Overview
The price of electricity from the grid is complex. Most power sources in the developed world are generated in industrial scale plants developed by private or public consortiums. The company providing the power and the company delivering that power to the customers are often separate entities who enter into a Power Purchase Agreement that sets a fixed rate for all of the power delivered by the plant. On the other end of the wire, the local distribution company (LDC) charges rates that will cover their power purchases from the variety of producers they use.
This relationship is not straightforward; for instance, an LDC may buy large amounts of base load power from a nuclear plant at a low fixed cost and then buy peaking power only as required from natural gas peakers at a much higher cost, perhaps five to six times. Depending on their billing policy, this might be billed to the customer at a flat rate combining the two rates the LDC pays, or alternately based on a time-based pricing policy that tries to more closely match input costs with customer prices.
As a result of these policies, the exact definition of "grid pricing" varies not only from location to location, but customer to customer and even hour to hour.
For instance, wind power is generally considered to be a form of base load and connects to the grid on the distribution side (as opposed to the customer side). This means it competes with other large forms of industrial-scale power like hydro, nuclear or coal-fired plants, which are generally inexpensive forms of power. Additionally, the generator will be charged by the distribution operator to carry the power to the markets, adding to their levelized costs.
In comparison, solar energy is considered to be a form of peaking power plant, and therefore competes against more expensive forms of power like natural gas. Additionally, solar has the advantage of scaling easily from systems as small as a single solar panel placed on the customer's roof. In this case the system has to compete with the post-delivery retail price, which is generally much higher than the wholesale price at the same time.
It is also important to consider changes in grid pricing when determining whether or not a source is at parity. For instance, the introduction of time-of-use pricing and a general increase in power prices in Mexico during 2010 and 2011 has suddenly made many forms of renewable energy reach grid parity. A drop in power prices, as has happened in some locations due to the late-2000s recession, can likewise render systems formerly at parity no longer interesting.
In general terms, fuel prices continue to increase, while renewable energy sources continue to reduce in up-front costs. As a result, widespread grid parity for wind and solar are generally predicted for the time between 2015 and 2020.
Read more about this topic: Grid Parity