For financial analysts, “grid parity” is just a shorthand way of describing when a clean energy form (think renewable sources like solar and wind) costs the same or less as a conventional energy form from the grid (think dirty sources like coal, oil, and natural gas). At least, that’s the short version. But for climate activists, grid parity is something of a Holy Grail, a critical point that – in many ways and for a number of reasons – shifts the transition to clean energy into high gear.
But like many terms from the world of finance, grid parity isn’t exactly cut and dry. Today, we hope to bring some clarity to the nuances of grid parity as we look at what it really means, why it matters, and examples of nations that have started to reach this turning point.
What is grid parity?
Technically speaking, grid parity is when an alternative form of energy generates power at a levelized cost of electricity that’s equal to or less than the price of buying power from the electric grid. In other words – as we mentioned earlier – grid parity is the point when the cost of the alterative energy becomes equal to or less than electricity from conventional energy forms like fossil fuels. It’s one of the most important things energy analysts look at when determining how economically viable an alternative energy form is for widespread development and adoption.
Grid parity is the point when the cost of the alterative energy becomes equal to or less than electricity from conventional energy forms like fossil fuels.
Why does grid parity matter? Well, the tried and not-true argument you hear over and over (and over) again against taking action on climate change by shifting to clean energy is something like “We just can’t afford to do it.” While the fossil fuel industry and its allies have been repeating this line like it’s going out of style, the cost of renewable technologies has been dropping precipitously in recent years. The average cost of solar panels fell 75 percent between 2009–2014 alone, and some analysts predict the cost will drop another 25 percent by 2018. The cost of wind energy isn’t far behind, dropping 65.5 percent in the US since 2009.
Grid parity marks the point where the big-picture costs of renewables cross the line to become equal to or less than those of fossil fuels, rendering the we-can’t-afford-to argument as relevant as a new Vanilla Ice album. And once the economic argument disappears, things happen in the market – good things – where more investment flows to clean energy projects and technologies, starting a virtuous cycle where wind and solar just keep getting more affordable and accessible. At which point clean energy isn’t just the moral choice. It’s the obvious choice. No wonder the fossil fuel industry isn’t a fan.
How do we measure grid parity?
It all comes down to levelized cost of electricity, or LCOE, the cost metric most analysts use when assessing grid parity. It’s a measure of the lifetime generated energy and cost of electricity from a certain technology – from its production through to the moment it generates its first watt and up until the moment it generates its last.
Why is LCOE important? Using LCOE helps remove biases between different technologies. It’s also the go-to benchmarking tool to assess the cost-effectiveness of different energy generation technologies. Put simply, LCOE is how analysts assess if an alternative form of energy is headed for grid parity and a viable energy source for consumers.
What factors help determine when a region reaches grid parity?
Grid parity is a moving target and varies from place to place. Factors like the amount of sunlight in an area (if we’re talking about solar energy), differences in financing conditions, and existing electricity prices and installation costs in different locations contribute to the LCOE and when a region reaches grid parity.
For example, there’s generally more sunlight in the state of Nevada than Washington. The difference in amount of sunlight between the two states, along with other factors, means Nevada has a lot more potential for solar energy and could have a leg up in achieving grid parity first. Despite regional differences like these and given the recent trends of rapidly falling costs for solar energy, 42 states in the US are expected to reach grid parity by the end of 2020, according to a report from GTM Research. That’s a big, big deal.
Which countries are at or on track to reach grid parity?
A 2015 study by Deutsche Bank predicts solar energy will be at grid parity in up to 80 percent of the world by the end of 2017. With grid-based fossil-fuel electricity prices rising in much of the world and solar energy costs expected to continue declining, many regions are on track to reach grid parity relatively soon. Plus, even if fossil-fuel electricity prices stay as is, solar energy would still be less expensive in about two-thirds of the world because its costs are projected to keep on falling.
The chart below from Deutsche Bank shows the countries with regions of grid parity in January 2015. The chart begins on the left with the nations who had the biggest differences between the LCOE of solar energy and the cost of conventional electricity. Notice that China and the United States, the world’s two biggest greenhouse gas emitters, were on the cusp of grid parity at the time of the study – a remarkable feat.
Remember, because grid parity can vary by location and depend on factors like amount of sunlight and existing energy prices, it’s not a global assessment of renewable energy costs compared to fossil-fuel electricity from the grid. It does, however, help chart the progress happening in different regions around the world.
As we strive to bring climate change solutions to the forefront of energy consumers’ and policymakers’ minds, watching the cities, regions, and countries reaching grid parity gives us a sense of how the global shift to clean energy is accelerating. And because all power is generated somewhere, it’s an area where attention to and action on local and national energy policies and utility practices can have profound effects on whether this shift speeds up or stalls. Which is to say, you have a part to play. To learn more about the clean energy solutions to climate change and ways to get involved, sign up below.