In the world of renewables, particularly solar, grid parity is a term that is bandied about a lot. But what does it actually mean, and when is it going to happen?

To complicate matters, the price of electricity from the grid varies widely between areas. For example, in the US prices range from high-cost jurisdictions such as Hawaii and California to lower-cost jurisdictions such as Wyoming and Idaho.

In a sunny island market such as Hawaii — with diesel-generated electricity, electric rates approaching US$0.30/kWh, and falling module prices — it makes considerable economic sense for consumers or utilities to install solar arrays, with the right infrastructure and regulations in place.

For similar reasons, a host of other markets — Italy, Spain, Australia, Germany, Japan, and the US (California, Texas) — are widely expected to achieve grid parity within the short to medium term.

Moreover, in some countries, wind power, landfill gas and certain forms of biomass generation are already lower-cost (on a per kWh basis) than electricity provided from the grid. In fact, “grid parity” has already been achieved in certain jurisdictions that continue to use feed-in tariffs (FiTs). For example, the generation costs from landfill gas systems in Germany are currently lower than the average electricity spot market price.

In remote areas electricity from solar photovoltaics (PV) can be cheaper than building new distribution lines to connect to the main transmission grid. This makes the notion of grid parity elusive.

Costs Make Comparison Difficult

But there is still a meaningful difference between grid parity at higher retail prices and at lower wholesale prices. Even then there are discrepancies, with some retail territories offering time-of-use pricing that impact on the value of generation from the solar system.

With wholesale pricing the comparison is even harder because solar power is essentially a mid-peak resource. This makes comparing it against average wholesale prices somewhat misleading. Comparing solar with average peak prices is better but still not entirely accurate, as solar isn’t entirely a peak resource. It can be compared with an alternative fuel — natural gas makes the most sense — but the fact that fossil fuels are dispatchable should really be accounted for.

Then there is the question of whether grid parity includes the cost of incentives and subsides, FiTs and so on. Not to mention the thorny question surrounding the cost of solar power itself — that is to say, the cost of the PV system and its anticipated lifetime.

Probably the best answer for solar is given by Ernst & Young, who argue that because so much solar power is likely to be installed in the built environment (displacing electricity consumed from the buildings on which it sits), solar grid parity is quite likely to be judged by reference to the retail rather than the wholesale price of electricity, with a deduction for the cost of the subsidy itself where it is recovered as part of that price.

A Moving Target

When grid parity is going to be achieved is another tricky question, and varies greatly from place to place. Again according to Ernst & Young, retail grid parity may be reached generally between 2012 and 2015 with, for example, the US to the fore and the U.K. having the prospect of parity in 2015, if retail electricity prices continue to rise.

However, if solar is judged by the harsher test of wholesale price parity, then it is not expected to be achievable until about 2030 in Italy — with concentrating solar power (CSP) achieving parity a few years earlier, between 2025 and 2027 in California and Spain, the company believes.

Other forecasters offer different estimates that would result in grid parity happening sooner. UN expert Sven Teske, a contributing author to the Intergovernmental Panel on Climate Change (IPCC)’s recent report on renewable energies as well as renewables director at Greenpeace, says the EU is on track for solar grid parity as early as 2017. Teske says that on current trends he expects Spain, Italy, France and Germany to reach grid parity by 2015, but that progress could be endangered by market uncertainty over the future of these nations’ FiTs.

Although its definition varies, grid parity is the point at which the cost of solar power matches that of grid electricity (Source: Photowatt)

The rapid deployment of renewable energy under FiTs seen in countries like Germany, Denmark, Spain and elsewhere has undoubtedly contributed to a significant reduction in technology costs. For instance, wind and solar technology costs have decreased dramatically over the past decade, as the devices have become more widespread, manufacturing processes have improved, innovations have been incorporated, and gains have been harnessed from economies of scale.

The EU’s PV Technology Platform has previously estimated that grid parity would only “apply to most of Europe by 2020.” And, the European Photovoltaic Industry Association (EPIA) has drawn the same conclusion from its analysis. “Reaching grid parity will depend on the geographical situation, irradiation and the price of electricity,” said Eleni Despotou, deputy secretary-general of the trade group. She added: “We have recently done a study that shows that in Italy we can reach grid parity in two years’ time, in Germany in all market segments by 2017, Spain 2016.”

Reaching parity across the EU as a whole would take “five, maybe six years,” says Teske, “and therefore we urge governments not to change their policy. We are almost there and what we need is a stable feed-in tariff policy.”

Encouraging Investment

But while FiTs are important, they are still very susceptible to changes in economic conditions. This circumstance forces PV manufacturers to plan for demand surges by building capacity with the understanding that local policy and downstream players are ready for long-term market build-out.

The EU’s climate action commissioner, Connie Hedegaard, says that EU nations should remember the Commission’s 2020 targets for renewables when taking such decisions.

“Take care that you, the Member States, are not doing anything retroactively that will just make people fear to invest in this area,” she said. “It’s in nobody’s interests. That does not mean that if you’ve had the feed-in tariff once it can never, ever be changed. But you have to be very cautious and you have to give very, very long warnings.” Stop-and-go policies discourage investors, says Despotou, citing FiT cuts in France and Spain as examples.

Reaching grid parity with solar power is anticipated in various markets over the coming years, starting in high cost markets like California (Source: SolarCentury)

“Governments may introduce a law [with] something wrong in [it] from the beginning. You may have very generous incentives in order to kick off the market and once the incentive is too generous, that of course creates some speculative bubbles,” she says.

Even with long warnings, market uncertainties caused by tariff cuts have apparently led companies such as First Solar to announce major new deals in China, and Total to invest instead in the U.S.

Teske expects Europe’s global market share of the PV sector to drop as a result and suggests that solar PV companies should be allowed to provide as well as produce electricity because at present, utilities could double their overnight backup prices — when the sun is not shining — and so nullify the benefits of any feed-in tariff.

“The main focus should be on allowing all electricity to be fed into the grid at a certain minimum price,” Teske said, “even if it’s lower than the market price. You just need something reliable.”

Low Cost Plus High Efficiency

Other analysts expect grid parity to come even sooner, with market intelligence firm Pike Research predicting that it will happen in the EU as a whole by 2013. The rationale is that the solar energy market has undergone a dramatic transformation over the past two years, driven by a new abundance of polysilicon, the effects of the worldwide financial crisis, and the plunging price of solar modules. As a result of these factors, the solar industry has shifted from supply-constrained to demand-driven, and a few strong companies have been able to improve their revenues and market share based on a low cost per watt combined with high module efficiency.

“Solar prices are plunging quickly, and lower pricing will fuel a surge in demand in 2010 and beyond,” says senior analyst Dave Cavanaugh. “However, pricing trends and oversupply of solar modules will also place huge pressure on solar suppliers, especially Tier 2 and Tier 3 companies that are not well-equipped to weather the storm. We expect a significant shakeout among solar suppliers in the next two years.”

Cavanaugh points to a number of factors determining this trend, including low-cost materials, processing, module efficiency, economies of scale, market presence in key growth countries, supply chain integration, strong balance sheets and internal financing of module manufacturing in North America and low-cost EU countries.

Market Projections

Others say grid parity has already been achieved in some markets. John Denniston, a partner at Kleiner Perkins Caulfield and Byers, agrees that innovation in clean technology has helped drive strong growth in both solar and wind over the last five years.

“Some geographies are at grid parity: in Italy, in some parts of California,” he says. “In the coming 12, 24, 36 months, we’ll be at grid parity in other geographies due to innovation and economies of scale. Countries like Spain and Japan and states like New York, New Jersey, Florida, Arizona, Texas are coming into grid parity in solar PV, and at that point, this already very large industry will be poised for a very significant takeoff,” says Denniston.

The New York-based Institute of Electrical and Electronics Engineers (IEEE) echoes this view. Solar power is approaching the point of grid parity, says James Prendergast, IEEE’s executive director. By “about 2015, we’ll be at a significant inflection,” and “if you talk about southern California, you’re probably already there,” he says.

Worldwide capacity for solar PV systems has been increasing by about 40 percent a year since 2000 — at those rates, solar is expected to provide 11 percent of total global power by 2050, according to the International Energy Association (IEA). However, Prendergast noted: “These projections are highly speculative,” adding that solar may provide even more of the world’s power as solar panel prices fall. “We are about as close to consensus as you can get that solar will be a game changer for the generation of energy in the future.”

Rapid deployment under FiTs in countries such as Germany and Spain has undoubtedly contributed to reducing technology costs (Source: FESA)

A recent report by Ernst & Young shows yet again how dramatically solar PV module prices are dropping. The report, which focuses on the UK solar market, illustrates the continued downward price pressure on panels due to a steady ramp-up in global manufacturing capacity. By 2013, the average selling price of a solar module will be down around $1 per watt, from $1.50 today, the document concludes.

This suggests that falling PV panel prices and rising fossil fuel prices could together make large-scale solar installations cost-competitive without government support within a decade.

That said, it is important to remember that these are simply module prices. The actual cost of solar electricity is determined by the cost of other equipment, construction and installation, and permitting. Low module prices do not in themselves bring grid parity. And, as large markets such as Italy or California reach grid parity, surges in demand for solar PV may push up installation costs. As a result, grid parity may be achieved only temporarily.

Moreover, in supply bottlenecks for various components or in services such as system integration, the availability of trained personnel for installation may slow the surge and raise prices, increasing overall system costs. It may take time for local industry and international suppliers to finally break through to a sustainable level below grid electricity prices.

Prices and Financing are Key

Financing remains a crucial part of the equation. The cost of a PV electricity project financed through either borrowing or required return on equity will impact the cost of electricity produced by a PV array. A relatively small rise in interest rates can therefore substantially increase the cost of a project, especially if it is financed over a typical 10-20 year period.

To date, the most secure way to keep finance costs low for solar PV has been the FiT. At some stage net metering might replace FiTs, enabling project owners and householders to collect what may be a higher rate per kWh — but, despite the prospect of higher kWh rates with net metering, the uncertainty driven by fluctuations in interest rates could still make this less attractive.

Prices may also be boosted by off-grid installations. As PV system components become more affordable, and with growth in battery manufacturing capacity and associated lowered prices, demand for off-grid systems could rise in the developing world. This increasing supply and affordability of solar modules would boost demand for PV and batteries worldwide, potentially increasing prices in other markets and making solar more expensive with regard to other sources of power.

With this in mind, it might be safer not to predict any specific time target for grid parity. Rather than a single event, the concensus is that it is likely to be something that slowly evolves over a number of years across a variety of markets.

So while grid parity is an important milestone, it is far from being the be-all and end-all for the solar industry. For solar power to experience sustainable growth, strategies for making grid parity part of an ongoing process will be necessary. In order to encourage ongoing investment in the industry it may well prove necessary to maintain the current FiT system, even at market rates, as a price stability mechanism and as a means to reduce capital expenditure financing costs.