A Free-Market Energy Blog

‘Grid Parity’ for Renewables: Why Subsidies? (Part II)

By Mark Febrizio -- March 22, 2016

“By focusing strictly on cost-competitiveness, grid parity fails to consider how dispatchability influences an energy source’s value on the grid. Moreover, renewable energy sources rely heavily on government funding to even reach cost-competitiveness. Continued subsidization of solar and wind to make them cost-competitive or accelerate their adoption is unjustified. “

As Part I of this analysis explained, grid parity for renewable energy is an empty concept because it fails to consider the functionality of renewable resources on the electric grid. Since grid operators must balance supply and demand to sustain grid stability and meet the power needs of Americans, dispatchable resources are extraordinarily valuable for electricity generation.

Resources such as coal, natural gas, nuclear, and hydropower can dispatch power on demand, but solar and wind energy are intermittent, making them undependable for electricity generation. In essence, true grid parity should also consider how an electricity source functions on the grid, not merely cost-competitiveness.

Nevertheless, renewable energy sources have not become competitive strictly based on their own merit. Instead, government assistance has been an important, even essential, component of lowering the cost of renewables enough to make them attractive in some locations. Despite receiving subsidies for decades, solar and wind remain unable to truly compete with conventional sources on the grid.

Renewable Subsidies: Nothing New

Solar and wind in power generation have existed since the 1800s and began receiving numerous subsidies from the federal government in the 1970s. Landmark pieces of legislation, including the Energy Tax Act of 1978 and Energy Policy Acts of 1992 and 2005, established financial incentives for investing in renewables. Furthermore, the federal government created agencies like the U.S. Department of Energy and government-funded research institutions like the Solar Energy Research Institute (now the National Renewable Energy Laboratory).[1]

Nevertheless, both the solar and wind industries continue to laud government funds as critical to renewable energy growth. Subsidies are a key part of the discussion of grid parity as their impact is commonly included in analyses of renewable energy cost-competitiveness. But continually funding such endeavors will not resolve the fundamental limitations of intermittent energy sources.

Unwarranted, Ongoing Subsidies

Giving even more money to renewable technologies as a way to bring them to grid parity is misguided. As discussed in Part I, attempting to make renewables competitive through subsidization is an artificial solution that also raises overall electricity prices: subsidies and renewable mandates in Germany “have distorted electricity pricing” so that solar PV has purportedly reached grid parity despite the country’s low insolation.[2]

In Europe, a result of this approach is overinvestment in renewable technologies in places where renewable energy is poorly situated. This “sub-optimal deployment of resources” has been costly for the European Union, which wasted $100 billion according to one report.[3]

A 2015 study from Deloitte MarketPoint even admitted that subsidies are critical for wind and solar to reach grid parity in some parts of the U.S. over the next 10–15 years.[4] If the tax credits for wind and solar expired, Deloitte found that the timeline for grid parity would be significantly longer in many regions.[5]

Despite highlighting technological improvements for wind and solar, Deloitte assessed, “the projected dates for reaching grid parity without subsidies appear to be much farther out than many predictions being featured in the media today.”[6]

Moreover, Deloitte found that even markets with very good “solar radiation potential” but low wholesale prices (e.g., Arizona and Southern Nevada) will not achieve grid parity for over two decades without subsidies, illustrating renewable energy’s reliance on government support.[7] As long as renewables are dependent on government subsidies to be successful, doling out more money will not make them truly competitive on the grid.

Furthermore, lower prices do not necessarily allow renewables to truly rival conventional energy sources. According to an analysis from MIT Technology Review, as solar energy’s role on the grid expands, its value lessens. Continually decreasing the price of solar energy—whether through subsidization or innovation—forces solar to compete with itself on the grid because it generates power only when the sun is shining. Without a large-scale and affordable way to store energy, solar cannot dispatch electricity when it is most needed, which limits its usefulness.[8]


By focusing strictly on cost-competitiveness, grid parity fails to consider how dispatchability influences an energy source’s value on the grid. Moreover, renewable energy sources rely heavily on government funding to even reach cost-competitiveness. Continued subsidization of solar and wind to make them cost-competitive or accelerate their adoption is unjustified.

These technologies have existed for over a century, have received government support for decades, and cannot achieve true grid parity due to their inherent limitations. In the end, grid parity remains a misnomer and an empty concept because it ignores the importance of how energy sources function on the electric grid.


[1] Matthew Sabas, History of Solar Power, Institute for Energy Research, February 18, 2016, http://instituteforenergyresearch.org/analysis/history-of-solar-power/.

[2] Rud Istvan and Planning Engineer, Solar grid parity?, Climate Etc., May 31, 2015, http://judithcurry.com/2015/05/31/solar-grid-parity/.

[3] Geert de Clercq, Badly located renewable power plants cost Europe $100 billion: Davos report, Reuters, January 20, 2015, http://www.reuters.com/article/us-utilities-europe-davos-idUSKBN0KT2BC20150120.

[4] Herman K. Trabish, The factors driving wind and solar toward grid parity, Utility Dive, December 10, 2015, http://www.utilitydive.com/news/the-factors-driving-wind-and-solar-toward-grid-parity/410304/.

[5] Jordan Blum, Report says wind, solar can’t compete for now without tax breaks, Houston Chronicle, November 20, 2015, http://www.houstonchronicle.com/business/energy/article/Report-says-wind-solar-can-t-compete-for-now-6647983.php.

[6] Deloitte MarketPoint, Journey to grid parity, 2015, p. 16, http://www2.deloitte.com/us/en/pages/energy-and-resources/articles/journey-to-grid-parity.html.

[7] Deloitte, p. 16.

[8] Even the potential for widespread, affordable energy storage, which would undeniably be an important technological development, is not a justification for subsidization. Rather, if energy storage can be effectively commercialized, then the market should determine its value. As discussed previously, subsidizing renewables has allowed RE to reach parity only because overall electricity prices have artificially increased. Doing the same to make energy storage competitive would only hinder true commercialization and adoption.


Mark Febrizio is a policy associate at the Institute for Energy Research in Washington, DC.


  1. Kent Hawkins  

    In general a good series. I agree with Tom Stacy’s comments in Part I. Producer costs do not necessarily transfer to electricity market costs, which is an auction process. Further, in electricity spot markets, the prices tend to reflect operational costs only.

    The impact of lower capacity factors mentioned in the post, due to displacement by wind/solar, could be at least two-fold: (1) producers close existing or no longer invest in new generation plants because these are not financially viable (all of which is not good news for electricity systems), and (2) over time the establishment of offsetting payments to such producers should eventually impact market costs.

    There are many other costs and factors that should be added into any levelized cost analysis, including:

    1. The EIA practice in the calculation of levelized costs assumes a fixed 30 year financial period for all generation plant types. Specifically in the case of wind, wind turbine plant lives are closer to 15 years than 30, according to a review of actual turbines installed by the Renewable Energy Foundation in the UK (http://www.ref.org.uk/attachments/article/280/ref.hughes.19.12.12.pdf ). In effect this doubles the basic levelized cost value for starters. Also remember than almost all of the wind turbines installed world-wide have been installed since 2000. These also are considerably larger than those installed prior to 2000 and thus more problematic. A quick search on the EIA site did not lead me to the reference to the 30 year period. As I was in contact with EIA staffers a few years ago on this subject, this may have been communicated to me by them. I suggest you check into this.
    2. Increased transmission networks to accumulate the highly dispersed wind/solar resource and to transmit the electricity produced, largely in remote areas, to demand centers. This otherwise not required addition to the transmission network has to be further overbuilt to handle the maximum electricity production which does occur occasionally. An alternative is curtailment of wind production, which is often paid for anyway. The average production over time for wind/solar is in the range of 15-25% of installed capacity. The EIA does mention that the transmission costs used are not complete. The main reason for this is that in general transmission costs are ‘socialized’ and not attributed to the individual technologies. However, and largely speaking, in the case of wind and solar these costs are due solely to wind and solar plants, and they should bear the costs.
    3. Finally, with wind and solar, across the electricity system duplicate capacity is needed to offset wind and solar’s short term (minutes) randomness and longer term (hours and days) unreliability. This can be seen by studying the installed capacity against the peak demand for an electricity system, and has been acknowledged by the European Wind Energy Association. This duplication of costs should be attributed to wind and solar costs. In effect this ‘fixes’ the non-dispatchable problem.

    Taking these into consideration, levelized costs for wind and solar, which can now be more directly compared to other generation technologies, will be substantially higher.


    • Tom Stacy  

      And I agree with your comments as well. Imposed cost in George and my “LCOE from Existing Resources” does what you suggest in your 3. I am glad you recognize this, Kent. It sounds like we are well aligned here. The PV solar update to the LCOE-E report should be out in a few days.


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