What is grid parity and what does it mean for solar power?

Grid parity is often described as the holy grail for solar photovoltaics (solar PV or solar power) and other forms of renewable power generation. What is it, exactly? Grid parity is when the per-watt price of electricity produced by a renewable energy source becomes equal to the price of electricity produced with conventional sources that are fed into the electrical grid–in Australia, mainly coal-fired power plants. Thanks in part to solar rebates and solar incentive schemes, there is now speculation from reputable sources that solar PV has reached the critical threshold that will enable household-generated electricity to compete economically with large-scale fossil-fuel generation.

Although forecasting the future price of anything can an inexact business and involves a lot of guesswork, an article by Angus Grigg in the 11 April 2011 Australian Financial Review is just one of a number of sources recently pointing out solar power’s gradual but increasingly certain rise to mainstream acceptance–a rise that has taken four decades and which cannot be attributed to any one breakthrough technological breakthrough event. Muriel Watt, Australian Photovoltaic Association chairwoman and UNSW school of renewable energy engineering senior lecturer, is quoted in the Financial Review as saying that solar power is “on the edge of parity” with grid-power. The convergence of factors cited for how this long-dreamed of milestone has finally been achieved are: the falling price of solar panels, the strong Australian dollar, and rising power bills across the nation. Director of consulting firm Solar Business Services, Nigel Morris, says in an interview, “The trend in Australia is towards dramatically increasing electricity prices, making the economics of solar even better.” He estimates that in the next 4 years, over half of the Australian market will be unsubsidised–that growth will continue even if financial incentive mechanisms for solar power begin to peter out. The purpose of these incentives, after all, is to help to make the solar PV and other renewable technologies competitive with conventional, polluting sources of electricity such as coal, into whose price the negative environmental externalities (i.e. damage to the environment) are not factored.

Some argue that the ultimate goal of having incentives for renewable energy generation is to level the playing field in order to make up for this disparity. In fact, Stephen Letendre, writing for RenewableEnergyWorld.com, points out that focusing too heavily on ‘grid parity’ conceals existing market distortions that have arisen due to the artificially low price of fossil fuels. Grid parity is something that would have happened for solar power long ago had all of the negative impacts of fossil fuels been known and economically accounted for from the time they started being employed on a broad scale–the concept of grid parity for renewables may have never developed, and it might not have become the hot topics that it is today. One more potentially influential factor for solar PV in the near-term future is the fact that the Labour government is currently arguing the case for a carbon tax which will financially penalise means of electricity production that utilise fossil fuels and emit large volumes of carbon dioxide, thereby encouraging people to reduce their electricity use or rely more on renewable sources.

It has been a long, hard, but steady slog for solar power to get where it is, but there has been a notable gathering of steam in the industry in Australia over the past 5 years or so. 40 years ago, the price of solar panels per Watt of capacity was $2500. By the mid-’90s, it was about $10 per Watt. Now, the numbers are below $2 per Watt, a number that could halve within the next 5 years, according to solar entrepreneur Adrian Ferraretto, former manager at Solar Shop Australia. Cheap solar power is on our doorstep. Even more telling of the direction of the industry is the incredibly rapid uptake of solar power over the past 3 years. As the Financial Review points out: “In 2008 there was less than 20 megawatts of rooftop solar capacity in the entire nation, compared with nearly 500 megawatts today. This equates to 4 percent of Australian households, or nearly 190,000 residences, which have rooftop solar.”

This ramping-up of solar PV production has resulted in economies of scale for the manufacture of solar panels and Balance of System (BOS) components such as inverters. A massive silicon cell manufacturing plant is currently under construction for the Taiwan firm AU Optronics. South Korea’s Samsung is talking about investing $6billion in solar over the next decade. All of these things do indeed point to a decrease in the cost of solar, but that will inevitably also mean a decrease in the government incentives for solar power. Indeed, the Australian federal solar rebate (Renewable Energy Certificate or REC) REC multiplier is set to decrease in July 2011 from 5x to 4x for the first 1.5kW of capacity installed for any system. Even Germany, the world leader in photovoltaic power installations, is scaling back its incentives as the ‘natural’ price of PV decreases. So, as we have discussed previously, despite the fact that the cost of solar power systems is decreasing on balance, you may not necessarily stand to benefit from waiting to install one. The solar power incentives in place at the moment may actually provide more financial benefit to you than you would get from simply installing a system for your own home electricity generation needs. Feed-in tariffs and the federal REC scheme have enabled the dawn of affordable solar to come earlier than it would have otherwise.

Written by James Martin

Analyst

© 2011 Solar Choice Pty Ltd

Resources and Links:

Bloomberg, “Solar energy costs may already rival coal, spurring installation boom”

RenewableEnergyWorld, “The grid parity fallacy”

News.Cnet.com, “Solar-power prices slide toward ‘grid parity'”

SmartPlanet.com, “Kleiner Perkins: solar PV approaching grid parity, ˜poised for significant take-off'”

Sydney Herald Sun, “Gillard’s carbon tax winning voters, but with conditions”

Sydney Morning Herald: “Fossil Fuels will run out out of gas when the solar revolution arrives”

Image thanks to Imaginal.com.au

Previous related Solar Choice blog entries: Solar Power Incentive Schemes : Inverters for solar power systems : REC multiplier set to decrease 1 July 2011 : Germany as a world leader in PV : Should I wait to install a solar power system at home?

James Martin II

Contributor at Solar Choice
James was Solar Choice's primary writer & researcher between 2010 and 2018.

He is now the communications manager for energy technology startup SwitchDin, but remains an occasional contributor to the Solar Choice blog.

James lives in Newcastle in a house with a weird solar system.
James Martin II