Solar Grid Parity 101

Editor’s Note: EarthTechling, always looking to forward the discussion on the cleantech revolution, is proud to bring you this article via a cross post from partner Institute for Local Self Reliance. Author credit goes to John Farrell.

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.

image via Shutterstock

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.

In Los Angeles, that same 1 kW system produces 35,000 kWh over 25 years, lowering the levelized cost to $0.31. The timeframe also matters.

If we only look back at the Minneapolis project with a levelized cost of $0.37, but instead look at the output over 20 years instead of 25 years, it increases the levelized cost to $0.43 because we have fewer kWh of electricity over which to divide our initial cost.

We choose 25 years because solar PV panels have a good chance of producing for that long.

We also use a lower installed cost that the U.S. average.  Residential solar projects may average $6.40 per Watt, but there are some good examples of aggregate purchase residential solar projects costing $4.40 per Watt.   The levelized cost of solar at $4.40 per Watt in Minneapolis is $0.25; in Los Angeles it is $0.21.

The following map shows the levelized cost of solar, by state, based on an installed cost of $4.40 per Watt, averaged over 25 years (click for a larger version).

This map shows half our grid parity equation, the cost of solar.  But what about the other half, the grid price?  It’s another complicated question.

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