Grid Parity – Part 1

In this post and the one that follows we’ll talk about what the term “grid parity” means in two easy to understand posts.

Grid parity is a pretty interesting concept. It’s a lot like peak oil in that once you understand the term you begin to see a lot of things very differently.  A great part of the philosophy that underlines much of the thinking here on ohmsteader.com is driven by the concept that once people see it’s not in their best interest to let someone else make electricity for them, they will make it themselves.  Grid parity is actually a key ingredient of that mix.

The term grid parity consists of two words:

Parity – meaning equal to.

Grid – meaning the price of buying electricity from “the grid”.

That’s pretty much it – grid parity is the point in time when making your own electricity costs the same as buying electricity from a utility.

Of course, it’s a bit more complicated than a single sentence, so let’s talk about what those two pieces mean in greater detail:

Electricity is provided via a grid of interconnected wires with some fancy (and not so fancy) bits of equipment in between. Because there is not a lot of creativity in the electricity market that grid that delivers the electricity is called the “electricity grid”.  These are sometimes called transmission and distribution infrastructure (transmission generally refers to very big very long wires that run sometimes hundreds of miles and distribution refers to smaller, shorter wires like you might see attached to poles in your neighborhood).   It turns out that all those wires and transformers and things cost money, which should not be that surprising considering that they run not only to every single power plant in the country (and a good number outside of the country) but also to almost every single home, apartment, farm, shopping center, and street lamp in the country.

Even with all that infrastructure there is actually no electricity flowing on it until someone pays to actually make some, so you have to add the cost of making electricity in there too.

Adding those two things together gives you the cost of electricity delivered over the grid.

That cost is passed on to you via rates that vary by customer class, location, and a host of other factors.  Rate design is very complicated, but let’s just assume that rates are designed to cover all the costs of supplying electricity based on how much electricity you use.  Once you have that you have half of the equation, the other half (the cost of making electricity on your own) we’ll cover in the next post.

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