Navigant Research Blog

Self-Consumption Markets Are the Future of Solar

— May 2, 2017

Regulatory changes and the increase in retail electricity prices have made some markets ripe for new business models built around increasing solar self-consumption by adding other energy solutions (like batteries or Internet of Things, or IoT).

In my previous blog, I showed how solar installations can benefit from increasing levels of self-consumption. When this is the main economic driver for solar, we define the market as a self-consumption market. While the blog cited the United Kingdom as an example, that is not the only country in which this strategy works.

European Countries Lead Self-Consumption Markets

Here’s a selection of the most attractive self-consumption markets:

  • Germany: Germany is in a similar situation to the United Kingdom. The feed-in tariff in the country (€0.123/kWh [$0.135/kWh]) is significantly below some retail electricity prices. For example, residential rates cost around €0.30/kWh ($0.33/kWh). To fully benefit from a solar installation, Germans need to displace as much as possible of their own consumption. In addition, Germany offers an incentive to install batteries along solar PV systems. German government incentives cover up to 30% of cost for a PV system battery, making the economics of self-consumption even more attractive.
  • France: Like in Germany, the current French feed-in tariff of €0.1382/kWh ($0.151/kWh) for behind-the-meter installations of up to 36 kWp is below retail electricity prices (€0.20/kWh [$0.22/kWh] for residential customers). So there is also an arbitrage opportunity for installations, although the economics are weaker than in Germany.
  • Spain: Despite Spain’s bad reputation in the renewables sector—well deserved given the retroactive changes to its incentive program and the introduction of the infamous tax on the sun—the country is becoming an attractive self-consumption market for installations under 10 kW. Spain has the best solar resources in Europe. Now the levelized cost of distributed solar is below the retail electricity price, opening an arbitrage opportunity for solar installations with high levels of self-consumption.

Self-Consumption Markets by Attractiveness

(Source: Navigant Research)

US Self-Consumption Markets Are Trying to Catch Up

The economics of self-consumption of solar in the United States are weak given the dominance of net metering as the main tool to incentivize solar. There are some states that are moving away from pure net metering that will increasingly be more attractive to providers of integrated solutions.

One example is Arizona. Per the new settlement reached between Arizona Public Service (APS) and local solar advocacy groups, energy exports of new distributed solar installations in Arizona will not be included in the old net metering program. Instead, it gives all new distributed solar customers the option to take a demand-based rate or a time-of-use rate.

If the new structure is approved by the Arizona Corporation Commission (ACC), it would set the self-consumption offset rate around ¢12/kWh, which includes a grid access fee that APS solar customers must pay. The new export rate, based on the ACC’s newly adopted resource proxy model, would be ¢12.9/kWh. Although these changes will not be enough to attract investment in expensive technology like batteries, it does send a signal to end users to start behavioral changes to increase self-consumption. It might be enough to encourage some level of IoT investment in energy management systems and automation.

Near-Term Growth Is Unlikely

From a purely growth perspective, self-consumption markets are likely to disappoint in the short term. The extra complexity they present needs to be well understood by solar players. In addition, end users and business models will need to be tested before being rolled out cheaply en masse. The strategies that are successful in those markets—and less dependent on incentives and more so on solar economics—are most likely to rule the distributed solar sector in the future.


Can Batteries Save the UK Solar Market?

— April 27, 2017

Last week, E.ON and EDF Energy both announced plans to launch solar plus storage programs for their UK residential customers. E.ON and EDF are two of Europe’s largest energy providers, and EDF is a large owner of coal, gas, and nuclear plants in the United Kingdom with a 13 GW portfolio.

EDF Energy has formed a joint venture with Lightsource, the largest solar operator in the United Kingdom, to launch Sunplug, a company that will be offering residential solar. Sunplug has indicated two contracting options for its systems:

  • One option will be to sign an index-linked, 20-year power purchase agreement with an initial price of £0.099/kWh ($0.123/kWh). Assuming 2% escalation over 20 years, this would average to £0.12/kWh. For comparison, the cheapest electricity tariff in the United Kingdom costs £0.12/kWh or £0.15/kWh ($0.15/kWh or $0.19/kWh) with or without fixed monthly costs, respectively. In this option, Sunplug is the owner of the system and receives any government incentives available to the installation and is responsible for any changes to it.
  • Sunplug’s second option will be a direct purchase for £7,999 ($9,999) that includes the equipment (5 kW PV system, inverter, and 6.6 kWh battery), 2-year labor cover, operations and maintenance, and a 2-year license for its home energy management system—but does not include installation or value added tax.

E.ON’s offerings are less clear, but the direct purchase for a typical system will start at £7,495 ($9,368) including the battery, or £4,495 ($5,618) for the PV system only.

The Economics of Self-Consumption

An interesting question is why both utilities decided to enter the UK residential market with solar plus storage programs rather than only solar. A key driver is the current regulatory environment, which has elevated the attractiveness of self-consumption in the UK solar market.

In the United Kingdom, a residential solar system can currently access the following revenue streams:

  • Generation tariff: This is paid for every kilowatt-hour generated, regardless of its destination. It is currently set at £0.0414/kWh ($0.05/kWh) and is indexed to the UK inflation rate.
  • Export tariff: In theory, this is paid for the electricity exported to the grid. For the time being, the government assumes that half of the kilowatt-hours generated are exported for installations smaller than 30 kW. Currently, the export tariff is set at £0.053 ($0.066).
  • Self-consumption: This is the customer’s bill reduction due to the avoided electricity consumption from the grid. In a northern European country, residential customers are typically only able to use about 20%-30% of the electricity produced by their own solar system without any storage or significant behavioral changes. Assuming 20% self-consumption and an electricity tariff of £0.12/kWh ($0.15/kWh), a solar system owner would save the equivalent of £0.024/kWh ($0.03/kWh) generated.

Taking these revenue streams into account, a residential solar owner with 20% self-consumption would receive £0.09 per kWh ($0.11/kWh) generated, whereas an owner with 100% self-consumption would receive £0.186 per kWh ($0.23/kWh) generated, 106% more. Of course, a battery would be necessary to achieve total self-consumption for a reasonably sized residential system. Using E.ON’s figures, the battery cost is £3,000 ($3,750). In other words, to earn 106% more per kilowatt-hour, the owner would need to invest only 67% more than the solar-only system—not a bad deal!

 UK Solar PV Plus Storage Revenue Streams

(Source: Navigant Research)


Are Inverter Players and Data Loggers the Gatekeepers of Future Residential Solar Services?

— April 5, 2017

Inverter and data logger companies, the little cousins of the solar OEM world, are sometimes seen as playing a secondary role in the industry. The cost of inverters is usually a fraction of module costs and an even smaller fraction of the total installed cost of a residential solar installation. But their location in an installation—between the solar modules and the grid connection—gives their manufacturers an opportunity to play an important role in a distributed energy as a service world.

Who Owns the Client Relationship?

In my Solar as a Service (SOaaS) report, I argue that large SOaaS player like SolarCity, Sunrun, and Vivint Solar need to evolve their offerings to offer advanced energy services. Their hold on the client relationship gives them an advantage against external players offering this type of service. But despite grabbing most of the headlines in the solar industry, the truth is that there are only a handful of large SOaaS players. All of them are active in one market—the United States—and combined manage only between 50% and 60% of all distributed solar installations in the country.

Globally, there is simply no large installer or SOaaS provider with a significant hold on the market. This opens the question of who can own the client relationship in this fragmented world, especially for small installations.

Inverter and Data Logger OEM Providers

It is difficult to see small local installers investing heavily in this type of service, but their OEM providers could. While module manufacturers take the lion’s share of the hardware cost of an installation, their product is essentially dumb. On the other hand, inverter and data logger OEMs do offer relatively smart products.

Inverters and data loggers with monitoring software have been part of distributed solar installations since at least the late 2000s, when distributed solar gained popularity, and in virtually all installations after 2012. Data loggers (external or as part of inverters) and monitoring tools have been used by installers and inverter companies as differentiators in an otherwise very competitive market. While there aren’t any public figures on active users, there are some examples of the penetration in the market. SMA—a leading inverter OEM—has put its user figure at around 250,000 residential end users. Using an average of 5 kW per installation, each company is monitoring around 1,250 GW. Solar-Log has a similar number of data loggers in the field, providing monitoring and other services to around 11.6 GW of installed capacity (including large installations). Other inverter companies like SolarEdge and Enphase have also integrated monitoring services into small-scale products.

Most of the smart monitoring tools have been developed and run at a loss by inverter and data logger OEMs. By doing this, they have inserted themselves in the routines of solar installation owners, as the monitoring tools are the interface between the solar system and the installation owner.

Ideal Candidates

Monitoring tools can become the seed of more interesting energy services if the OEMs keep building the products offered through their tools. Most of them already allow for battery installations along with solar, and some companies are already adding ways to monitor loads and become home/building energy management tools. They could even open the platform to allow third-party service providers through an app store to add other services like generation forecasting, artificial intelligence-based load management, etc. The interface role that inverter and data logger OEMs play in solar installations, combined with their large user base, makes them ideal candidates to provide advanced energy services.


Is Quality Over Quantity the New Game in Solar?

— November 21, 2016

Rooftop SolarThe solar module manufacturing industry is facing the second abrupt collapse of module prices in a decade. Prices fell by 12%-20% between January and October 2016 (depending on the technology and location) as the industry expanded manufacturing while the Chinese government decided to reduce its targets amid a deceleration in other markets, particularly in Europe.

Manufacturers have been in planning mode for the last few months thinking how best to ride out this dry spell. The last time the market saw a significant oversupply (between 2009 and 2012), prices fell 80% in a 3-year period. The survivors of the crisis managed to do so mostly by cutting costs, hence offering better value for the same product.

New Strategies Needed

But the same strategy is unlikely to work this time around, according to the US Solar Photovoltaic System Cost Benchmark: Q1 2016 report published by the National Renewable Energy Laboratory. The report states that for a residential installation in the United States in 2015, non-equipment-related costs were $1.91/W, or 65% of the total cost, while module costs were $0.64/W (21%) and inverter and other equipment costs were only $0.42/W (14%). Therefore, a 20% reduction in the cost of a module only reduces the total installation cost by about 4%.

The impact for utility-scale projects is more important. Installation costs for these projects vary significantly depending on the size, but non-hardware costs usually make up between 45% and 55% of the final cost of a project, while the module represents between 40% and 45%. Although cheaper modules could make a difference in this market, the current auction system used in different countries to give long-term agreements has made the segment ultra-competitive, leaving only a razor-thin margin (if any) for the whole value chain.

Manufacturers Adjusting Course

After months of planning, companies are now announcing new strategies to their investors. SolarCity/Tesla announced an alliance with Panasonic for its Gigafactory, as well as a new set of building integrated PV solar tiles and shingles aimed at carving out a luxury segment from the residential market, especially for new builds and re-roofers.

First Solar also chose quality over quantity. On November 16, it took the decision to scrap its Module 5 product, which had been expected to debut next year. The new plan is to instead accelerate the production schedule of its Module 6 and introduce it in 2018, a year earlier than previously planned.

On December 9, SunPower will be the last American module manufacturers  to make an announcement of its strategy. We will see if the company follows a similar pattern, but for the time being, it seems that quality is winning over quantity.

In Navigant Research’s Next Generation Solar PV report, published before the latest collapse of module prices, we forecasted that advanced solar modules would become mainstream by 2025. The plunge in prices could slow the adoption of new technologies, but it seems that American manufacturers are willing to sacrifice market share and are doubling their bets on higher quality (and higher price) products to keep positive margins.


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