One of our recent articles explained how rooftop solar PV is more expensive that a centralised supply, and that the transmission and distribution cost savings of the rooftop system, on their own, do not make up for this cost difference. Here, Javier López Prol at the Wegener Center for Climate and Global Change, University of Graz, responds to those challenges. First, the economies of scale of distributed rooftop solar are yet to be realised. Next, getting private players – residential, commercial and industrial – who would not otherwise invest in clean energy to pay out of their pockets can increase the money being directed at the transition. And there’s behaviour change: “prosumers” are likely to optimise their consumption patterns to the benefit of their budgets, the grid and decarbonisation. He goes into all the main reasons that show why rooftop solar should be taken seriously as an addition to meeting our decarbonisation targets.

In a previous Energy Post article, Severin Borenstein analyses the economics of centralised vs. distributed photovoltaics (PV). He rightly points out that rooftop PV is more expensive that centralised solar (see, e.g. the latest Lazard LCOE report), and that transmission and distribution cost savings alone do not generally make up for this cost difference.

Given these facts, he concludes that rooftop PV is only cost-effective in specific locations where land is scarce or grid connection expensive. But beyond those cases, could there be any other reason to promote the diffusion of distributed PV?

Economies of scale not yet reached

Earlier in the development phase of PV, many economists argued that support for PV deployment was not justified, as its unit abatement cost was higher than other alternative mitigation options. Thanks to public support to both R&D and adoption (see Kavlak et al 2018, or an excellent summary by David Roberts), PV costs have plummeted in the last decades. PV has become the lowest cost technology in many locations (IRENA, 2020), and is set to become “the king” of electricity generation (IEA, 2020).

This happened with PV modules, but the situation could be similar for distributed PV. Its current cost is considerably higher than centralised PV due to the lack of economies of scale, higher transaction costs and other market barriers to small-scale diffusion.

Current rooftop PV systems are usually installed ad hoc. Costs savings could be realised if the PV system is implemented at the moment of roof renovation or construction. Moreover, the standardisation of building-integrated PV and the development of new business models for shared electricity self-consumption could bring the lower cost of centralised PV to the distributed market.

Reach segments that would not otherwise invest

The IEA estimates that $740 billion per year of investment in clean electricity technologies will be necessary until 2030 to meet the Paris Agreement, compared to the $480 billion invested in 2019 (IEA, 2020b).

Since promoting distributed PV mobilises capital from segments (such as residential, commercial and industrial) that would not invest in clean energy otherwise, it increases the aggregate amount of investment dedicated to the energy transition. For this reason, promoting distributed PV is not a zero-sum policy, as it boosts the total amount of investment directed to decarbonisation, and all efforts will be necessary to meet the climate targets.

Additionally, even when land is available, large scale PV could conflict with other policy objectives, such as biodiversity conservation, or even with other climate mitigation options, such as reforestation. Given the huge challenge of reducing emissions in line with the Paris goals (IPCC, 2018), focusing only on the lowest cost solution might not be enough to mitigate environmental degradation at the required speed and scale.

Technological spill-overs and Behaviour Change

Once consumers install a PV system, they become more “energy-aware” (see, e.g. Gram-Hanssen et al., 2020). PV self-consumption incentivises prosumers to change their demand patters to self-consume as much as possible (as far as there is no net metering). Decarbonised electricity systems will need multiple sources of flexibility to integrate high shares of variable renewables. Among these flexibility options is demand response, so prosumers with flexible loads could contribute to lower the integration costs of variable renewables (see, e.g. Kubli et al, 2018).

Likewise, prosumers are more likely to invest in complementary technologies to maximise the value of their PV system (see, e.g. Gu and Feng, 2020), such as smart meters or appliances, electric cars, etc. The increase in distributed PV could therefore push these complementary technologies and accelerate the transition to a decarbonised economy.

Risks of distributed Solar PV

PV presents many opportunities, but also potential risks (López Prol and Steininger, 2020). The most evident is the one highlighted by Borenstein: support policies could become burdensome for the public sector and hinder more effective investments if done wrong.

One example is net metering: it has a high cost for whoever is financing it, may provide windfall profits for prosumers in areas of high insolation and high retail electricity prices, and does not offer incentives to adjust demand (as also pointed out by Borenstein here).

Another potential risk is the distributional impact. On the one hand and depending on the tariff structure, prosumers may be free-riding on the rest of consumers by avoiding the part of the grid costs charged in the variable part of the retail price. On the other hand, since higher-income single-family homeowners are more likely to install PV than low-income individuals, subsidising rooftop PV could indeed be regressive.

Is distributed Solar PV worth it?

Although unpopular, internalising external costs (e.g. through carbon prices), leading to higher retail electricity prices, would be the best incentive for distributed PV at zero cost for the government. The income generated by the carbon tax could then be used to mitigate the regressive distributive impacts of such a measure.

Other zero-cost support policies could be competitive net billing self-consumption schemes, where the surplus electricity is remunerated at wholesale price (see, e.g. López Prol and Steininger, 2017); and regulatory flexibility to allow the emergence of new business models that could bring about lower costs to the distributed PV sector.

But beyond the correction of market failures and despite the lower cost of centralised PV, active support to distributed PV could be justified given its potential for further cost reductions, the clean energy investment multiplier effect, technological spill-overs and incentives for behavioural change. These potential co-benefits are hard to quantify but likely worth exploring.

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Javier López Prol is Schrödinger fellow at the German Institute for Economic Research (DIW Berlin) and Wegener Center for Climate and Global Change, University of Graz, Austria.

 

References

Borenstein (2016). Billing Tweaks Don’t Make Net Metering Good Policy https://energyathaas.wordpress.com/2016/01/04/billing-tweaks-dont-make-net-metering-good-policy/

Borestein (2020). Why promote Rooftop Solar when the Grid is so much cheaper? Energy Post. https://energypost.eu/why-promote-rooftop-solar-when-the-grid-is-so-much-cheaper/

Gram-Hanssen et al. (2020). Danish PV Prosumers’ Time-Shifting of Energy-Consuming Everyday Practices. https://doi.org/10.3390/su12104121

Gu and Feng (2020). Heterogeneous choice of home renewable energy equipment conditioning on the choice of electric vehicles. Renewable Energy. Volume 154, July 2020, Pages 394-403 https://doi.org/10.1016/j.renene.2020.03.007

IEA (2020). World Energy Outlook 2020. https://www.iea.org/reports/world-energy-outlook-2020

IEA (2020b), World Energy Investment 2019, IEA, Paris https://www.iea.org/reports/world-energy-investment-2019

IPCC (2018). Global Warming of 1.5°C. An IPCC Special Report on the impacts of global warming of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development, and efforts to eradicate poverty. https://www.ipcc.ch/sr15/

IRENA (2020). Renewable Power Generation Costs in 2019. https://www.irena.org/publications/2020/Jun/Renewable-Power-Costs-in-2019

Kavlak et al (2018). Evaluating the causes of cost reduction in photovoltaic modules. Energy Policy Volume 123, December 2018, Pages 700-710 https://doi.org/10.1016/j.enpol.2018.08.015

Kubli et al. (2018). The flexible prosumer: Measuring the willingness to co-create distributed flexibility. Energy Policy Volume 114, March 2018, Pages 540-548 https://doi.org/10.1016/j.enpol.2017.12.044

Lazard (2020). Lazard’s Levelized Cost of Energy Analysis – version 14.0. October 2020. https://www.lazard.com/media/451419/lazards-levelized-cost-of-energy-version-140.pdf

López Prol and Steininger (2017). Photovoltaic self-consumption regulation in Spain: Profitability analysis and alternative regulation schemes. Energy Policy Volume 108, September 2017, Pages 742-754. https://doi.org/10.1016/j.enpol.2017.06.019

López Prol and Steininger (2020). Photovoltaic self-consumption is now profitable in Spain: Effects of the new regulation on prosumers’ internal rate of return. Energy Policy. Volume 146, November 2020, 111793. https://doi.org/10.1016/j.enpol.2020.111793

Roberts (2018). What made solar panels so cheap? Thank government policy. Vox. https://www.vox.com/energy-and-environment/2018/11/20/18104206/solar-panels-cost-cheap-mit-clean-energy-policy