Solar Grid Parity 101: How the Cross-Over Occurs

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.

Read more