Understanding solar power cost: have you reached grid parity yet?

Grid parity, also called socket parity, is a measurement that compares the cost of solar electricity with the cost of residential retail electricity. When grid parity is reached, it becomes more economical for you to install solar panels on your roof rather than purchase power from your utility company.

Revisiting the Levelized Cost of Electricity

In order to make an apples-to-apples comparison, it is essential to find a way to calculate the cost of solar in a simple, consistent and reliable way. This is where the concept of levelized cost of electricity comes in. As we discussed in a previous article, levelized cost is an "all-in" cost calculation at the point of connection to the grid, including both the initial installation costs and the ongoing expenses such as fuel (non-existent in the case of solar energy) and maintenance. Levelized cost is very useful when we need to compare the cost of different energy generation sources and when we need to determine if a particular location has reached grid parity.

WhatNextNow Solar Interactive Grid Parity Map for Residential Solar in the U.S.

We built an interactive grid parity map for residential solar energy in the United States, that takes into account the latest state average cost of residential electricity for each state and compares that to the levelized cost of solar electricity in that state. You can switch the ITC on and off to see the impact and you can adjust the cost of solar panels to reflect falling prices. With the cost of solar PV systems falling rapidly, i.e. 50% over the last 5 years, and electricity prices rising, solar grid parity will be a reality for many more locations. (We also built grid parity maps for Canada and Australia).

So how do you determine if your home is in a location that is at grid parity? There are three main factors to consider: your WhatNextNow Solar solar score, the lifetime cost of installing solar panels, and the utility rates in your area.

WhatNextNow Solar Solar Score

The solar score is a number between 1 and 100 that indicates how much solar insolation is available in your area. This score directly affects your system's performance. Location is not the only factor that determines performance: it also depends on the type of solar panels (as we previously discussed in an article on solar panel efficiency), the orientation and tilt of your panels, and the degree of shading on your roof. In essence, the WhatNextNow Solar solar score is your first step in getting good performance estimates for your location. For example, the solar score for Montgomery, the capital of Alabama, is 62, whereas the solar score for Annapolis, the capital of Maryland, is only 50. At first glance, Montgomery seems to be one step ahead of Annapolis on the path to grid parity, but there are other factors that can tip the balance.

Lifetime Cost of Solar

The second factor is how much solar energy will cost you, over its entire lifetime. The cost of solar energy is top heavy: the main cost is the initial cost of installation. Once the system is online, there is no cost of "fuel", and there is very little maintenance. Another significant variable affecting the cost is the PV system's lifetime. Most people assume 25 years for the solar panels and about 10-15 years for the central inverter. Thus, the cost estimate should include the replacement cost of a central inverter (if you are going to use micro-inverters, this may not apply to you). Financial incentives offered by local and national governments help tremendously to bring down this upfront cost. The federal Solar Investment Tax Credit (ITC) in the United States offers a 30% tax credit for residential solar systems until December 31, 2016. These types of solar incentives are helpful in encouraging people to invest money upfront versus the more traditional pay-as-you-use utility payment for the grid. However, there is a large variation among the states when it comes to the types and amounts of the incentives available for homeowners.

Your Local Utility Rate

The last factor is the local utility rate in your area. With few exceptions, this rate is based on energy from non-renewable energy sources (such as natural gas or coal) or nuclear power. Local utility rates can vary widely depending on the state and even the city. We built another interactive map for electricity rates across the U.S., that provides the latest 12-month rolling average electricity rate by state, as well as the average year over year escalation rate in those states since 2005. Calculations presented on your utility bill may look a bit complicated, but you can easily determine the effective rate you are paying by simply dividing your monthly electric bill by the number of kilowatt-hours you have used.

What does the future hold?

Grid parity has been the dream of the solar community for decades. Today, it is the reality in many states. Tomorrow, it may well be the case for a majority of cities around the world. For instance, the U.S. Department of Energy's SunShot Initiative has the goal of reducing the cost of solar PV systems by 75% to about $1 per watt by 2020. As we have seen though, grid parity will not come to everyone all at once. Instead, it will be achieved at different times depending on your location, roof orientation, solar panel system, energy company's utility rates, state and federal incentives, and a number of other factors.  A great start to determining if solar energy is right for you is to use WhatNextNow Solar Discover (just enter your address of zip code to get started).

Updated version of an article originally published September 2014.