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The Grid Parity Test: Comparing Apples to Oranges?

published: 2011-07-22 9:14

Many solar market pundits believe solar energy will reach grid parity within the next few years. Solar has crossed the boundaries of a supply-constrained market, to a market driven by demand-side dynamics. Firms that have managed to combine high solar module efficiency rating and   low cost per watt have gained a higher market share and enhanced revenues. The cost of electricity production has drawn even closer to “grid parity.” Grid parity occurs when the cost to generate one kWh of solar electricity, or any clean energy source, reaches the equivalent cost to produce one kWh of coal.

Coal represents the most widely used fuel source for generating electricity around the world. According the U.S. Energy Information Administration's International Energy Outlook 2010, coal-fired production resulted in 42 percent of the global electricity supply. The U.S., China, and India, three of the largest users of coal; all three nations have an abundant natural supply. Natural gas accounts for about half of the generation by coal-fired plants. Nuclear energy generated 16 percent of the world's electricity based on 2007 figures.

The cost of coal per kilowatt-hour (kWh) is a major marker for measuring the feasibility and bankability of solar energy. Coal has the lowest cost of production; it cost $0.6 cents per kWh of electricity produced from coal-fired plants. Although the price of solar cells, modules, inverters, and other components have drastically fallen, based on the prevailing calculations, solar-generated electricity cost range between $0.8 cents and $13.5 cents per kWh depending on the solar technology used to generate the electricity.

Attaining the “Holy Grail,” solar energy power generation, equal with coal at $0.06 per kWh, represents a key benchmark for solar industry players, such as manufacturers, developers, and investors. 

Negative Externalities 

The problem with making the cost of coal -fire electricity production the standard for measuring the viability of clean energy fuel sources, such as solar, involves the failure to include environmental costs, such as smog, mercury poisoning, acid raid, thermal pollution and greenhouse gases - or “negative externalities.” These, and health-related cost do not figure into the current formula for calculating coal's real costs per kWh.

English economist and University of Cambridge professor Arthur C. Pigou (1877 - 1959) described “negative externalities” as the external costs related to the production or consumption of a service or products. Pigou believed the government must correct the impact of negative externalities by assessing a special tax, now called a Pigovian Tax.

During the early 1990s, several state utility commissions in the U.S. required utility companies to include the environmental impact when making price comparisons with other fuel resources. By the mid-1990s, the subsequent deregulation of the electrical power industry forced bureaucrats to abandon this requirement.

The Negative Externalities of Mountaintop Coal Removal

In the United States, mining companies employ the use of underground shafts to remove most coal from the earth. About five percent of extraction process occurs through a technique known as “mountaintop mining” (MTM). MTM entails removal of the top or summit to reach the desired seams of materials. The MTM method allows for easier and quicker mining of coal: however, the Environmental Protection Agency recognizes it as one of the most devastating approaches when it comes to the environment and the local quality of living. Some effects include:

- Deforest the land - sell or burn lumber

- Remove mountain tops with 2,500 pounds of explosives, the equivalent of a Hiroshima bomb each week

- Remove boulders and rocks that often fall into valleys, rivers, and streams

- Flatten ancient mountain ranges

MTM occurs most often in the Kentucky and West Virginia - the top coal-producing states in the U.S. The process has interred 1,200 miles of waterways and blast away 470 mountains in the Appalachia. The mountaintop mining contaminates water supply, send toxins into the air, deplete forests, and has an impoverishing effect on the local communities.

Several years ago, Robert F. Kennedy Jr., in an article he wrote for the Huffington Post, Kennedy states that, “coal is only “cheap" if one ignores its calamitous externalized costs.” In addition to global warming, these include dead forests and sterilized lakes from acid rain, poisoned fisheries in 49 states and children with damaged brains and crippled health from mercury emissions, millions of asthma attacks and lost work days and thousands dead annually from ozone and particulates.

"Coal's most catastrophic and permanent impacts are from mountaintop removal mining. If the American people could see what I have seen from the air and ground during my many trips to the coalfields of Kentucky and West Virginia: leveled mountains, devastated communities, wrecked economies and ruined lives, there would be a revolution in this country,” said Robert.

Recent Harvard Study

Paul Epstein, Associate Director of the Harvard Medical School Center for Health and the Global Environment, released a study that revealed  that coal-fired power plants cost the United States economy $345 per year in hidden cost associated with the fossil fuel, outside the expenses incurred by the miners or utility companies. Polluting local settings and health issues make up the most common cost passed on to local residents.

If the coal industry was to bear this cost, instead of the taxpayers in surrounding communities, Epstein believes it would add 18 cents per kWh. This makes coal -- at a cost of $0.24 -- one of the most expensive fuel sources for electricity generation in the world. As of November 30, 2010, the United States have an average cost of electricity of $0.10/kWh.  


Historically, governments have not directly addressed the negative externalities of coal-fired plants. Modifying polices to recognize the “true” costs of burning coal would “internalize” the environmental and healtheffects inherent in dirtiest of all fossil fuels -- from mining to burning -- by assessing a tax equal to the estimated external costs.

However, among the largest users of coal, India and the European will recover some of the environmental costs in the form of carbon taxes. China, the largest consumer of coal will enact its carbon tax scheme in full by 2015. The United States, second in coal usage, does not have a carbon tax policy.

As the coal industry and governments maintain the legend of cheap coal, solar manufacturers and developers continue pushing the cost of solar power systems lower in the quest to make solar-generated electricity costcompetitive with coal plants -- without adjusting for negative externalities. Some critics may argue that certain solar technologies also have potentially negative externalities, but the environmental effect simply does not have the same impact. Failure include negative externalities associated with coal-fired electricity production distorts its true cost of production. The same holds for natural gas.

In recent weeks, the Fukushima Daiichi plant disaster, potential misfortune looming with the flooding occurring near two nuclear facilities in Nebraska, and wildfires nears a New Mexico facilities, which has 100s of  barrels of unprotected nuclear waste, highlight environment and other costs that  must be added to arrive at the real cost of electricity generation when comparing the fuel sources.

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