What is grid parity? Will FITs still be needed when grid parity is attained?

Grid parity is conventionally defined as the moment in time when the cost of producing from RE sources, such as solar, matches the “avoided” cost of the RE producer. Consider for example a residential consumer who pays P10/kwh for conventional energy. If such a consumer can reckon his cost of installing, say, a small solar plant, and his cost is also P10/kwh, then he has achieved grid parity. He would be indifferent as between using his solar plant or buying from the grid.

Today, some estimates of the cost of solar power are in the range of US 15-30 cents per kwh. At the low end, which is for a large industrial plant, this would translate into P6/kwh, which is already almost at grid parity. The average industrial consumer in the Philippines paid US0.13/kwh (or about P5.5/kwh) in 2010. At the high end, which applies to residential installations, grid parity may not yet be there because the cost of solar is about P12/kwh, somewhat higher than P10/kwh that many residential customers of Meralco now pay. 

But suppose that in two years grid parity obtains for all users. At that point, it pays for all users, small and large, to simply go “off grid” (and this is largely driven by the fact that the price the end-user sees includes the so-called universal charges, such as those collected to help repay the debt of Napocor as well as the new FIT-All implied by the RE Act of 2008). The dreaded scenario of power shortages would turn into one where demand for electricity from the grid would fall sharply. The rational consumer would then rely primarily on his own RE power, and connect only to the grid as a backup when there is not enough wind, sun, etc.

In other words, traditional producers will likely have to scale down their business because of the presence of RE electricity. Such a scenario can even mean that traditional producers would lobby government for subsidies! Some of the traditional producers may already be aware of this grid-parity scenario, and it is already in their interest, as well as that of the average consumer, to delay or even avoid altogether the implementation of the FIT scheme.

Once grid parity is attained, RE producers will be more than happy to produce electricity without need of the subsidy element from the FIT.

UPDATE: In the United States, where the price of electricity is less than in the Philippines, solar energy is reported by motleyfool.com as already close to grid parity.  The US data suggest a cost of P8/kwh, already below the retail price of P10. If we can import panels without duty, as is provided for under RA 9513, we are already at grid parity even for the small residential user.

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