Distributed Solar and Grid Parity

Date: 8 Mar 2011 | posted in: Energy, Energy Self Reliant States | 1 Facebooktwitterredditmail

Grid parity is an approaching target for distributed solar power, and can be helped along with smarter electricity pricing policy.

Consider a residential solar PV system installed in Los Angeles.  A local buying group negotiated a price of $4.78 per Watt for the solar modules and installation, a price that averages out to 23.1 cents per kilowatt-hour over the 25 year life of the system.*  With the federal tax credit, that cost drops to 17.9 cents.   Since the average electricity price in Los Angeles is 11.5 cents (according to NREL’s PV Watts v2), solar doesn’t compete. 

Or does it? 

In Los Angeles, there are three sets of electricity prices.  From October to May, all pricing plans have a flat rate per kWh and total consumption.  During peak season (June to September), however, the utility offers two different pricing plans: time-of use pricing and tiered pricing.   Time-of-use pricing offers lower rates – 10.8 cents – during late evening and early morning hours, but costs as much as 22 cents per kWh during peak hours.  Prices fluctuate by the hour.  Tiered pricing offers the same, flat rate at any hour of the day, but as total consumption increases the rate does as well.  For monthly consumption of 350 kWh or less, the price is 13.2 cents.  From 350 to 1,050 kWh, the price is 14.7 cents.  Above 1,050 kWh, each unit of electricity costs 18.1 cents.

The following chart illustrates the difficulty in determining whether solar has reached “grid parity” (e.g. the same price as electricity from the grid).  For some marginal prices, solar PV is cheaper than grid electricity when coupled with the federal tax credit.

Over the course of the year, solar is not less than grid electricity.  A very rough calculation of the expected time of day production of a solar array in Los Angeles finds that the average value of a solar-produced kWh is 15.1 cents over a year.  That suggests that solar power is not yet at grid parity, even with time-of-use pricing.

There are other considerations, as well. 

For one, we ignored additional incentives for solar power, including federal accelerated depreciation (for commercially-owned systems) as well as state and utility incentive programs.  These programs substitute taxpayer dollars for ratepayer ones, making the cost of solar to the grid lower.

We also didn’t confront the complicated issues involving a grid connected solar PV system.  Net metering is the rule that governs on-site power generation and it allows self-generators to roll their electricity meter backward as they generate electricity, but there are limits.  Users typically only get a credit for the energy charges on their bill, and not for fixed charges utilities apply to recover the costs of grid maintenance (and associated taxes and fees).   Producing more than is consumed on-site can mean giving free electrons to the utility company.  So even if a solar array could produce all the electricity consumed on-site, the billing arrangement would not allow the customer to zero out their electricity bill.

Where Can Distributed Solar Compete?
Based on our own analysis, solar PV at $5 per Watt (with solely the federal tax credit) could not match average grid electricity prices in any of the sixteen largest metropolitan areas in the United States.  With accelerated depreciation – an incentive only available to commercial operations – solar PV in San Francisco and Los Angeles (representing 21 million Americans) could compete with average grid prices near $4 per Watt installed cost. 

Under a time-of-use pricing plan (where prices could be 30% higher during solar hours, as in Los Angeles), 40 million Americans would live in regions where solar PV could compete with grid prices at $5 per Watt with both federal incentives.

With solar at $4 per Watt, Californians would only need the tax credit (not depreciation) for grid parity with time-of-use rates.  Adding in the depreciation bonus would increase the number to over 62 million Americans.

Distributed solar is nearing a cost-effectiveness threshold, when it will suddenly become an economic opportunity for millions of Americans.

*Note: for regular readers, we changed and improved our levelized price model (in response to some comments on our cross-post to Renewable Energy World). 

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John Farrell

John Farrell directs the Energy Democracy initiative at the Institute for Local Self-Reliance and he develops tools that allow communities to take charge of their energy future, and pursue the maximum economic benefits of the transition to 100% renewable power.