TODAY’S STUDY: RESIDENTIAL SOLAR’S INCREASING PRICE COMPETITIVENESS

PV Grid Parity Monitor – Residential Sector; 2nd issue

May 2013 (Eclareon)

Executive Summary

This is the second issue of the PV Grid Parity Monitor for residential consumers. Since the first issue of the residential GPM (2nd half 2012), almost every country improved its grid parity situation. This is due mainly to the reduction of the PV LCOE, as depicted in the Figure below. This has been caused by a reduction in the cost of PV systems, driven by lower equipment prices (across the board) and increased competition in emerging markets (like Brazil, Chile or Mexico).

If we have a look at the evolution of residential electricity costs (see Figure below), we notice a growing trend in most European markets, while LatAm countries enjoyed reductions.

As well as Grid Parity proximity, regulatory support to grid parity (mainly via net metering or net billing mechanisms) varies significantly from country to country. These two variables (“Grid Parity Proximity” and “Regulatory support to PV self-consumption”) are represented in the Figure below.

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The following conclusions can be drawn from the above Figure:

• PV Grid Parity is being pushed away by a high discount rate in Brazil and low irradiation in UK, added to the high installation prices in both markets.

• In California, PV is still far from being competitive mainly due to generous government incentives that enable high margins throughout the entire value chain and push up prices.

• The South of France has already reached grid parity, while the North of the country is still far from competitiveness due to low irradiation levels.

• In Mexico, PV self-consumption is a good investment opportunity for DAC consumers (households that pay more than twice the price of the average residential tariff).

• In Spain, although a clear grid parity situation exists, there is no convenient regulation allowing PV self-consumers to feed their excess generation into the grid in exchange for a compensation (either monetary or energy compensation).

• In contrast, the net-metering system in California is a trendsetter on how to promote PV self-consumption. The recently approved regulations in Brazil and Chile seem, on a first evaluation, an excellent instrument to foster PV self-consumption.

This economic reality should lead to the creation of PV markets based on self-consumption PV systems, especially in countries where grid parity is more evident. This is something already happening in some cases. Although poor regulatory support is often a barrier for market creation, we think that the absence of conscious consumers (who still do not understand and do not trust self-consumption schemes) and a well-prepared PV industry (mainly in emerging markets) are the main reasons not to see larger volumes being generated.

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Introduction

The PV Grid Parity Monitor analyses PV competitiveness with retail electricity prices for residential consumers and assesses local regulation for self-consumption of twenty cities in ten countries. It is based on a rigorous and transparent methodology (detailed in Section 4) and has used real and updated data provided by local PV installers, local PV associations and other reliable players from the PV industry. It also includes a specific and in-depth analysis of retail electricity rates for each of the cities taken into consideration. The results of the analyses show that PV Grid Parity (defined as the moment when PV LCOE becomes competitive with retail electricity prices, assuming that 100% of the electricity is self-consumed instantaneously has already been reached in several of the cities analyzed in this report. [Since 100% of instant self-consumption is not likely to happen in residential systems, net metering/net billing or equivalent mechanisms will be crucial to achieve economic feasibility for this kind of installations, provided that a good match of generation and consumption curves is not possible.] This fact does not imply that PV technology does not need governmental support anymore. On the contrary, in order to make the development of a PV self-consumption market possible, policymakers should concentrate their efforts on reducing administrative barriers and creating or improving regulatory mechanisms to allow PV self-consumers to feed their excess generation into the grid in exchange for a compensation (either monetary compensation under the net-billing system or energy compensation in the net-metering mechanism). On this side, our analysis shows that regulations can still be improved in many countries. It should be noted that it is the combination of both elements (grid parity and proper regulation) what generates the investment opportunity. The existence of one of them only, will not generate any market effect.

Even in the ideal case where PV Grid Parity is combined with an efficient regulatory framework, a massive market is not likely to develop owing to the nature of the investment (i.e., based on savings). However, given that grid parity is an economic reality, policymakers should create the proper frameworks to adapt the energy system to the increasing importance of distributed generation, and in so doing ensure that it is properly monitored, channelled, and regulated.

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It is important to understand that Grid Parity represents a unique opportunity to develop a local and sustainable power generation technology in a cost-effective way, however, proper regulatory changes must be made to make this possible. This is part of the Smart Grid Challenge, which will require taking into consideration economic factors to design the grid of the future: one prepared for a massive penetration of distributed generation.

Important considerations

• This report is exclusively focused on the residential sector. Self-consumption PV installations in the industrial and commercial sectors may represent a very interesting opportunity as well but they should be analyzed separately since several characteristics differ from those of residential installations (PV installation costs, retail electricity prices, etc.). The industrial and commercial sectors will be analyzed in a separate issue of the GPM Series.

• This report only compares PV LCOE with retail electricity prices. However, under some local net-metering/net-billing or equivalent mechanisms, PV electricity fed into the grid is compensated/priced below retail electricity rates, making this investment less attractive. - When this regulation exists, a case-by-case analysis should be conducted to determine the economic viability of each individual PV installation (installations with a high percentage of self-consumption will be more profitable than installations that feed an important part of their production into the grid).

• Only two cities per country were analyzed. This implies that in some countries (such as Chile and Brazil) where irradiation and retail electricity prices vary significantly, the Grid Parity diagnosis might largely differ from region to region.

• Other barriers that could hinder the development of the PV self-consumption market (e.g. administrative barriers) have not been analyzed in this report.

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Over the last few years, cost-competitiveness of PV technology has experienced a considerable evolution: the remarkable growth of the global PV market generated economies of scale, which added to constant technological improvements and demand-supply imbalances have led to a significant decline in costs of this technology.

Jointly with the cost reduction of PV-generated electricity, the constant increase in electricity prices has been pushing the arrival of PV "grid parity": the moment when the cost for a consumer of generating its own PV electricity is equal to the price paid to the utilities for grid electricity.

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Important assumption for Grid Parity definition

As a result of the mismatch between PV generation and electricity consumption, part of the electricity produced by the PV system will not be instantaneously self-consumed by the household and will thus be fed into the electric grid. The value of this “Excess PV electricity” depends on each country’s regulation:

• If self-consumption is not regulated, the PV producer receives no compensation in exchange for the excess PV electricity fed into the grid.

• If an self-consumption regulation exists (e.g. a net metering/net billing mechanism), the owner of the installation does receive a compensation (either monetary or as consumption credits in kWh) for the excess PV electricity fed into the grid.

Depending on the regulation, the value of this compensation can be equal to retail electricity price or lower. For the sake of simplicity, this report compares PV Levelized Cost Of Electricity with retail electricity prices but the reader must bear in mind that, depending on the local self-consumption regulation, a part of the PV generation (i.e. excess PV electricity) might be lost or valued at a lower rate.

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Once PV grid parity is reached, for some end-consumers of electricity it would make sense from an economic point of view to self-consume PV-generated electricity instead of purchasing electricity from the grid.

As expected, this reality has excited the curiosity of electricity consumers, regulators, utilities, PV manufacturers and installers, among other parties. In line with this interest, the objective of the PV Grid Parity Monitor is to increase awareness of residential PV electricity self-consumption possibilities by periodically analyzing PV cost-competitiveness in some of the main current and potential PV markets: Brazil, Chile, Germany, Italy, Mexico, Spain, and USA (California).

In order to assess PV cost-competitiveness in each country, the costs of generating PV electricity should be compared to residential retail electricity prices:

• The cost of PV-generated electricity is expressed as the Levelized Cost of Electricity (LCOE), defined as the constant and theoretical cost of generating a kWh of PV electricity that incorporates all the costs associated with the PV system over its lifetime.

In this study, PV LCOE is based on country-specific (and city-specific, if applicable) variables needed to accurately quantify the cost of PV-generated electricity (average PV system lifespan, initial investment, O&M costs, electricity generation over the system’s lifespan and discount rate, among others).

• When considering retail electricity prices, a maximum of 3 different variable electricity prices paid by residential consumers for each of the cities under study are presented.

The PV Grid Parity Monitor may well be one of the most comprehensive analyses of PV grid parity to date, because:

• It is based on a rigorous and transparent methodology (detailed in Section 4).

• It uses real and updated data as inputs, which include turnkey quotations of local PV-system installers from each of the countries under study, not estimates.

• It includes specific and detailed information per country (and city, when applicable) such as the discount rate, retail electricity prices, and inflation.

• It is recurrent, as it will be updated every semester to show the evolution of PV grid parity proximity.

• It analyzes not only potential markets in Europe but also some of the most promising ones outside Europe (Brazil, California, Chile, and Mexico). The PV Grid Parity Monitor consists of two main sections:

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• Results Section, where PV LCOE is quantified for each of the locations under study and PV grid parity proximity is analyzed.

• Methodology Section, which includes a thorough explanation of the LCOE concept, and the main assumptions and inputs considered.

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LCOE vs. electricity grid prices: Considerations for a fair comparison

When analyzing cost-competitiveness of PV technology against grid electricity, one should bear in mind that what is really being compared is the cost of electricity generated during the entire lifetime of a PV system against today’s retail price for electricity. This reality has important implications because, while future grid electricity prices are likely to change, PV LCOE is fixed as soon as the PV system is bought. Consequently, to counteract this mismatch, when assessing PV competitiveness against the grid, PV LCOE should ideally be compared against today’s electricity price, but accounting for the estimated future increase in retail electricity rates over the entire PV system lifetime.

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