Grid parity occurs when an alternative form of energy generates power at a levelised cost of electricity (LCOE) that is less than or equal to the price of buying electricity from the grid.

LCOE is a measure of the lifetime generated energy and cost of electricity from a certain technology. The cost is typically given per kilowatt-hour or megawatt-hour. It includes the initial capital, discount rate, as well as the costs of continuous operation, fuel, and maintenance. LCOE is used to assess if an alternative form of energy is headed for grid parity and a viable energy source for consumers.

Since 1970, solar PV costs have dropped by a factor of 150x while oil, coal, natural gas and nuclear have increased 35x, 6x, 15x and 10x respectively. In effect unsubsidised solar PV has improved costs by thousands of times relative to most conventional forms of energy.

Grid Parity 01

Source: Clean Disruption, Tony Seba

The declining costs have transformed PV systems into a more mainstream technology – with mass adoption driving the costs lower due to economies of scale. In other words, it has become a virtuous cycle of scale enabling scale.

Grid Parity 02

Source: Bloomberg New Energy Finance

Lazard’s latest LCOE analysis as of November 2015 has revealed that unsubsidised LCOE of utility scale solar has decrease from US$323-394/MWh in 2009 to US$58-70/MWh in 2015, which makes it already competitive with the cost of gas powered plant at US$52-78/MWh.

Lazard's Levelised Cost of Energy Analysis - Version 9.0

Source: Lazard’s Levelised Cost of Energy Analysis – Version 9.0

Grid parity is a moving target and may vary from jurisdiction to jurisdiction. Factors such as amount of sunlight, differences in financing conditions, market regulation and existing electricity prices and installation costs in different locations contribute to the LCOE and when a region reaches grid parity.

In 2015, Deutsche Bank has predicted that solar systems will be at grid parity in up to 80% of the global market by 2017, adding that the collapse in the oil price will do little to slow down the solar.

However recent updates have shown that market may be moving faster than expected.

In March 2016, Enel Green Power has submitted a bid of US$36/MWh for a solar project in Mexico (against average residential electricity rate of $90/MWh), which does not include the value of green energy certificates. Solar tariffs in the USA now regularly dip below US$40/MWh, but these include a 30% tax incentive and other subsidies. Last May 2016, the Emirate of Dubai set a new world record for the unsubsidised cost of solar power, with the Dubai Electricity and Water Authority receiving bids for the 800 MW Sheikh Maktoum Solar Park Phase III as low as US$30/MWh (against average residential electricity rate of $80/MWh).

Undoubtedly solar is now at a key inflection point with rapid growth to be driven by improving economics, making it possible to achieve grid parity in global markets sooner than expected.