Cost competitiveness: reaching global grid parity
In simple terms, achieving ‘grid parity’ with a renewable energy project means that the electricity it generates is cheaper than electricity traded on a country’s electricity grid (the wholesale market).
The arrival of grid parity heralds a milestone in the history of energy production. It means renewable energy being commercially viable without any subsidies, producing energy with the lowest possible environmental impact that is cost-competitive compared with conventional energy.
The term has been used to describe a number of different scenarios, such as when the cost of a project meets the retail cost of electricity, to when the project meets the wholesale cost or the comparative production cost of fossil fuels.
The truth is, grid parity is different for every local electricity market but, at its simplest, it should be seen as the point on a graph at which the levelised cost of electricity (LCOE) of a specific generator/technology meets the wholesale market price for electricity in that country.⁴⁸
In 2017, research undertaken by BayWa r.e. and the Becquerel Institute in Brussels accurately predicted the growth of grid parity across central Europe by 2020, with grid parity predicted in northern countries like Finland by 2030.
Grid parity is essentially an easy formula consisting of only a few main parameters. However, this does not mean that any one of them is easy to achieve. The four key criteria are:
The cost of construction and operating the generator
This includes the cost of the grid connection, panel or turbine prices, land prices, build costs, materials and labour, logistics and ongoing maintenance over many years.
The wholesale market price of electricity
The cost of electricity varies from country to country and takes into account external factors such as energy demand, government policy and market design. In addition, the cost of electricity in any country will fluctuate over a period of time.
Finance costs
Projects have high upfront costs that can go into tens of millions, so there is almost certainly an additional financial cost in the form of interest on a loan.
Location
For solar projects, the amount of solar radiation is key while for wind projects it is average wind speed that is crucial.
To find out more about Grid Parity, what it means to BayWa r.e. and where it’s going next, please read our white paper: Grid parity and the solar renaissance