Grid Parity – The (N)Everlasting Concept

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The following article comments on the ongoing discussion of the grid parity issue. Although considerable movement can be observed in how PV is thought of in the industry, this article aims to point out the consequences of the necessary transition from incentive to non-incentive markets.

Grid parity as the Holy Grail of the industry

For years, grid parity has been considered to be the saviour of the PV industry. It was said that if this was achieved, PV would become independent of incentives. Thus, PV demand would be triggered and global demand would explode. The overcapacities built over the past years would be necessary to satisfy this demand of PV applications and the whole industry would enter a golden age.

None of this proved to be true. Grid parity has long since been achieved. It has been achieved in Germany, Italy, Hawaii, Spain and in at least a dozen other markets. So what happened – did demand skyrocket? No.

Instead, we encountered the mantra of grid parity being repeated again and again. The Holy Grail was just too appealing, too important to not be true. When grid parity was achieved theoretically, people said that the assumptions made in the calculations were simply wrong. So assumptions were changed – again and again. This pushed grid parity further into the future, just enough to make people believe that this concept could still prove to be the saviour of the industry. Meanwhile, it is only now beginning to dawn even on the last and most furious defenders of the concept. The concept is still there; it was never wrong. But the impact it was said to have was and is terribly wrong.

Grid parity what exactly does it mean, and why are there so many different concepts out there?

To understand why this concept has no practical relevance, it has to be understood what is meant by the term grid parity. There is a wide range of definitions but the most common one is the following: grid parity for PV is the intersection of the electricity price that has to be paid to the utility in order to receive electricity from the grid and the LCOE of a PV system.

The Levelized Cost of Electricity (LCOE) is a net present value concept applicable to any electricity-generating technology. It describes the cost which can be expected to generate one kilowatt-hour of electricity with the given technology. Thus, to put it very simply, it is the average expected cost of electricity over the lifetime of the power plant.

There are other concepts like incentive parity and generation parity, which all more or less address the same thing: the intersection of LCOE with another line, i.e. incentives paid (e.g. FiT rate) or the average cost of generation from a given utility park. In theory, at this point it would make sense not to opt for an FiT or an existing utility park or not to pay for electricity from the grid but rather to generate the electricity by oneself with a PV system.

Insignificance of grid parity as a concept within the state of the art

Now why is grid parity not working as it was supposed to? In order to understand that, it is necessary to firstly understand what is done when calculating the grid parity of a PV system. In order to derive the intersection points, assumptions have to be made with respect to

  • Energy yield
  • System cost
  • Interest rate / discount factor
  • O&M
  • Inflation
  • Lifetime of a plant

These assumptions are subject to discussion, which leads to the consequence described in the first paragraph. However, in almost every case it will not lead to applicable assumptions, unless someone chooses astronomically high interest rates to discount the electricity generated to the present value (which actually could make sense in order to reflect the demanded payback time).

There are, however, two major drawbacks. First, it is impossible to consume all the electricity generated. Second, very few will invest in something that takes 15–20 years (i.e. lifetime of the system) to pay off. Therefore, the concept of grid parity as it has been applied historically has almost no impact on reality.

The Holy Grail – refined…

Now, under the state-of-the-art technology of PV systems, a simple question arises: when will PV become really competitive? Unfortunately, to answer this question we have to draw assumptions again. The most important one is yield or payback time. Generally, it is hard to say what a reasonable payback time (PBT) is, but according to the EuPD Price Monitor it should be eight years or less for residential end customers.

As EuPD analysis shows, a household in southern Germany with an annual electricity consumption of 4,500kWh that applies a south-faced 4kWp PV system will have a “natural” self-consumption of about 49% over the course of an “average” year. These values are based on VDEW load profiles and consider the average year in terms of weather conditions. If “only” 49% of the PV system’s electricity can be consumed instantly and no battery or smart electricity consumption steering device is applied and the consumer wants to achievea payback time of maximum eight years with a household electricity rate totaling €0.24, system costs have to hit €1,000/kWp (in the model settings, the electricity price increase compensates for degradation on system level and discount rates). If the same household installed a 1kWp system, thereby realizing a “natural” self-consumption share of 99%, the required system price level would have to be €1,900/kWp.

One can also view it from another angle by looking at how important payback time expectations really are. If the majority of the PV-interested end customers expected the system to have a PBT of approximately 16 years, the 4kWp PV systems, as described above, could cost about €2,000/kWp.
These examples do not take into consideration the possible sales of the redundant electricity to the utility (i.e. net metering or possible export tariffs) nor do they consider the possibilities of energy storage or smart consumption. They only give an indication on where system prices should be in order to reflect real-life, outright conditions.

Solution? Solutions!

So what can be derived from the findings above? The industry should not rely on the “old” concept of grid parity in order to survive nor will it help to win customers. There are various concepts to increase the self-consumption share and to provide the utilities with the capabilities to steer the grid. But in the end, it is the consumer that counts. People need something that helps them to address the problems of high energy cost, insecurity of supply and energy dependency. Hence, the industry has to offer solutions that:

  1. are practicable and cost efficient
  2. allow them to use a large share of the electricity generated by themselves, hence, “throw away” as little electricity as possible and
  3. amortize themselves within a reasonable period of time.

Thus, the industry is currently stuck in a dilemma which might turn out to be a bigger hindrance than previously thought. On the one hand, solutions like batteries and smart energy devices will raise the cost of a PV system, but they will also increase the share of electricity that can be outrightly consumed.

On the other hand, as described above, there is no alternative to driving down costs any further. This task cannot be achieved by module manufacturers alone as PV modules costs account for a lower and lower share of the total system cost. In the future, the focal point has to move to other parts of the PV value chain in order to make PV truly competitive. We will see if the solutions, which will be presented at Intersolar 2012, help to face the challenges and make the transition towards a newly thought-out PV industry.

18 October 2021
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