What Is Grid Parity?

by | May 7, 2024 | Glossary and FAQs

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For financial analysts, “grid parity” is simply a term used to describe when a clean energy source (such as solar and wind) costs the same or less than a conventional energy source from the grid (such as coal, oil, or natural gas). At the very least, that is the short version. Grid parity, however, is something of a Holy Grail for climate campaigners, a tipping point that accelerates the move to renewable energy in many ways and for various reasons. However, like many other financial terminology, this term must be clarified.

What is Grid Parity?

Grid parity, in technical terms, occurs when an alternative energy source generates power at a levelized cost of electricity equal to or less than the cost of purchasing power from the electrical grid. In other words, as previously stated, grid parity occurs when the cost of alternative energy equals or lowers that of power generated by traditional energy sources such as fossil fuels. It is one of the essential factors considered by energy experts when analyzing the economic viability of an alternative energy type for widespread development and adoption. It occurs when the cost of alternative energy equals or lowers that of power generated by traditional energy sources like fossil fuels.

What is Grid Parity?

Source: State Dept./J. Maruszewski

Why Does it Matter?

Grid parity is the point at which the overall costs of renewables cross the line and become equal to or less than those of fossil fuels, making the we-can’t-afford-to argument. Once the economic argument is removed, beautiful things happen in the market, such as more investment in clean energy projects and technology, initiating a virtuous cycle in which wind and solar continue to become more affordable and accessible. When sustainable energy becomes more than a moral imperative, it’s an obvious decision.

Also Read: What Is An Off-Grid Solar System?

How do we Determine Grid Parity?

It ultimately boils down to the levelized cost of electricity, or LCOE, which is the cost parameter most analysts use when determining grid parity. It measures the lifespan generated energy and the cost of electricity from a specific technology, beginning with its manufacture and ending with the generation of its last watt. Using LCOE helps to eliminate biases between different technologies. It is also the preferred benchmarking method for determining the cost-effectiveness of various energy-producing technologies. Simply put, LCOE is used by analysts to determine whether an alternative form of energy is on track to achieve GP and become a viable energy source for customers.

What Variables Influence When a Region Obtains Grid Parity?

Grid parity is a dynamic concept that varies by location. Factors such as the amount of sunlight in a region (if we’re talking about solar energy), variances in financing conditions, and existing electricity rates and installation costs in the different areas all influence the LCOE and when a region approaches grid parity. For example, Nevada generally receives more sunlight than Washington. The difference in the amount of sun between the two states, combined with other considerations, means Nevada has much more potential for solar energy and may have an advantage in reaching grid parity first. Despite regional disparities, and given recent trends of rapidly declining solar energy costs, 42 states in the United States are likely to achieve grid parity by the end of 2020, according to a GTM Research analysis.

In conclusion, Grid parity varies by area and depends on factors such as solar availability and current energy prices; it is not a global comparison of renewable energy costs to fossil-fuel electricity from the grid. It does, however, help to chart progress in various places worldwide. As we work to bring climate change solutions to the forefront of energy customers’ and policymakers’ thoughts, seeing cities, regions, and countries achieve it demonstrates how the worldwide move to clean energy is accelerating. And, because all power is generated someplace, local and national energy regulations, as well as utility practices, can have a significant impact on whether this shift accelerates or slows.

Also Read: Best Solar Inverter Off Grid System 2024



  • Michael Thompson

    Michael Thompson is an esteemed expert in the renewable energy sector, with a profound experience spanning over 25 years. His expertise encompasses various sustainable energy solutions, including solar, wind, hydroelectric, and energy efficiency practices. Michael discusses the latest trends in renewable energy and provides practical advice on energy conservation.

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