Grid Parity – Part 2

In the previous post we started to define grid parity by talking about how much it costs to supply electricity to your house. The other half of the equation that defines grid parity is how much it costs to make your own electricity. As with all things related to the electricity industry there is no simple answer.

Perhaps the most important factor to consider when thinking about how expensive it is to make your own electricity is that storing electricity is expensive by most standards. Once you add storage to an equation the cost of supplying electricity can get pretty expensive – to be certain, the price of storage is going down, especially as billions of dollars in R&D are being invested by and for the auto industry as it electrifies – but it’s easier to think about grid parity if we think about electricity that is consumed as it is produced.

So, if we are not storing electricity, we can focus on the cost of production. There are three main factors that allow us to determine how much it costs to make electricity:

- Fixed/capital costs

- Variable/O&M costs

- Financing costs

Most folks will agree that these are pretty much universal factors in assessing the cost of anything. In the production of electricity there is a great deal of variation in the ratio between these numbers. As an example you can buy a relatively low cost gasoline generator but your price of fuel (a variable cost) will be very high, or you can buy a PV panel with a relatively high fixed cost and no fuel costs. If you don’t have enough cash to pay for those fixed costs up front, you need to consider the financing costs.

If you’re connected to the grid it is not cost effective to make your own electricity from a gasoline generator – the fuel costs are just too high. Conveniently, you can make electricity from resources that have low or no variable costs such as wind or solar – their fuels are essentially free, and that makes it easy to calculate the variable costs – let’s pretend they’re zero to keep thing simple.

It turns out that calculating their fixed and financing costs is pretty easy: The cost of the product (and any money borrowed to buy it) divided over the lifetime output of the product. For a typical solar generation system the fixed costs have been falling pretty rapidly and are now down under $.15 per kWh.

That number happens to be right around the price of electricity you might buy from the grid and that’s what we call grid parity.

When you consider that some resources, like solar, are what they call “peak coincident” (they produce electricity when the demand for electricity is highest) they do even better.

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