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 U.S., 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.
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.
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.
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.
May 30, 2023
Making electricity from renewable sources such as solar and wind, rather than by burning fossil fuels like coal and gas, is crucial to address climate change. Would switching entirely to these clean energy sources raise the price of electricity? Yes—at least if you don’t count the cost of the environmental damage caused by fossil fuels, says Richard Schmalensee, MIT’s Howard W. Johnson Professor of Management Emeritus, Professor of Economics Emeritus, and Dean Emeritus of the MIT Sloan School of Management.
Schmalensee says the main problem is the “intermittent” nature of wind and sunshine. We’re used to matching electricity supply and demand moment-to-moment by burning as much fossil fuel as we need. Renewable sources just don’t work that way. “You get what you get when nature gives it to you,” Schmalensee says. “That's just a more complicated system, and it's not going to be cheaper.”
This isn’t a major problem for today’s electric grid, in which renewables make up only a small share of electricity. In fact, building and operating renewables can often be less expensive because the costs of solar and wind have plummeted. This is what people mean when they say solar and wind are cheaper than fossil fuels: averaged over their lifetime, the price of solar or wind energy per kilowatt-hour is lower than coal or gas power.1
But if renewables provide most or all of our electricity, then we need a plan for what to do when they aren’t making electricity. That probably means energy storage, storing lots of solar or wind energy when it’s plentiful to use when it’s not—and storage is not cheap.
“If you could costlessly store electricity, you might argue that getting it all from wind and solar might save money,” Schmalensee says. “But you can't.”
Today, most of the grid’s energy storage capacity is in “pumped storage hydropower”: when we have lots of energy, some of it is used to pump water uphill. When we need more, the water is released to flow downhill through a hydropower turbine. Someday, Schmalensee says, batteries, too, will help to balance the grid. The current electric vehicle (EV) revolution should bring down the cost of batteries because of the need to build so many. It’s also possible, he says, that when most Americans have a big battery in their cars or a backup battery in their homes, that storage capacity could help balance the grid as a whole.
Until then, the best way to work around the variable nature of renewable energy is through economic incentives—which means electricity might get more expensive when there’s less of it. Imagine a scenario, Schmalensee says, in which we get most of our energy from solar. The supply of electricity wanes as the sun goes down in the evening, exactly when many people get home from work and want to run their air conditioners and charge their EVs. (This happens in solar-heavy California, where the state has run advertisements asking people to use less energy between 4 and 9 p.m.2) By charging more for electricity at peak hours, and less at midday when the sun shines brightly, we can nudge people to do things like charge their cars at work, lessening the need for expensive energy storage.
Even if energy storage becomes more affordable, running an electric grid entirely on solar and wind is always going to be more complicated than what we have now, Schmalensee says. For that reason, we may need climate-friendly energy sources we can turn on and off at will—whether that’s coal or gas plants fitted with carbon capture technology, or something new like small nuclear plants. The more of these backup sources we have, the more we can rely on low-cost solar and wind energy at their peak generation times.
And though a completely wind- and solar-powered grid can’t compete with the out-of-pocket costs of fossil fuels, that’s only because the price of coal and gas doesn’t incorporate the damage caused to the planet and humanity by filling up the atmosphere with carbon dioxide. “If you take into account the total cost of running a system that puts CO2 into the air, [then renewables] will be cheaper,” Schmalensee says.
Thank you to several readers for sending in related questions, including George Walchuk of Annandale, New Jersey, Barry Davis of York, Maine, and Holger Piekenbrock of Germany. You can submit your own question to Ask MIT Climate here.
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