Synopsis

This factsheet is simple, go-to resource outlining how electricity supply options (renewable vs. traditional), specifically behind-the-meter solar photovoltaic (PV) systems, can be appropriately compared.

This publication is the second in a series of three tools to help break down these analyses for greater clarity and precision in weighing the cost effectiveness of renewable energy options.

Key Findings

  • Behind-the-meter generation is cost-competitive for end-use consumers when its average cost of energy (calculated from past projects or LCOE) is at least equal to the retail electricity price over a project’s lifetime. In developing economies, this generation unit’s cost-competitiveness is determined by the retail price plus the amount saved in backup generation costs.

  • In the United States, most behind-the-meter PV systems are contracted through a third party who owns the system and sells the electricity to end-use consumers at a negotiated price. This model has become popular because it eliminates the up-front cost of PV systems to end-use consumers. This model is cost-competitive if the price offered to end-use consumers is below the electricity retail price over the contract period.

Executive Summary

Comparing the cost of renewable energy options to traditional electricity supply is critical for decision-makers, policy experts, investors, and regulators to determine the most efficient and cost-effective way to supply electricity.

The problem is that comparing these costs “apples-to-apples” can be difficult and confusing. That means that businesses, policymakers, and other groups may be choosing an electricity option based on inaccurate or incomplete information.

Glossary

Cost parity: Cost-competitiveness between a renewable energy option and the comparable, traditional electricity supply option(s)

Behind-the-Meter Generation: Generation that supplies electricity at the point of demand without first interacting with the grid

The Grid: The transmission and distribution system that connects generators and end-users

Average Cost of Energy: The cost of each unit of energy a project produces calculated using information from past projects or the levelized cost of energy (LCOE)

Levelized cost of energy (LCOE): The projected total system and operating costs divided by total kWh produced over the lifetime of the project or contract

Capacity Factor: The percentage of time a project is expected to produce Electricity

Power Purchase Agreement (PPA): A fixed-price contractual agreement to purchase a power plant’s energy, typically calculated using project finance LCOE or set at the feed-in-tariff price

Independent Power Producer (IPP): A power plant owner and/or operator independent of the local utility

Wholesale Generation Price: The price ($/MWh) of the most expensive plant operating in a particular block of time in order to meet demand

Marginal Cost of Production: The cost of producing each additional megawatt hour (MWh)

Integrated Resource Planning (IRP): Regional planning process for energy resources to help meet long-term energy demand with least-cost supply and energy efficiency while mitigating risk

Requests for Proposals (RFPs): Calls for competitive proposals for projects fitting specific characteristics