Photovoltaic self-consumption profitability

This is a short summary of the papers

which explains a very restrictive regulation that prevented the profitability of PVSC in Spain; 

which quantifies the effect of the current regulation reformed the previous one above enhancing PVSC profitability in Spain; and 

which introduces the concept of profitability landscape and quantifies the determinants of demand-side management returns.

With photovoltaic solar panels (do not confuse with thermal solar collectors for heating), anyone can generate electricity in their own house. Photovoltaic self-consumption (PVSC) presents multiple opportunities, as we need all possible hands to advance the energy transition, but also risks related to their integration in conventional electricity systems. Table 1 summarizes the risks and opportunities of PVSC.

The development of PVSC was bumpy because it is the first technology that allows demand-side generation for both self-consumption and grid injection for many different types of investors (households and companies). Some countries provided important incentives, such as subsidies and net metering schemes (see Figure 1), that enhance PVSC profitability. Other countries, however, passed restrictive regulations that prevented PVSC's economic feasibility, such was the case of Spain (López Prol & Steininger, 2017). A later regulation, however, improved the conditions of PVSC adopting the three main recommendations we had made in López Prol & Steininger (2017): (i) removing the "sun tax" on self-consumed electricity, (2) allowing the sale of excess generation, and (3) allowing shared self-consumption. Thanks to this reform, PVSC is now profitable in Spain (López Prol & Steininger, 2020).

Table 1. Risks and opportunities of photovoltaic self-consumption (PVSC). Source: López Prol & Steininger (2020).

The generation from solar panels does not usually coincide with consumption, so the excess generation can either be stored for later use, sold to the grid or just curtailed. In absence of batteries and given installation costs, PVSC profitability depends on the variable part of the retail price (which is the value of the self-consumed electricity), the price at which we sell the surplus electricity to the grid, and the share of electricity generated that we self-consume vs. sell to the grid.

PV is the first technology that allows consumers to directly generate their own electricity and interact with the system. For this reason, retail tariffs have to adapt their structures to allow all technologies to compete in the same conditions. A competitive tariff design for prosumers would allow them to sell the surplus electricity at wholesale price (Figure 1), any price above wholesale would be an implicit subsidy and vice versa. In a competitive setting, likewise, all fixed costs of the system should be included in the fixed part of the retail price, so prosumers do not evade that cost through self-consumption and all externalities should be internalized. 

Figure 1. PVSC profitability depending on the price at which the surplus electricity is sold to the grid. Source: López Prol & Paul (2024).

Figure 2 shows residential and industrial PVSC profitability (internal rate of return) in Europe in a hypothetical competitive scenario, in which the variable part of the retail price only includes the marginal cost of providing electricity, and the surplus electricity is sold to the grid at the average wholesale price. Only currently internalized external costs are included. Under these conditions, PVSC is profitable in most countries except the Northern countries due to low insolation and the Eastern European countries due to low internalization of externalities.

Figure 2. PVSC profitability (internal rate of return, %) in Europe in a hypothetical competitive situation with the currently internalized external costs. Source: López Prol & Paul (2024).

Battery prices are falling fast (see, e.g. Home batteries, electric vehicles or smart appliances can help prosumers increase the share of electricity they self-consume from their PVSC system. This would be beneficial as the wholesale price (at which they would sell electricity to the grid) is generally lower than the retail price (at which they would buy from the grid). Thus, while prosumers can’t influence those prices, they can influence the share of self-consumption, either by behavioural changes or by installing storage or demand-management devices along with their PVSC system. To see whether it pays off to increase the PVSC system cost with complementary demand-management devices or not we propose the concept of profitability landscape, which illustrates the trade-off between the potential increase in self-consumption and the increase in system cost caused by these additional investments. Figure 3 shows the profitability landscape for the industrial and residential segments in Spain. Residential profitability (internal rate of return) in Spain under a competitive scenario would be ~5%. The landscape shows that profitability would be the same (5%) if the self-consumption share increases to ~62.5% and system cost to ~2€/Wp, i.e. we can profitably double our system cost (e.g. by installing batteries) if that allows us to self-consume more than 62.5% of our generation. López Prol & Paul (2024) provide profitability landscape for all EU countries.

Figure 3. Profitability landscapes: internal rate of return (lines from 0% (light solid on the top) to 20% (dark dashed at the bottom)) depending on the share of self-consumption and the installation cost. Source: López Prol & Paul (2024) (see appendix for profitability landscapes of all EU countries). Source: López Prol & Paul (2024).

The slope of the profitability curves shows the returns to demand management, i.e. the higher the slope, the more we can increase our system cost for each additional percentage point achieved by the additional demand management devices installed along the PVSC system. The residential segment generally has higher incentives for demand management due to the higher spread between wholesale and retail prices (see Figure 4 in López Prol & Paul, 2024).

PVSC presents both risks and opportunities for decarbonization. Retail tariffs have to adapt to the new phenomenon of demand-side generation by providing the right incentives to investors. López Prol and Steinger (2017 and 2020) explain the successive PVSC regulations in Spain and their impacts on PVSC profitability. López Prol and Paul (2024) introduce the concept of profitability landscapes for PVSC and simulate profitability in Europe in a hypothetically competitive regulatory setting to finally quantify what are the main determinants of the returns of coupling PVSC systems with additional demand management devices.