Solar Energy Grid Parity: How About Now?

As mentioned in previous posts, the installed cost of a photovoltaic (PV) solar energy system has declined by more than 50% in the past 2 years. This is a result of large cost reductions in solar panels, cost reductions in balance of systems and higher efficiency in the design, engineering and installation functions.  Overall, the levelized cost of energy (LCOE), a key metric for project finance entities, is significantly enhanced by these cost reductions, resulting in strong solar project bankability for the finance community. (LCOE is defined as all the expense line items of a PV system’s installed cost + the total lifetime cost of the PV system divided by the total amount of energy output in kW hours that the system will put out over its lifetime,)

At the same time, energy prices from conventional brown fuel utilities have been increasing by an average of 2.5% per year in the U.S. While there has been a temporary flattening of this price increase during the recession, all forecasts point to a 2.5% to 6% annual increase in electricity rates as the economy recovers.

These two factors are rapidly leading to a situation where the retail cost of solar PV electricity at the kWh level (the unit of energy your utilitySolar energy grid parity, solar bankability meter reads) will be same or less than utility-supplied energy (a.k.a. “grid parity”) by 2012 – 13 in vast geographies across the U.S. and globally. Currently, in a few regions solar is already at grid parity, including city centers in California and in New England, where utility rates are above $0.15/kWh with time of use (peaking) charges that are more 5X that rate. An excellent research report about near term, residential solar grid parity in the U.S. can be found here from the highly esteemed people at the National Renewable Energy Laboratory (NREL) which part of the U.S. Department of Energy.

Internationally, a recent announcement about the reduction in the Italian solar subsidy program (Italy has highest utility grid power costs in Europe) is in reaction to this drop in PV costs. Grid parity in that country is imminent.

Solar energy grid parity is not a simple subject. The number of variables, including widely varying utility rate structures from location to location, different insolation (incoming solar radiation), conditions labor costs, transmission and distribution costs etc. make broad generalities less accurate.  Diving down into the detail in a blog format is not possible but the NREL presentation cited above provides solid background on these variables and the process to determining grid parity. What is exciting is that this intersection of downward installed PV costs with rising utility costs will make the need for government subsidies less important.

As page 22 of the NREL presentation shows, 80% or more of the U.S. will be at grid parity with only the 30% federal investment tax credit (ITC) subsidy being applied (it also includes a CO2 carbon policy resulting in 0.3 cents/kWh – 2.5 cents/kWh utility cost increase depending on location). This removes the need for state subsidies and will go a long way toward a national solar energy market rather than the state-by-state paradigm currently hobbling U.S. market growth. Previously, photovoltaic solar energy has only been deployed where a strong state subsidy or mandate could be combined with the ITC to make a solar system economical.

For the first time in the history of the solar energy industry, there will be a demand pull market place on large markets instead of an artificially driven market that is a response to large and complex government incentive programs. While the industry needs the banks to start lending again to finance new solar installations, grid parity will go a long way toward making the industry  more predictable and make solar bankability less risky in the eyes of the finance community.

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