Levelized Cost of Energy: Page 5 of 10
Inside this Article
Grid Parity and the PV Market
Grid parity is a metric regularly used in evaluating the viability of renewable energy sources, which have historically been thought of as too expensive. For a retail customer, grid parity is achieved when the cost of power from an energy project is equal to or less than the retail price of power from the utility. However, it can be difficult to quantify when grid parity is reached. According to Branker, Pathak and Pearce in “A Review of Solar Photovoltaic Levelized Cost of Electricity” (see Resources), “The concept of grid parity for solar PV represents a complex relationship between local prices of electricity, solar PV system price . . . and local attributes.
Utilities do not charge one set rate per kWh. The rate varies depending on market and by location. It can also change depending on when the power is used. In addition, the power output of many renewable energy projects is strongly dependent on the availability of local resources, such as solar insolation and wind. The result is that grid parity occurs at different project costs for different regions and at a higher rate for residential customers, followed by commercial and industrial customers, and lastly for power delivered at the utility scale.
“You cannot effectively compare LCOE to a single point value like today’s electricity price,” explains Nate Blair, manager of the data analysis and visualization group at the National Renewable Energy Laboratory (NREL). He continues, “The LCOE includes projections about future inflation and fuel cost changes, but that’s not what you see in a single point value like electricity price. To make an effective comparison, you need to take the LCOE of future projected electricity prices into account.”
The LCOE of an energy project is often compared to grid prices. This is a good first approximation because, when done correctly, an LCOE calculation accounts for regional and market variables. However, simply comparing the LCOE of a technology or project to the grid cost of electricity does a disservice to that technology or project. While LCOE captures all future anticipated costs, the current utility rate for electricity is only a snapshot.
In most cases the rate for utility power is anticipated to increase due to changes such as increased fuel costs or regulatory changes. To compare the LCOE from a new project to the cost of power from a utility, an LCOE calculation should be performed on the anticipated cost of utility power over the same lifetime as for the new project. The resulting value may be compared to the LCOE of the new project.
Here we have considered grid parity from the perspective of a retail consumer of electricity. As Nat Kreamer, CEO of Clean Power Finance, points out, the topic is even more complex when considering grid parity from the perspective of a utility or an independent power producer.
Example LCOE Analyses
While LCOE is not always the appropriate metric to use when evaluating project-specific decisions, it is an excellent tool for evaluating trends or big-picture issues. In the following examples, we explore some familiar questions in the PV industry and show how LCOE can be used to provide insight. These examples include evaluating how LCOE varies in different areas in the US, comparing single-axis tracking and fixed-tilt projects, analyzing inverter loading, analyzing module cost versus degradation rate and looking at downtime as it relates to system cost.
To provide consistency in the examples, we have defined two baselines: a fixed-tilt, ground-mounted PV system, and a single-axis tracking system. The values provided are not intended to represent the actual LCOE for a given configuration or location. Rather, they are included to show the relative values that result from varying the input assumptions. The real, rather than the nominal, LCOE is reported in each case.
LCOE VS. LOCATION
Site selection can have a major impact on a project’s feasibility. The weather conditions at a project site and its geographical location have implications for construction costs due to labor rates or building costs associated with land preparation or terrain, interconnection costs (these may be utility mandates, upgrade requirements due to limited utility infrastructure or distance from suitable power lines), or simply the cost of land.