant.  In California, this is called the “market price referent” and it’s around 12 cents per kWh.  The figure varies from state to state.

But while the market price referent provides a reasonable comparison for the cost of utility-scale solar, it’s not the number that matters for solar installed on rooftops or near buildings.  In those cases, the power is used “behind the meter,” and depending on the type of state policy for net metering, the customer can essentially spin their electric meter backward when their solar panels produce electricity.  That means that solar power is really competing against the energy cost on a utility bill, known as the “retail price.”

The following map shows the average retail electricity price by state across the U.S.  It ranges from 8-10 cents in the interior to 15 cents per kWh and higher on the coasts.

In general, the residential retail electricity price is the generally accepted grid parity price.  With this price and our previous map of the levelized cost of solar, we can assess the state of solar grid parity.  The following map shows the ratio of the levelized cost of solar to the grid parity price in each state.  Only Hawaii has reached solar grid parity without incentives.

As time rolls ahead, and grid prices rise while solar costs fall, the picture changes.  In five years (2016), three states representing 57 million Americans will be at solar grid parity: Hawaii, New York, and California.

There are other considerations in the grid parity calculation.

Time-of-Use Rates

Some utility customers pay “time-of-use” rates that charge more for electricity consumed during times of peak demand, such as when a hot sunny day has everyone using their air conditioners.  Under these rates, a solar project can be replacing electricity that costs upwards of $0.30 per kWh.  Over a year, time-of-use rates can (on average) boost the cost of electricity – at peak times, when solar panels produce a lot of power – by about 30 percent.  Assuming every state implemented time-of-use pricing (and that it was equivalent to a 30 percent increase in grid prices during peak times), solar grid parity would be a reality in 14 states in 2016, instead of just 3.

Solar v. Grid Over Time

There’s one other calculation.  Let’s say that in 2011 solar still costs just a bit more than the grid electricity price, but that the grid price is rising at a modest rate each year.  In this case, solar may still be the right choice because the lifetime cost of solar (at a fixed price) will be less than the rising cost of grid electricity.  We can use an accounting tool called net present value to estimate the savings from solar compared to grid power over 25 years, and we find that for every percentage point annual increase in electricity prices, solar can be ~10% more expensive that grid power today and still be at “parity.”  We find that with electricity price inflation of 2% per year, solar grid parity shifts up two years using this method.

John Farrell is a senior researcher at the Institute for Local Self Reliance. This piece was originally published at Energy Self Reliant States.

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35 Responses to Solar Grid Parity 101: How the Cross-Over Occurs

  1. fj says:

    NYC Wins Department of Enery ‘SunShot’ Award to Make Solar Energy Cost Competitive
    30 Organizations Collaborate on City University of New York Plan
    CUNY Ventures to utilize IBM’s Intelligent Operation Center™ for Solar

    sunshotNYC http://bit.ly/rvaWXX

  2. fj says:

    The transition can be quite amazing.

    At some point it may be that just like when people chopped wood for energy, people will supply their own energies including solar, wind, human, etc.; and communities will build their own micro grids and systems; just like for other commodities, for instance information and communications technologies (ICTs).

    A similar thing may also evolve for transportation from perhaps small hybrid human-electric vehicles that work on-and-off agile open systems; instead of things like NYC’s Metropolitan Transit Authority which blows through $9 billion a year and does not provide the distributed on-demand mobility that people require.

    And, people could have a lot more control of their lives not locked into huge corporations, industries, and government agencies — at least not nearly as much — to do things for them; things which they can do better for themselves.

  3. Dave Bradley says:

    While a 13.7% net output from an ideally situated PV panel in Minneapolis might be possible -especially with free snow removal – in reality, you’d be doing good to get 10% net output of the rated panel peak output capacity -very similar to what is observed in most of the North Coast (Great Lakes) region. We are not a desert, after all, and on average, the sun peaks through the clouds about 50% of the daylight ours. But, sure beats Seattle….

    And where on earth can we get loans for 5% for 20 or 25 years? Dream on… So, using 7.7% for 20 years (still a stretch) means that you need 10%/year of the loan principal) for loan repayments.

    And then there is energy storage. Unless the losses for pumped hydro (and in many cases, the cost of the transmission lines to/from an energy storage facility and also construction of a new pumped hydro or a more expensive compressed air unit) are factored in, PV in most places in th US will only be a small part of the renewable electricty supply mix, but a very expensive one, too. And if it is only a small part, it would hardly be missed, especially if air conditioner setpoints are adjusted upwards….

    In most parts of the US, the only way grid parity will even be approximated via PV is if the grid price rises significantly. And that is not going to be popular at all. Even offshore wind will be a lot cheaper than PV.

    The main usefulness of PV is as a job creation mechanism. And this means that the only way PV is of any use is if it is made in the USA, and the factories/components in those factories are also made in the USA. Otherwise, you are just flushing our national/collective wealth down the proverbial drain.

    For most of the US, the bulk of the least cost renewable electricity supply will come from onshore commercial scale wind turbines -hydro is supercheap, but there is just not enough to supply 400 GW on an average basis, and US wind resources on land are at least 18 times that requirement. So why propose to install PV at real required prices of over 50 c/kw-hr? Plus, we have no Feed-In Law, so average people cannot invest in renewables without getting hosed. After all, spending $19,000 to supply an average of 300 watts of electricty and which now costs $35/month seems unwise and then some. That’s only a 45 year simple payback at present electricity prices and a 20 year one once most electricty gets supplied by wind turbines..

    DB

    • SecularAnimist says:

      Dave Bradely wrote: “The main usefulness of PV is as a job creation mechanism. And this means that the only way PV is of any use is if it is made in the USA …”

      With all due respect, not so.

      PV is “of use” for massive job creation in installation and deployment, regardless of where the panels are manufactured.

      According to the National Solar Jobs Census 2011 conducted by The Solar Foundation, as of August 2011 the US solar industry employed over 100,000 people at more than 17,000 sites, and had an annual job growth rate of nearly 7 percent — ten times the overall US job growth rate. According to the survey, solar employers expect to add another 24,000 jobs by August 2012, an annual growth rate of 24 percent.

      The survey classifies solar jobs as manufacturing, installation, sales & distribution, and “other”. Manufacturing jobs are indeed growing, and are expected to grow at an annual rate of 14 percent through August 2012.

      But manufacturing only accounts for about 25 percent of solar jobs, whereas installation accounts for 44 percent of jobs and is expected to grow at 22 percent per year, and sales/distribution accounts for about 12 percent of jobs and is expected to grow at a 35 percent rate.

      As for the rest of your comment, and again with all due respect, it appears that you have simply chosen to ignore the facts and analysis offered in John Farrell’s article, and to offer in rebuttal pre-existing beliefs which are not well informed by the realities of the solar industry today.

    • Tim says:

      And where on earth can we get loans for 5% for 20 or 25 years? Dream on… So, using 7.7% for 20 years (still a stretch) means that you need 10%/year of the loan principal) for loan repayments.

      From your mortgage company. If the system is built with the house, 30-year mortgages are averaging just under 4% for people with good credit. For a 15-year mortgage, interest rates are averaging about 3.25% right now.

  4. Leif says:

    I also do not feel that it is fair to mention “grid parity” without mentioning the cost advantage that fossil fuels evade by ignoring the societal burden “we the people” bear. Interest on the National Debt, health care expenses, storm damage to infrastructure, environmental damage, agricultural lose, species extinction, ocean acidification, and more. Factor even a small percentage of those costs into the price of fossil and I will bet my bottom dollar”grid parity” was reached a long time ago.

    • Mulga Mumblebrain says:

      Leif, the big ‘externality’ that fossil fuel plutocrats ignore is the destruction of human civilization through climate destabilisation caused by the emission of anthropogenic greenhouse gases. The capitalist economistic approach to existence is once again revealed here to be suicidal and immoral. We ought to start from the premise that committing auto-genocide is a very bad idea indeed, then work backwards. We must reduce greenhouse emissions, no matter what the ‘cost’ in dollars, we must do it by whatever means are available that do not cause greater or comparable harm, and we must make the wealthy kleptomaniacs who have misappropriated so much of the planet’s wealth, pay for it, starting with the fossil fuel pathocrats. Confiscatory taxation of 99% of a billionaire’s ill-gotten loot still leaves him with $10 million to live one-I’m sure they’ll manage, somehow.

  5. Neil Levine says:

    Fanciful. Waterwheels safer, cheaper, cleaner and abundant.

  6. John Hollenberg says:

    It’s getting closer, but not quite there yet. We just did a lighting retrofit in our small condo that saved about 30% of our electricity costs. Payback is just over two years. To my amazement, one of the owners asked about getting solar installed also. A huge change from attitudes at the condo 5-10 years ago. We are going to get a quote for solar, but it sounds like it isn’t quite attractive enough economically for us to go with solar. However, in 3-5 years we will probably reach the tipping point.

  7. Anne van der Bom says:

    Why is the installed cost for residential solar a whopping $6.40 in the USA?

    It is now under € 2.00 in Europe, or less than $ 3,00.

  8. Rabid Doomsayer says:

    If you want solar to look even more attractive, start studying the state of various transmission systems. Some are in a perilous state, others are pretty close to maxed out (New York).

    Solar can take a considerable amount of pressure off these systems. Unlike concentrated solar which would require new transmission infrasture solar pannels can increase the life of existing structure.

    In rural and even slightly rural situations it can be very expensive getting power to the house. The set up cost of stand alone solar power is cheaper in many circumstances than the cost of running power into the property.

    I would have liked to put some numbers into the above but hard data is a little hard to come by and each situation is different. But it may not be so much the relative cost of solar vs external power but solar vs the risk of no power.

    In many cases the problem is that transmission companies and retailers have not been allowed enough margin for upgrades.

    • sailrick says:

      “Between 1999 and 2010, the energy industry spent more than $2 billion fighting climate change legislation, more than $500 million of it from January 2009 to June 2010.”

      A study done by NREL, for the Western Governors Association, found potential for 300 GW of solar thermal near already existing power lines.

      To take advantage of the other 700 GW potential in the southwest, yes we would need to build some HVDC transmission lines. But these would improve the grid, making it more robust and liminting line loss over long distance.
      We need these anyway, for wind power. An example is western Texas, which has huge wind and solar thermal potential.

      And solar thermal with heat storage, would make it easier to integrate more intermittent PV solar and Wind energy into the grid. That’s because of it’s firm capacity coupled with it’s flexibility – ability to follow the load.

      • sailrick says:

        I pasted the wrong quoted paragraph above.

        Rabid Doomsayer said:
        “Unlike concentrated solar which would require new transmission infrasture solar pannels can increase the life of existing structure.”

  9. Mark Shapiro says:

    1) PV already beats the grid for the 3 billion poorest people who remain off the grid. A small PV panel, battery, LED light, and cell phone charger costs less than a grid connection and meter.

    2) PV at $4/ Watt hits grid parity in Hawaii and other sunny islands.

    3) With PV panels at $1/Watt, the road to grid parity goes through the elimination of installation costs. Calling all home-building entrepreneurs.

    4) Want clean, low carbon PV to dominate? Ask for a PV friendly DC standard voltage and connector to eliminate the DC/AC and AC/DC middlemen that add cost and reduce efficiency of PV powered electronics.

  10. M. Robin Church says:

    While the economics sound interesting, in Virginia you have to compete with the antisolar charges from Dominion. You can only spin your meter backwards up to the average annual power that you consume. Any excess they take for free. In addition they have just leveled a distribution charge which may yet be applied to domestic installations. With the latest installed cost it would take me over 23 years to pay back the investment, and that does not include installing new roof shingles before adding the solar panels. Since the panels are only guaranteed for 25 years it is unfortunately not a good deal.

  11. Brian Cassutt says:

    Also of significant importance for distributed generation is the issue of fixed versus variable utility costs. Rate structure across the U.S is inconsistent, and utilities are shifting their rates in favor of higher fixed costs to decrease the amount of lost revenue. This will be a very important issue for grid-parity over the coming years.

  12. Mike#22 says:

    One way to reduce installed costs is to simplify the installation process. Integrating the inverter right into the panel does that, and the panel feeds directly into the house AC wiring. Enphase is launching this product for 2012 (panel integrated that is, they already do microinverters that sit right under the panel). SMA is (very reluctantly) getting into the microinverter game also for 2012.

    All the installer needs to do is get the panels on the roof and connected into the house AC.

  13. Andy says:

    A utility bill consists of a lot more than just the cost of the electricty. Taxes, fuel surcharges, and other fees make up a substantial portion. They add a little more than 10% to my electric bill.

    Other utility fees may increase because of global warming, such as sewage fees. See this NY Times story regarding the very high costs associated with sewage overflows being caused by more greater rainfall.

    http://www.nytimes.com/aponline/2011/12/26/us/AP-US-Awash-in-Sewage.html?hp

    Taxes and other fees as well as the external costs of electricity source should be added into the calculations for solar and wind grid parity when they can be reasonably calculated and when they directly add to a household’s utility bill. I think when this is done, the extra cost of solar versus coal for example, becomes much less important to a household.

  14. Andy says:

    Also, utilities borrow money for power plant construction and are often allowed to pay for loan interest through billing fees. They are also allowed to discount their property taxes for many equipment purchases resulting in higher household tax rates as well as deduct depreciation costs out of what would otherwise be their taxable profit.

    • Andy says:

      To finish my post. Homeowners who go solar should receive a property and income tax credit because they are foregoing other tax credits received by electricity generators on their behalf, and they are not adding to the household costs of others by polluting or exacerbating global warming.

  15. Joy Hughes says:

    Great to see John Farrell’s analysis here!

  16. David B. Benson says:

    Evryone installing solar PV should pay a balancing agent fee (against the rainy days when the PV doesn’t generate). In a low carbon world the balancing agent fee is likely to be so high that solar PV isn’t worth it.

    The eonomics is quite messy and I’m still working on finding a good & practical solution. So far what I have looks rather disappointing.

    • Robert Merkel says:

      If I’m understanding your comment correctly, you’re pointing out that solar PV (without local energy storage) doesn’t reduce the capital cost of the grid, nor the need for non-PV generation. Therefore, if solar PV ends up being widely deployed, it will end up increasing the cost of grid electricity per KWh (or increasing a fixed distribution charge).

      Which is a serious point, and one I haven’t heard the advocates of domestic solar PV seriously address (except to indulge in handwaving about V2G technologies, which are great in principle but a very long way from commercial viability).

      So, how about it?

    • Mark Shapiro says:

      David,

      Doesn’t PV produce most when demand for electricity (and thus price) is highest?

      That’s a beginning of the balancing. . .

    • Mike#22 says:

      At low penetration of PV, baseload generation can be ramped up and down to respond to PV easily–the PV production over a geographic region is quite easily predicted. At higher levels, smart grid features will be necessary, such as real time of use pricing (PV will generally come out ahead for the PV owner) and smart appliances that avoid using power when grid supplies are tight.

      Long term, V2G is the solution.

  17. David B. Benson says:

    Mark Shapiro — Robert Merkel explains the point. There are the capital costs of providing the balancing agent(s) to backup solar PV on cloudy days. In fairness, those costs should be borne by the solar PV owners.

    As the demand for electricity is hihgly inelastic the market price does not resolve this matter.

  18. David B. Benson says:

    Mike#22 — As Robert Merkel explained it is a matter of the fixed costs for the balancing agent. An energy-only market does not work well in meeting those (necessary) costs.

    V2G will fail in the sense that new batteries in cars are too precious to squander on V2G. However, once the batteries are removed from vehicles various utility companies have expressed interest in acquiring the units on the used market (to use primarily for regulatory purposes as there simply is not enough for energy storage — which is the issue I raise).

    • Mike#22 says:

      David–

      V2G is basically a free benefit from electrifying the passenger vehicle fleet. Passenger vehicles aren’t going away, gas is, and Li batteries are headed towards 400$/kwh.

      We need to buy new cars every tens years anyway, make them plug ins (30k) not luxury SUVs (50k).

      This is just one of the wedges. It works with other wedges, like smart grids and energy efficiency. You can’t pull PV out of the overall solution and ignore how it interacts with the rest of the solution. Take a look at what Germany is doing.

    • Daniele Gaetano says:

      “V2G will fail in the sense that new batteries in cars are too precious to squander on V2G.”

      (I’m assuming EV owners would be compensated for lending their batteries to the grid)

      As long as there are enough bargain hunters among EV owners (those who will go for the immediate money and not consider the battery issues) then a V2G program will work. I doubt this is a big portion of the early adopter crowd, but if/when EV’s go mass market there will be plenty of these people. We all know someone who can’t resist a sale, whether it makes sense or not.

      And for the record: eight months ago I’d have never let anyone touch my EV (a Leaf) for V2G for the very reason you point out. Now that I’m much more familiar with it I’d go for a well designed V2G program. If my change of heart on the issue is representative of EV owners (and I’m fully willing to admit it may not be) then V2G will work fine.

  19. David B. Benson says:

    Mike#22 — Germany is currently planning on building up to 17 new coal burners. Tell you something?