Utility-Scale Renewable Energy
Understanding Cost Parity
This factsheet is simple, go-to resource outlining how electricity supply options (renewable vs. traditional), specifically utility-scale renewable energy systems, can be appropriately compared.
This publication is the final factsheet 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.
A power purchase agreement (PPA) option is cost-competitive for end-use consumers when the full price of electricity paid is lower than or equal to the retail electricity price over the lifetime of the project or PPA contract.
In the traditional market context, a renewable energy project is cost-competitive (that is, it presents economic savings) against another technology, that fills the same capacity need, when it has a lower or equal average cost of energy (past projects or LCOE) and/or a lower risk profile.
Renewable energy projects can lower wholesale generation prices through a lower marginal cost of production and thus the retail electricity price paid by end-use consumers – which includes the wholesale generation price. However, a renewable energy project is cost-competitive against the current wholesale market generation mix (that is, can generate profit for the owner) only when the average cost of energy of a project is lower than, or equal to, the average wholesale prices at times when the project generates power.
When a renewable energy project is cost-competitive against the current generation mix, wholesale buyers may lock in a fixed price through a PPA to limit the risk associated with wholesale price volatility. This in turn can also reduce the retail electricity price paid by end-use consumers.
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 series, 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 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
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