PROJECT EASY GREEN

Grid parity. It is the solar industry’s favorite expression/discussion topic/holy grail. You hear it at every conference, in many press releases, and from well-respected research institutes. We at GTM Research have even been guilty of using it ourselves. But grid parity shouldn’t be the focus of the industry — and our expectations of that day when it arrives should be much more tempered, for four reasons. First, grid parity isn’t a single thing. Second, it won’t come at a single time. Third, we often won’t know when we’ve reached it. Finally, the initial impact of grid parity on demand is overestimated.

1)      Grid parity isn’t a monolithic concept

Let’s start with the definition. At its core, grid parity is the point at which the cost of solar power matches that of grid electricity. There is, however, some nuance to be considered here:

Wholesale vs. Retail Parity. There is a meaningful difference between competing with retail electricity prices (which are higher) and wholesale prices (which are lower).

·         Retail grid parity. If we’re comparing the cost to retail prices, are we in a location with time-of-use pricing? If so, we need to account for the time of generation of the solar system.

·         Wholesale grid parity. The comparison here is even trickier. You can compare the cost of solar power against average wholesale prices, but solar is really a mid-peak resource. You can compare against average peak prices, but solar isn’t entirely a peak resource. You can compare against an alternative fuel (natural gas makes the most sense), but you should really account for the fact that fossil fuels are dispatchable (i.e., can be turned on/off on command), and solar is not.

Pre-Incentive or Post-Incentive Parity

When people talk about grid parity, they usually mean “unsubsidized” grid parity — or the time at which solar competes favorably with grid prices without any incentives. In many places, though, this has only theoretical importance for the next few years. Take the U.S., for example. We have the Federal Investment Tax Credit — a 30% tax credit (or, currently, cash grant) on system costs — in place through 2016. Even ignoring state- and utility-level incentives, this means we don’t really need to hit unsubsidized grid parity until 2017 at the earliest. Instead, we need to become competitive with grid prices given available incentives. If we use this definition, we’ve already reached grid parity in many locations. Commercial (and in some cases residential) power purchase agreements (PPAs) are available for less than current retail prices.

On the other hand, if we’re talking about unsubsidized grid parity, we need to ask when it will become necessary. In other words, when will all incentives be removed? Until that point, unsubsidized grid parity is important only in theory.

The Cost of Solar Power

Let’s assume we have clarified the definition of grid prices. For argument’s sake, let’s say we are using unsubsidized residential retail prices as our comparison. The next question we have to ask is how we estimate the cost of solar power. After all, a PV system is almost all up-front capital and very little O&M. So in order to compare against grid prices, we need to estimate the levelized cost of electricity (LCOE) of the system — or the price per kWh over the system’s lifetime.

Here, however, we run into a patch of thorns. What system lifetime are we assuming? Twenty-five years, as the module warranty might offer, or longer? What degradation rate are we assuming? In general, LCOE analysis is a product of assumptions, and variability among those assumptions only serves to further complicate the issue.

There is another way to look at this. In the U.S., the PPA model is king. If a company like SolarCity, SunEdison, Tioga Energy, or other is willing to offer you a PPA for less than current retail prices, you’ve reached grid parity, right? Well, that depends. Often, a PPA will have a built-in escalator of say, 3% per year. This escalator is often less than historical average annual retail price increases, but we all know that the future won’t necessarily mimic the past. So even if the PPA offers “grid parity” on day one, it could lose that status years later.

2)      Grid parity won’t come at a single moment in time

Perhaps, you might say, the exact definition of grid parity doesn’t matter. It is more about the general concept of solar power being cost-competitive with grid electricity. Let’s assume that is true, or at least that we’ve agreed upon a clear definition. Even then, grid parity will be a slowly evolving phenomenon, not a discrete event that takes place at a single point in time. PV system costs vary widely from installation to installation, electricity costs vary from utility to utility, and incentives vary by state. This is not even taking into account differences in electricity prices across countries, which are even larger than those across states. Finally, let’s not forget that solar resource/insolation varies widely by location and drives meaningful differences in system output. As such, although one system may be at grid parity, its neighbor may not.

In essence, this means that grid parity will be a slowly developing phenomenon  — occurring over a number of years across various markets.

3)      We often won’t know when we’ve reached it

The lynchpin to the complexity of grid parity is the fact that you generally cannot know whether a system has reached grid parity until the system is retired 20 to 30 years after installation. A simple example will help bear this out. Assume your current retail grid prices are $0.10/kWh and an installer offers you a 20-year fixed PPA at that exact price. If electricity prices stay flat or increase over the 20-year period, grid parity has been achieved. However, if electricity prices were to fall during that period, you might find that your solar electricity ultimately cost more than grid power. In other words, you’re always taking on some risk related to retail electricity prices.

The only way you can be sure that you’ve achieved grid parity right away is to receive a PPA that tracks grid prices — and this is a difficult contract to find.

4)      The initial impact of grid parity on demand is overestimated

There is often a belief in the solar industry that grid parity, however defined, will immediately open up vast amounts of new demand for solar. Consumer psychology, however, should never be underestimated. Even if I can put solar on my home (or business) for the same price as grid electricity, I still have to go through the trouble of getting a site assessment, allowing construction on my roof, and so on. If I’m not using the PPA model, I may be deciding between a PV installation and a kitchen remodel or other home improvement. To be sure, many people will happily expend a bit of effort in order to get clean, renewable power on their rooftop at a known cost.

However, it would be a mistake to assume that everyone will do so. After all, the most important question is not when we hit grid parity, whatever that means, but what (in terms of impact on demand growth) would be the consequences of that — and the price elasticity of demand for solar is not well understood at all.

So what will really matter? In my opinion, there will be two achievements (both occurring over an extended period of time across various locations) that will make solar mainstream. For wholesale generation, it will be the point at which large volumes of solar become attractive to utilities even accounting for dispatchability. This could achieved either through the competitiveness of solar plus energy storage, or by making solar so cheap that supplementing solar generation with natural gas or another peaking resource beats the peaking resource alone. For retail generation, the difference will be made when consumers can see significant cost savings from a PV installation that are assured. In essence, the droves of new solar customers will be driven by cost savings, not cost parity. 

The bottom line is that the solar industry is thriving even in our complicated, semi-parity world. Over time, prices will continue to fall and incentives will become increasingly unnecessary. In the meantime, let's see grid parity for what it is: an attractive idea that will just be one among many factors enabling the solar revolution.

Europe looks like it will become a live laboratory for the some of the biggest questions facing the energy world.

Reacting to a historic election backlash, German Chancellor Angela Merkel will effectively transform Germany into a nuclear-less country by 2022. Germany has already suspended eight of its reactors in the wake of Fukushima and now will phase out all 17 of its reactors in 12 years. These reactors provide 23 percent of the country's electricity.

Renewables–mostly wind and solar–provide approximately 13 percent of Germany's power. Depending on the wind and weather, renewables can provide 17 to 27  gigawatts to Germany's grid. In February, Germany cut its feed-in tariff for renewables by 15 percent. Since then, however, the political situation has begun to favor the future of renewables. Germany has a goal of getting 35 percent of its power from renewables by 2020.

Just as important, renewables wield political power in Germany. The country remains home to several solar and wind companies. German universities and research institutes like the Fraunhofer Institute are also leaders in renewable research.  Approximately 17.67 billion euros were invested in renewable energy in the country in 2009, according to a study in 2010. The turnover, or revenue, from German-based renewable energy manufacturers came to 16.1 billion euros: 40 percent of that total came from the wind industry and 34.7 percent came from solar. Some estimates predict that renewable employment will come to 500,000 by 2020 or earlier.

In 2009, approximately 294,000 people were employed in renewable energy with 87,000 of the total coming from wind; 64,600 were employed in solar. The figures do not include the farmers who've dedicated acres of corn and wheat to solar. Indirectly, trucking and construction firms benefit from solar. Coal mining employs about 47,000 in Germany, according to this study.

By contrast, nuclear has faced strong opposition in Germany since the 70s. The Green Party was born there after all.

Can Germany pull this off? The 35 percent goal represents a massive overhaul of infrastructure and will require breakthroughs in solar, batteries and storage technologies. (Natural gas plants to balance solar and wind will also likely benefit, even though increased gas consumption might increase the power of Russia in Germany's energy affairs.) Naturally, solar stocks are up today, but resistance and complaints could build if power prices spike or blackouts occur.

An energy pinch could also favor nuclear. France and the Czech Republic could both export nuclear power from their grids to Germany. France gets 80 percent of its power from nuclear and the French government owns most of Areva, the large nuclear developer. Areva has offered to take nuclear waste from other countries where it builds reactors and process it in France.

But nuclear too, is dependent on the weather, according to this report from Reuters. Nuclear plants need water for cooling, a tragic fact highlighted in the Fukushima disaster. France in recent years has weathered unusually hot summers and regional droughts. In both 2003 and 2006, EDF, the country's large utility, stopped some reactors because of heat waves, according to Reuters.

More heat waves are expected this year.

Nuclear plants are also expensive and take far longer to build than solar farms. An Areva nuclear plant in Finland, due to open next year, ballooned from $3 billion to $5 billion. If total capacity is an issue, the nuclear industry simply can react quickly.

If the renewable industry can meet the challenge, the profits and revenue coming from a German overhaul could not only help Germany. They could inspire a similar overhaul in the U.S. (You can already imagine "Help America–Hire a U.S. Solar Contractor" bumper stickers.) Or will hot summers or winter blackouts force politicians to reach for coal and nuclear?

Europe has long been a leader in energy technologies–now it seems primed to become the place where renewables will be put to the test.

This really is a debate about the Two Chief Systems of the World.