Sunday, December 25, 2011

Grid Parity for Solar PV: Important Milestone but not a Tipping Point

A recent study shows that solar electricity from photovoltaic systems has reached grid parity. The final peer-reviewed paper from this study has not yet been published, but a prepublication draft may be accessed here.  The study has already generated discussion on several websites (e.g., see here and here).
Achieving grid parity marks a significant milestone in the development. Although the authors of the study do not call it so, grid parity has been claimed to be the tipping point. Is it the tipping point—the point which marks an inexorable trend towards installation of PV systems over other technologies such as coal, natural gas, or nuclear? I think it would be premature to call it a tipping point, as doing so unnecessarily raises false hopes and undercuts credibility when reality does not live up to the expectations. Let us review what is really meant by grid parity and then we can decide whether or not to call it a tipping point.
A technology is said to have reached grid parity when the levelized cost of electricity, LCOE, produced by it is equal to the price of electricity that customers pay to the utility. Note that already there is an apples-to-oranges comparison. On the one hand we are talking about the cost of producing electricity, on the other it is the price that we pay for it.
There are many technologies for producing electricity each with its own set of capital and operating expenses, risks—which impact interest rates—and expected useful lifetime. Some require fuel use others do not. LCOE is a way of capturing these disparate factors and estimating the cost of producing a unit of electricity from a new facility. It is a tool to help power producers decide which technology to deploy to expand capacity. Conceptually the process is straightforward and entails estimating all the expenses for the lifetime of the plant and the total dividing it by the total amount of electricity expected from this plant. In practice though, details get in the way and muddy the waters. I found this discussion of LCOE to be particularly lucid.
Plants are rarely built with all installation costs paid upfront by cash. They generally require some type of financing, and these charges (principal and interest) as well as operational and maintenance expenses are incurred over time. Likewise, the income from the sale of the power is accrued over time. Net present value of these future expenses and revenues are calculated using a discount rate, which is generally slightly more than the projected inflation rate. For technologies requiring fuel inputs, projections must be made about the likely the future price of the fuel. The expected power output also requires assumptions about terms such as plant’s availability, useful lifetime and performance degradation over time. One of the key messages of the study cited above is that it is very important to use consistent and realistic values for these parameters when comparing LCOEs. The other point of the study was that if one uses realistic estimates for financing terms, useful lifetime, and performance of PV panels, the LCOE of solar electricity is significantly lower than many previous estimates.  It can range between 12 and 25 cents/kWh and thus reach grid parity in many locations.
The grid price for electricity for many US customers is between 9 and 12 cents/kWh, although the cost of producing electricity is substantially lower. Depending on their usage, the marginal cost of electricity for residential users can be as high as 35 cents/kWh. The cost of producing 1 kWh of electricity from coal power plants is often quoted as between 2 and 2.5 cents. This cost is not the LCOE from coal plants as it refers to only additional cost incurred by plants that have already been paid for. LCOE from coal plants is estimated at between 6 and 8 cents/kWh without carbon capture and sequestration. The economics of installing a PV system depend on whether one is speaking of residential systems or a utility scale system.
While it may now make economic sense for certain users to install PV at their homes, the LCOE from PV systems have to ultimately compete with LCOE from competing technologies. With relatively stable natural gas prices for the foreseeable future (ca. $4.00/MBtu), the LCOE from gas-fired plants is currently estimated at about 7 cents/kWh. Add to that their reliability, rapid ramp up, and relatively low system cost PV still has ways to go before it becomes the technology of choice for large scale installations. 

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