Clean Energy’s Pursuit of An Empty Prize

April 8, 2012 by  
Filed under Green Energy News

Grid Parity - Transmission LinesGrid parity, an energy technology’s ability to generate electric power at a levelized cost equal to the price of power purchased from the grid, is supposed to be the game-changing moment for clean energy.

The theory goes like this. When solar panels and wind turbines produce power as cheaply as coal plants, the invisible hand of the market will will move those technologies from the margins into the mainstream of the world’s energy economy.  Subsidies will no longer be needed.

Here is how the green tech investment blog “Grid Parity” puts it: “ Grid Parity is the point at which renewables become cost-competitive with traditional grid power—making it the Holy Grail for clean technology.”

While this Holy Grail may be a relevant metric for evaluating macro or historical energy trends, it is a dangerous distraction for start-ups trying to save customers cash in the form of lower electricity bills.

The obsession with the “cost” of producing electricity has obscured the mission critical consequences of the “price” paid to consume electricity.  All else equal, most people care more about the price they pay for power than the cost of producing it.

Technology may drive the cost of producing electricity, but policy and politics drive (albeit not exclusively) the price people pay to use it. This latter point has been grossly underappreciated, especially for the most revolutionary distributed generation technologies like building-integrated solar photovoltaic that challenge the fundamental architecture of the conventional power grid.

For example, Photon Consulting recently reported that solar could achieve grid parity when the fully loaded cost of a system declines to about one dollar per Watt, which would generate electricity for slightly less than than the average price of electricity (about $.12 per kilowatt hour).

The average price of electricity paid by customers is usually calculated as aggregate utility revenues divided by sales based on the Energy Information Administration‘s Form 861 database.   This formulation tends to underestimate the price electricity actually paid by consumers by overweighting large consumers who commonly pay lower prices than smaller consumers, according to analysis by the Tariff Analysis Project.

Being sort-of right about the economics of electric power may suffice for policy makers, but it will not cut for business leaders. Businesses selling the economic savings created by a clean energy technology will not be in business long by being sort of right about the economics of electric power. And those economics are intensely local.

The cost of consuming electricity varies significantly for different types of consumers and different parts of the country. These variations are embedded in the rarefied details of electric rate schedules and tariffs defined by electric utility companies.

A tariff is not a list of prices per se, but an algorithm for calculating a customer’s electricity bill based on the size of the customer as measured by its annual peak demand, the season and other variables like local geography or industry. The price is not determined solely by the tariff – it also depends in a very fundamental way on when, how and how much electricity a customer consumes over a billing cycle.

In this sense, the tariff is probably best understood as a mathematical function that takes the customer’s input data and returns the bill.

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