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Clean Power Two Kinds of Solar Parity

Published on July 17th, 2013 | by John Farrell

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Is Solar Cheaper Than Grid Electricity? Yes. And No.

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July 17th, 2013 by  

This article originally posted at ILSR’s Energy Self-Reliant States

The word “parity” is to the solar advocate as the word “abracadabra” is to the magician.  Through it, all things are possible.  But there’s really two kinds of solar parity with electricity prices, and the difference is significant.

Take this article from Renewable Energy World last month.  It claims that solar installations in New Mexico are at grid parity – i.e. the cost of solar is equivalent or less than the cost of grid electricity – for schools that are buying solar electricity instead of electricity from the power company. It’s true, for these schools and many consumers, the price you will pay for solar from a “third party” (i.e. non-utility) solar providers like SolarCity or SunRun is less than what you pay for power from the grid.  I’ll call this Subsidized Solar Parity – when the consumer can buy solar electricity (priced with subsidies) for less than power from their utility.

But while the consumer is signing up for less expensive electricity from solar, the cost of energy from that solar array is actually higher.  That’s because the solar company selling to those schools is still getting 30% from a federal tax credit, and a further tax savings via accelerated depreciation.  So while the ultimate consumer might be paying 7¢ per kilowatt-hour for solar energy, the actual cost of generating electricity from the solar array supplying them is closer to 12¢ per kilowatt-hour.  The difference is the federal taxpayer.

In other words, calling these power purchase agreements “solar parity” involves a bit of sleight of hand, because it’s not really the cost of solar, but the existence of subsidies, that’s allowing it to compete. (More on these agreements later.)

That’s why I prefer to talk about Unsubsidized Solar Parity – when the consumer can buy solar electricity (priced without subsidies) for less than power from their utility.

In the example I just gave, the city of Palo Alto is buying subsidized electricity at 7¢, with an unsubsidized cost of 12¢ per kWh.  For most residential electricity customers, this is still better than their marginal electricity price, which is between 13¢ and 17¢ per kWh.  So Palo Alto, with relatively high rates and abundant sunshine, has already reached ‘Unsubsidized Solar Parity’.  And at the installation cost of $2.15 per Watt that’s generating that price, our interactive solar parity map shows that at least 800 megawatts could be installed at ‘Unsubsidized Solar Parity’ (on commercial property) in New Mexico, as well. Utilities like to claim that there’s a third type of parity, pricing solar energy against wholesale electricity prices (matching solar against the price of power from existing power plants paid off years ago).  But that’s wrong, for two reasons.  First, in most geographic regions of the US, solar energy competes against the most expensive power during times of peak energy use.  And second, it’s more often a resident or business installing solar as a way of lowering their electric bill, which is based on the retail electricity price, not the wholesale.

An Aside on Solar Leases and Power Purchase Contracts

Back to those power purchase agreements for a minute.  As solar has become more cost competitive (but the incentives have remained complicated to access), the market for third-party owned solar arrays has boomed.  In simple terms, this means you have a solar array on your roof, but someone else owns it.  You either lease the solar array to get the solar energy or buy the solar energy on contract.  Many of these providers offer customers a lower price for electricity than they pay to the utility.  Great, right?

Perhaps not.  Many of these contracts have an inflation escalator.  A reasonable one might assume that the price of grid power will climb by 2-3 percent per year (as it has historically) and the customer’s price will mirror that.  But some contracts assume much higher price inflation, 5% or 6% or 7%.  Electricity prices have rarely increased that fast over a long period of time, which means that the solar customer may actually end up paying more for their solar energy than if they had stayed with the (dirtier) electricity from their utility.  For many customers, that won’t matter.  But as solar goes mainstream, the price comparison will be that much more important.

An Issue With Equity

Confusion about solar parity is also going to create a significant issue with equity.  While the price of solar has tumbled across the country, places reach parity based more on their local electricity price or solar resource.  In the near term, it means that in places like southern California or New York – already at ‘Unsubsidized Solar Parity’ – the federal tax incentives will be financial gravy to solar customers or installers.  Meanwhile, solar seekers still need incentives to be competitive in places like Minnesota or Illinois.  The looming reduction in the federal solar tax credit may not matter for well-established solar markets in the sunniest regions, but it could present a big problem in emerging markets.  See ILSR’s interactive solar parity map for more on the geographic disparity.

It’s Unsubsidized Solar Parity That Matters

While it makes a great headline to claim solar is delivering energy for less than utilities, it’s disingenuous to do it on the basis of subsidized prices.  Additionally, the prices reported may be based on contracts with escalators that won’t match grid price inflation, or that may reflect a geographic imbalance in solar incentives.

Besides, there’s already a remarkable story to tell about Unsubsidized Solar Parity.  Even at $3 per Watt, there’s 100 gigawatts of solar that could be installed at parity with out subsidies across the country.  Now that’s what I’d call magical.

Solar Potential at Grid Parity 2016 - 3 per Watt

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About the Author

directs the Democratic Energy program at ILSR and he focuses on energy policy developments that best expand the benefits of local ownership and dispersed generation of renewable energy. His seminal paper, Democratizing the Electricity System, describes how to blast the roadblocks to distributed renewable energy generation, and how such small-scale renewable energy projects are the key to the biggest strides in renewable energy development.   Farrell also authored the landmark report Energy Self-Reliant States, which serves as the definitive energy atlas for the United States, detailing the state-by-state renewable electricity generation potential. Farrell regularly provides discussion and analysis of distributed renewable energy policy on his blog, Energy Self-Reliant States (energyselfreliantstates.org), and articles are regularly syndicated on Grist and Renewable Energy World.   John Farrell can also be found on Twitter @johnffarrell, or at jfarrell@ilsr.org.



  • RSMills

    I would like to see a graph comparing all in subsidies if given to solar i.e. if solar was given the cost for all externals as well as all fossil subsidies how would that compare…. very interesting don’t you think?

  • Zedicus

    Are we talking about solar PV or solar thermal (with the mirrors and the molten salt)? Because if we’re talking about solar PV, this kind of talk has always confused me because I feel like the greatest benefit of solar panels is a distributed energy network where most buildings produce the lion’s share of the electricity they use. Talking about ‘grid parity’ is bizarre, when most solar installations are privately owned. Installation is an investment, and the important figures are how long it takes to recover that investment, and how much that investment will ultimately save.

    If we’re talking about solar thermal, then I’m on board. But ‘grid parity’ with solar photovoltaics is silly. They’re much more economical and scale-able for private installations than for utilities.

  • Steeple

    What the author said

  • Senlac

    One question; what is the true cost of carbon based electricity? Because it is not the market cost. The health and environmental effects are real, but very difficult to estimate. This power is also subsidized! How does one reconcile these costs when comparing to the cost of solar or wind etc… What about increased storm damage and the higher property insurances rates caused by climate change and the greater weather volatility. Those are real costs, and are higher as the result of using carbon energy sources. My feeling is, if solar rates are close or equal, subsidized or not, your more or less at grid parity. The truth is, we can never know how much the carbon energy is costing us. It is higher. But by how much? Lets hope it doesn’t cost us the Planet.

  • Omega Centauri

    Palo Alto is actually not all that sunny, but the power plants contracted are in the much sunnier San Joaquin and Antelope valleys a couple hundred miles away.

    The third parity, is in my mind the most important one of all. For once utility scale solar is cheaper than coal/gas for the utility, why would a utility build another fossil plant? What we are currently seeing, is that niches where solar is at or better than traditional open up, which allows the solar market to expand. Then as more niches open up, it expands further.

  • RobS

    With grid parity upon the US I think now is the time to start thinking about a phased subsidy withdrawal, doing it gradually limits the pain and can actually have the effect of pushing down prices faster to compensate for the falling subsidy. Something along the lines of dropping the subsidy 10% annually, ie currently 30% tax rebate, next year 27% then 24% such that the subsidy is phased out fully in ten years time. This is relatively painless and yes I agree other power sources are subsidised but being able to show that solar is on track to be competitive without subsidies is powerful from a marketing point of view.

    • sault

      This would only be fair if we scaled back subsidies going towards coal, oil and gas too. In reality, dirty energy should have their supports taken away first in order to counteract the century of uninterrupted government support they have enjoyed.
      For example, oil companies get $4B in tax breaks that they don’t need, especially in the era of $100 per barrel oil. Coal companies have gamed the auctions for leases on public lands for years, costing the government nearly $1B annually.
      As for the negative externalities associated with pollution, they are difficult to pin down. However, the most straightforward way to correct this market failure is to mandate strict pollution control and effectively enforce those controls. The limited efforts by the Obama Administration to lower pollution from coal power plants are a good start, but to make things fair, the dirtiest coal plants either need to bring their pollution levels in line with the “cleanest” plants or shut down. And we also need to keep the pressure on these “cleanest” plants to continually improve. For natural gas, we need to repeal the specific exemptions that “fracking” has from the Clean Air and Clean Water Acts as a first step and then we need to determine whether “fracking” can be done safely AT ALL without contaminating ground water or blowing up people’s homes. Vehicle fuel economy mandates and increased enforcement of environmental regulations on oil refiners take care of the oily side of our fossil fuel problem.
      And since ALL fossil fuels cause the emissions of CO2 during extraction, processing, transportation and consumption, we need to tack on a modest carbon tax to them in order to incorporate some of the current and future costs of climate change into the price of the fuels that are causing it. While the exact value of the “social cost of carbon” is still under debate, $20 a ton is much lower than most serious estimates of its value. We can start there and work our way up as we come to understand the dangers of climate change first hand.
      After all this is accimplished, ONLY THEN is it a good idea to remove clean energy subsidies. Doing so beforehand only tilts energy markets even more unfairly in dirty energy’s favor. Why we would want to subsidize pollution is beyond me.

      • RobS

        Well I already live somewhere with $24 per tonne carbon tax, although the coal generators do receive subsidised credits that bring that closer to $8-$10 per tonne because they’d go out of business overnight if they had to shoulder the whole amount. However you seem to have missed my point, I know fossil fuels receive subsidies but they are rather more nebulous and open to debate about what constitutes a subsidy and what is simply a typical business tax deduction, externalities are even more difficult to accurately cost, if a child dies of asthma what fraction of that do you attribute directly to fossil fuel derived pollutants? In the end arguing about fossil fuel subsidies you get bogged down in minutiae, if however you can say solar is now economical unsubsidised even when put up against subsidised fossil fuels then you can’t be accused of accounting tricks which distract from the message and the free marketeers would be hard pressed to find an argument against such a situation.

    • Bob_Wallace

      The current subsidy program runs out in 2017, I believe. I suspect that we won’t see a new set of subsidies for solar unless we have a major change in the makeup of Congress.

      But that’s probably OK for solar. Cost should be very sweet by then.

      Fossil fuels will likely hang on to their subsidies until the bitter end. People who live in coal and oil producing areas will send people to Congress who will try to protect those industries and in order to get their votes on other issues fossil fuel subsidies will be granted.

      Here’s how we fix it. We install more and more renewable generation until we are no longer using fossil fuels.

      • RobS

        Dropping the 30% subsidy overnight will be disastrous, there will be a flood of installation immediately prior as tens of millions of systems are ordered prior to the change, then after the cut orders will dry up for at least a year, possibly longer, it makes it very difficult to run and grow a business, far better to seek to change the subsidy so it is phased out gradually, far less disruptive to the industry that way, a gradual phase out between now and 2020 would result in the same overall costs as a sudden drop in 2017 but without the boom bust impact on the industry.

        • Bob_Wallace

          Possibly, but let’s think about that for a moment.

          I think you’re right, there will be a huge rush to get systems installed before the subsidy runs out. But what are the likely prices of those systems before subsidy?

          Europe is now installing at about $1.50/watt. No subsidies. Were we installing in the US for $1.50 we would be generating electricity for under a dime.

          By 2017 we should have caught up with where Europe is today and taken prices some lower. And natural gas prices will likely be considerably more than they are today.

          Utility solar at $1.25/watt would be cheaper than NG generation and the cost would be locked in for 20 years. After that the cost of solar would drop to almost nothing for another decade or decades.

          Utility companies are going to keep installing solar because it would simply be cheaper. Without subsidies.

          Rooftop solar in the US is now twice as expensive as in places like Germany and Australia. Get down to their costs over the next four years and people will install solar without subsidies.

          I can see a nasty period for installers between subsidy and non-subsidy periods. Lots of companies will come into being during the last year or two when the rush is on. Some of them will go broke once the rush is over.

          I doubt Congress will get it together to make the transition smooth.

  • Victor Provenzano

    If one is seeking to make a fair comparison between the price of unsubsidized solar per kWh and the price of grid electricity, then one would first have to account for all the official and unofficial subsidies that are being given to grid electricity. For instance, the plurality of U.S. grid electricity in the year 2013, thus far, has come from coal. A study at Harvard showed that coal alone was the cause of between a third of a trillion and over a half a trillion dollars in annual losses in the U.S. from accidental mine deaths, deaths of miners from black lung disease, environmental damage from mountain top mining and fly ash pond, public and private health costs, sick days, lost productivity, etc. These “external” costs are paid for by government, taxpayers, businesses, and individuals. If all the costs that I named above were accounted for, what would the price of unsubsidized solar have to be in order to be competitive with coal? Fully accounting for the “external” costs measured in the Harvard study would double to triple the cost of coal-based electricity (http://www.boston.com/lifestyle/green/greenblog/2011/02/new_harvard_study_looks_at_ful.html). Now take natural gas. The full price of using natural gas would have to include, for instance, the cost hedging on its price by buying natural gas futures and other natural gas derivatives. The Rocky Mountain Institute has calculated the annual cost of buying fossil fuel derivatives at $1.5 trillion. A significant portion of this figure is for natural gas, which is the second most important source of grid electricity in the U.S. The cost of burning natural gas also includes its “external” health costs, its related climate event costs, etc., not to mention any direct state or federal subsidies that it receives. What about all the subsidies that are given to nuclear power plants in the form of loan guarantees, liability insurance, etc.? Do you still think that unsubsidized solar is not already at grid parity? A full accounting would have to be done first.

    • Bob_Wallace

      Good points.

      (Paragraphs would make it easier to read.)

      ” If all the costs that I named above were accounted for, what would the
      price of unsubsidized solar have to be in order to be competitive with
      coal?”

      About 18 cents per kWh. Since solar is already being sold for under 11 cents per kWh, no subsidies included, solar is already cheaper than coal.

      Full accounting would show solar cheaper than new new nuclear and both new and old coal. Solar is likely about the same price or only slightly higher than “full accounting” NG. Solar should drop below the price of NG in the next couple of years, solar is coming down/gas is going up.

      We need to do more to get people to understand full accounting/all-in pricing. Most people do not realize that they pay for their electricity (and) gasoline with their tax bills in addition to what they pay at the meter/pump.

      • RobS

        Remembering that “new coal” actually takes ~8 years to come on line vs solar which is closer to 2 years, so new coal being planned today is not competing against the current cost of solar, it is competing against the cost of solar in 6 years time. That makes the comparison even more favourable for solar, no financier in their right mind would fund a new coal project in the US that isn’t already in the pipeline, and many already in the pipeline are being scrapped.

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