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Does grid parity matter?

23. November 2011 By:  Matt Feinstein, Lux Research

Lux Research analyst, Matt Feinstein poses the question: "Does grid parity matter?" He argues that while it may be a useful gauge to measure competitiveness, it would be "foolish" to wait for parity before declaring the viability of solar.

The question of grid parity is a complex one, to say the least. Not only do electricity prices vary by region and application segment, system costs also differ by technology and application segment, as volume orders lower costs. A better question then, than "Have we reached grid parity?" is "Does grid parity matter?"

The answer is yes, it matters, but just not as much as you might think. Grid parity - and proximity to it - is a helpful gauge for solar’s competitiveness in a given market. At the same time, it is not the determining factor in whether or not suppliers or installers target a specific market.

Suppliers, installers and financiers want to understand where solar is a profitable business proposition, and where it is most profitable. The reality that installers, developers and independent power producers (IPPs) can sell power generated from solar arrays to energy consumers at a price competitive with grid rates, while making a profit for themselves and the financiers providing the funds for the system purchase, is key to solar’s success today, and will continue to be in the future, as grid parity eludes most major energy markets for the next five to ten years.

In addition to Italy and Hawaii, where solar benefits from the high electricity prices it competes with, the next markets slated for grid parity in any market segment are the Dominican Republic, Haiti and Ukraine - not quite the behemoths of the global energy market.

Lux Research analyzes profitability through a detailed levelized cost of electricity (LCOE) analysis, accounting for subsidies in 156 geographies worldwide, to compute internal rate of return (IRR). While IRR should not be taken as the sole indicator of demand in a region, it is one of the more important metrics used by developers when determining where to set up operations. A high amount of intermittent renewable energy on Germany’s grid and the prevalence of natural gas in Brazil are examples of other factors that need to be taken into account when forecasting actual installations.

Our most recent analysis shows that the most favorable conditions are in Europe, where generous feed-in tariffs have propelled the industry in recent years. However, economic problems in that region make the industry increasingly likely to diversify itself geographically, seizing opportunity in India, where the National Solar Mission and various provincial subsidies have begun to create what will be a major market in the near term. The market is also favoring the U.S., where even in states absent of Renewable Portfolio Standard (RPS) or Solar Renewable Energy Credit (SREC) programs, the Investment Tax Credit (ITC) stands to benefit installations in the entire country. Looking forward, other potential winners include Thailand and the Philippines.

To wait for grid parity before declaring the viability of solar would be foolish. Rapidly falling panel prices and the rise of the solar power purchase agreement have made solar competitive as an energy source, and successful as an industry driver, leading to major growth and venture capital investment into installers, project developers and IPPs worldwide. However, make no mistake, the solar demand market and the industry players serving it remain reliant on the generous incentives that have led to this point, and will continue to be for the foreseeable future.

Matt Feinstein is an analyst who leads the Solar Systems Intelligence service at Lux Research. Lux provides strategic advice and on-going intelligence for emerging technologies. Leaders in business, finance and government rely on us to help them make informed strategic decisions. Through our unique research approach focused on primary research and our extensive global network, we deliver insight, connections and competitive advantage to our clients. Visit www.luxresearchinc.com for more information.