22 Aug 2013

On Grid Parity

Robert Wilson (@CountCarbon), in a comment on my last blog, raises the issue of grid parity, asking what it is in reality. It's a good question. In essence, the idea is very simple. It's when new forms of energy production cease to be expensive and cost the same as existing methods. The idea being when solar PV, or wind turbines, or whatever tickles your fancy, costs the same as gas or coal burning then, voila, everyone will switch to the renewables. They will have achieved grid parity - that means that the electricity they supply to the national grid costs the same.

But I don't think Robert was looking for the mundane answer. He's a bit of an expert in these matters — I think he will know full well what grid parity means in theory. What he is driving at is that the concept is a whole lot more complicated to understand than my simple explanation makes out. And it is. Take a look at my last blog post for starters — this post more or less carries on from there so it's not such a bad idea to read that one first in any event.

There I make the point that comparing fossil fuel burning with renewables (or nukes — I'm fond of nukes) is an apples and oranges scenario. Fossil fuel has to be paid for but the plant to burn it in is cheap to build. All the others are almost free to run but the capital costs of getting the kit up and running are high. So, given this, the concept of grid parity is immediately challenged because to get a true cost of the electricity produced you have to perform a series of calculations involving a number of assumptions.

For instance, how long will the low-carbon plant last? If it's 25 years, the cost of the power will be x; if it's 50 years, it will be half as much (or x/2). We don't really know how long this plant will last because we have only just started rolling it out in large quantities, so immediately we are in the world of guesswork.

Suppose we decide on a 25-year lifespan, so that we can then work out a cost per unit of energy. We then have to look at 25 years of fossil fuel burning to make a comparison. But what will the cost of fossil fuel be in 25 years, not to mention all points in between? We'll need to know that in order to make a grand total so that we can compare with our low-carbon plant costs. But who knows what will happen to fossil fuel prices over 25 years. More guesswork.

This is an exercise you can do and, indeed, it's been done already many times, notably using DECC's 2050 pathways calculator. This suggests that a low-carbon route is likely to be no more expensive than a fossil fuel, business-as-usual one. But it does all depend on the assumptions being made.

If this really is the case, and that DECC's calculator has got it right, then we have already achieved grid parity and we simply don't need any green subsidies to kick start the low-carbon energy drive. Apparently financial logic dictates that we should move towards low-carbon electricity right away because it's already as cheap and is likely to get cheaper over time (fracking notwithstanding).

But no one really believes this to be the case. Institutions are not falling over themselves to build offshore windfarms or new nuclear power stations, or anything else that vaguely fits the bill. They all want generous subsidies or guarantees to take away the risk that the assumptions made might be wrong.

In other words, there is an apparent lack of will here. It easy to carry on with the business-as-usual scenarios because they are perceived as being less risky, because there is less money at stake. The low-carbon plant would have to become a whole lot cheaper than it is now for the institutions to take the plunge and invest in expensive low-carbon plant without any subsidy involved.

Or to put it another way, grid parity is not enough. We need to get to something like half-the-grid price before new energy forms will start to take over off their own bat. Or maybe even less. Once again, we are speculating.

Even then it's not quite so simple, because we need to sort out the power storage issues before we get too far down this track. Before we can talk about one-for-one substitution, we have to have adequate methods in place to store energy from intermittent renewables, otherwise we will still be building new gas plants well past 2050. Power storage has to be built into the financial equation. Without it, each unit of renewable electricity is worth ever so slightly less than the one produced immediately before it. This isn't a problem with nukes but then again nukes have their own problems.

It's not as if the business-as-usual route is without risks. Even discounting the effects of climate change over the next 35 years, this route ties us into burning fossil fuels and who knows how easy these will be to obtain, especially if the emerging economies continue to expand on the back of fossil fuel derived energy. It may be that fracking and other technological breakthroughs will bring about an unexpected energy abundance. But equally it may not. There's really no more logic to the pro-frackers position than there is to the EnergieWende route, as espoused by the anti-nuclear, pro-renewable Germans. Except, of course, that the German route does at least address carbon emissions, something the frackers only pretend to do.

Which brings us back to the concept of grid parity. It's not really measurable, certainly not in terms of unit costs of electricity. Instead, think of it as a ravine that has to be jumped. As you travel along the side of it, the gap gets steadily narrower but at what point do you actually decide to jump? Wherever that is would be where grid parity is. We could hang out a signpost that says Welcome to Grid Parity. But we won't know where to place it until we get there. And there's no guarantee that we ever will.


  1. Mark

    Really good outline of what's wrong with the concept of grid parity.


    Really good outline of what's wrong with the concept of grid parity.

    Another issue that rarely comes up in these discussions is how there are different types of powerplants with very different economics.
    The grid needs peaker power plants that can be switched on and off to meet peak demand. And because of their low capacity factors it is preferable for them to have low up front costs.
    It's very difficult to see nuclear power plants being cheaper for this than gas. And obviously we cannot control the sun or wind.
    And the need for such plants may increase a lot in future.
    A report by Element Energy for the CCC (see page 21 here: http://goo.gl/0C5KSN) estimated that a large scale shift to electric heating would add 100 TWh/year to electricity demand.
    This is an average of 11 GW. Yet it would result in a need to meet an extra 65 GW of peak demand in winter when people turning heating to the max. Meeting that heating demand entirely with low carbon energy is a bit of a nightmare, irrespective of whether we have reached “grid parity.”

    This is perhaps where you are slightly incorrect about the need for storage for nukes. It's certainly less of an issue than for renewables, but if demand is going to become much spikier then storage for nukes may be necessary as well.

    I agree that the costs of storage (or curtailment) needs to be factored into the costs of renewables. Again, this is something people just gloss over. Doing this of course is just guess work. We really don't have any economically viable ways to store electricity, despite the incessant nonsense you read on clean tech websites.

    I largely agree with the general point that Chris Goodall has made that chemical storage is what is really needed to make large scale renewables viable. Battery style approaches just run into the problem of going a week with no win, you just end up falling back on fossil fuels. But again these storage methods come with a significant cost. The power to gas proposal Goodall discussed seems particularly dubious from an economic and engineering point of view. You capture carbon dioxide from a power plant. Then convert excess wind electricity first to chemical energy in hydrogen, and then convert your captured carbon dioxide into methane. This apparently is 60% efficient. Run the methane through a gas plant and you are going from 1 kWh of excess wind to 0.3 kWh of electricity out the other end. This will have a big cost. But if people are going to talk about 100% renewable electricity being cheaper than business as usual they will need to explain where the stuff comes from when it's not windy and what the cost is.

    You make a good point as well that low carbon electricity will need to be below “grid parity” to drive investment in them. This is even more of a problem in the world of shale gas. Anyone investing in power plants is fully aware that gas prices might plummet by 2030. This is why I have a strong preference for pricing carbon than providing fixed prices for renewables or nuclear. You need to provide investors with certainty that there will be significant cost increases in emitting carbon.

    So I guess overall the concept of grid parity is rather misleading.

  2. >Apparently financial logic dictates that we should move towards low-carbon electricity right away because it's already as cheap and is likely to get cheaper [...] But no one really believes this to be the case. Institutions are not falling over themselves to build offshore windfarms or new nuclear power stations, or anything else that vaguely fits the bill. They all want generous subsidies or guarantees to take away the risk that the assumptions made might be wrong

    There is another factor at play here. It is not enough for the electricity to be cheap. It has to be profitable to attract investment. Despite being cheap, onshore wind (for example) still requires subsidy to make it profitable.

    It is often assumed that grid parity means that subsidy would no longer be required. But this is not necessarily the case. Profitability depends on the value of the electricity in the market, as well as the cost of generation. It happens that wind power is often sold at times of low market value:

    When the wind is blowing strongly, the supply of electricity increases and the market value naturally drops. So at the time when most wind electricity is generated, the market value tends to be low. And the more wind capacity is built, the more pronounced this effect is. It is cheap, but it is hard to make a profit because it sells at a low value.

    To a lesser extent the same is true of nuclear. It generates constantly so it has to accept a low price some of the time.

    By contrast, fossil fuel generators can pick their time to generate, ideally when the fuel cost is low but the electricity value is high. They can be profitable even when the fuel is expensive, because they can choose to generate and sell at peak times.

    So it should not be assumed that grid parity is sufficient to create an attractive investment opportunity.

    - ColinG