This factsheet is a simple, go-to resource outlining how electricity supply options (renewable vs. traditional) can be appropriately compared.
This publication is the first in a series of three tools to help breakdown these analyses for greater clarity and precision in weighing the cost effectiveness of renewable energy options.
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.
A power purchase agreement (PPA) option is cost-competitive (and can save end-use consumers money) when the price paid for the electricity is lower than or equal to the retail electricity price over the renewable project’s lifetime or contract.
Renewable energy projects can lower the wholesale generation price in the short-term through their low marginal cost of production but is only cost-competitive in the long-run when its average cost of energy (past projects or LCOE) is at least equal to the average wholesale costs when the project is generating power.
In the traditional market context, a renewable energy project is cost-competitive (and presents economic savings) against other technologies that provide the same service when it has at least equal average cost of energy (past projects or LCOE) and/or lower risk.
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.
With the cost of renewable energy systems falling globally—particularly large-scale wind and solar energy in the United States—these comparisons will become more and more important. WRI’s new fact sheet, Understanding Renewable Energy Cost Parity, outlines, the accuracy of these comparisons is drastically improved by clearly defining the perspective from which the comparison is being made; the electricity supply options being considered; and what other factors should be taken into account.
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
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