The Economics of Home Solar PV

Friends, you may find this hard to believe, but someone posted something incorrect on Twitter the other day. They suggested that home installations of solar PV will soon become uneconomic.

I commented that I didn’t agree. But to my surprise, several people commented further suggesting that Home Solar was not only uneconomic, it was tantamount to theft!

At first I was bewildered: How could these people be so wrong? But then it turned out these people were economists, and so were quite un-phased by being wrong.

But after an extended exchange, I began to understand their perspective, and that is what this article is about. I still think they are wrong, but the perspective shift was interesting.

Home Solar PV: Simple Economics

The economics of home solar PV are fairly straightforward. A system of 10 panels (~£5,000) and a 5 kWh battery (~£5,000) will conservatively generate around 3,500 kWh/year of electricity which is roughly the annual usage of electricity by a household. The system will generate (on average) about 15 kWh/day in summer and perhaps just 2 kWh/day in winter depending on local shading.

Typically around 2,000 kWh will be used within the home saving (at current prices) 2,000 × 34p/kWh ~ £680/year which would otherwise have been purchased. Additionally, the extra 1,500 kWh will be exported earning a much less impressive 5p/kWh or £75 /year. So a roughly £10,000 investment has a return on investment of ~£750/year, a nominal 7.5%/year return. It’s possible to do a bit better or a bit worse depending on panel orientation and battery size.

By any conventional economic assessment, this is a reasonable investment.

Home Solar PV: Simple Carbonomics

Considering the carbon dioxide emissions avoided, the home solar PV system above might involve roughly 2,100 kg (2.1 tonnes) of embodied carbon dioxide emissions. That’s based on:

• Panels: ~400 kgCO2 per peak power (in kW) of a panel – leading to around 1.6 tonnes of emissions (Links 1, 2).
• Battery: ~100 kgCO2 per kWh of storage – leading to around 0.5 tonnes of emissions for a 5 kWh battery (Link)

Each kWh of electricity generated might avoid nominally 0.23 kgCO2 emissions. And so the system would avoid 3,500 x 0.23kg ~800 kgCO2/year. Additionally, by using the battery to avoid consumption at peak hours, the system could also help reduce grid costs and the use of ‘peaker’ plants.

This is a pretty reasonable carbon investment.

Home Solar PV: How could this not make sense?

So from an economic and carbonomic point of view, Home Solar PV systems with or without batteries definitely make sense. So what was this Twitterista going on about?

Well it turns out that they were not talking about the UK but were instead referring to (if I recall correctly) Belgium or Holland. In these countries the majority of people do not pay fixed price tariffs on their electricity. Instead they pay tariffs which change every 30 minutes depending on market conditions. In the UK this practice is not at all common.

And the situation they were referring to was the situation where there was so much solar power being made available by large solar farms, that while the sun was shining, solar power would cover the majority of electricity required. At this point, the economic market value of any extra solar generation would be zero.

This is a situation that will become increasingly possible as we expand renewable generation and the market will need to evolve to cope with this reality. But in the UK it would not make much difference. Most of the electricity generated on a rooftop is used within the home, and this avoids paying the market rate, so the savings would be unchanged. However, the price paid for exporting electricity might possibly fall to zero, but since that was only worth £75/year, it doesn’t really significantly the economics.

If consumers were exposed to market electricity prices that varied every 30 minutes through the day, then the cost of buying electricity when the Sun shone might fall to zero, and so consumers would be able to have free electricity whether or not they had a solar PV system on their home. In this situation, having a home battery would make a lot of sense because one could fill it for free!

But that is not the situation in the UK. I think it is good to have relatively fixed tariffs so that people can budget for likely electricity costs. In this way, professional traders take calculated risks for which they earn a reward. I think that is better than exposing us to the risks of a market which when under stress can become extremely volatile, and potentially bankrupt people who keep their electricity on when the system is under stress. For example, in the 2021 power crisis in Texas, in between blackouts, the price for some customers rose to $9/kWh – up from a few cents per kWh resulting in some customers facing bills of $1,000/day.

So the situation in which half-hourly market prices sometimes falls to zero is unlikely to affect the UK market directly. And even it did, people with home solar would still be getting free electricity at times when the market cost was not zero.

At the heart of this persons argument was an economic rationale that any investment in an economic activity which is sub optimal – represents a waste. This is based on a hyper-capitalistic view of society in which optimal capital deployment will result in optimal outcome. This is patently, just not in correspondence with reality.

Home Solar PV: Theft?

Theft! Surely I was dealing with an idiot here? But here is their argument.

The tariffs we pay for electricity are divided into two parts:

• a so-called ‘standing charge’ typically about £0.40/day and
• a ‘unit’ charge of typically £0.34/kWh.

Originally the idea was that this reflected the cost structure of the electricity supply industry.

• The ‘standing charge’ would pay for the costs of the electricity network that gave us the possibility of buying electricity, whether we used 1 kWh/day or 100 kWh.
• The ‘unit charge’ would pay for the extra costs – notably the fuel – used to generate every extra unit of electricity.

So with this structure, using solar PV to go ‘off grid’, I would still pay the standing charge, and so contribute my fair share to the maintenance of the electricity network.

However, standing charges are no longer just a way to pay for the fixed costs of the electricity network. They now include costs of paying for the mass failure of electricity companies in 2021/22, and elements of subsidy for ‘greener’ generation. And some elements of the unit charge actually reflect fixed costs.

So if I avoid paying for units of electricity, I am avoiding paying for some of the fixed costs of the network, and thus forcing those costs to be paid by people who can’t install solar PV. In short, by using solar PV I am stealing from the community and increasing the cost of electricity for everyone else. At this point I would understand if you wanted to just stop reading – why read words by a social reprobate like me?

Except of course that this is just nonsense. There is nothing that I – or anyone else – can do about the assignment of fixed costs to standing/unit charges. The whole mess is the combined result of weak regulation, energy industry lobbying, and government meddling. All no doubt undertaken with the aim of ‘making things better’. But if the side-effect of these historical changes is to cast someone trying to reduce carbon dioxide emissions as a thief, then I think that view is non-sense.

From a wider perspective, we see that the costs of regulatory failure have been assigned to electricity bills rather than gas bills. This political choice drives people to continue to use gas for heating when using heat pumps would save the country money AND reduce carbon dioxide emissions. So by a similar argument, gas users are ‘stealing’ from electricity users.

In short, our energy supply market contains distortions. All the companies that went bust made large profits which were privatised, but their losses are now being spread over all our bills. In other words, the profits were privatised and the losses socialised: standard operating procedure in a mis-regulated monoply. This is a failure of market design and regulation and it’s not my fault!

Home Solar PV: But I’ve got no roof?

Of course if you don’t have a roof, you may feel excluded from this discourse. But by using Ripple, you can buy a fraction of a solar park, and a pro-rata share of the profits will be deducted from your energy bill.

Having previously built one wind turbine (Graig Fatha), and commenced construction of the 8-turbine Kirk Hill Wind Farm, Ripple are now (Spring 2023) looking for people to contribute money to build a solar park in Devon.

The deal is this:

• You can buy a share of the solar park from £25 to a value equivalent to 120% of annual electricity consumption priced at roughly £1/kWh.
• So if annual electricity usage is 2,900 kWh, then if you pay roughly £3,000, you will own a fraction of a solar park that will generate as many kWh as you use in a year.
• Their financial projection is summarised below:

It’s clear the projected savings are modest (~ £180/year) which for a £3,000 investment amounts to about 6%/year.

But it is interesting to compare these cost with the costs of the home solar PV system described above. The Ripple investment is cheaper per kWh generated and gives you less to worry about. For example, you don’t have to worry about pigeons. Of course, none of this is financial advice: honestly: don’t listen to me. I only care about the carbon dioxide.

Keep your eye on the carbon

If you are fortunate enough to have a few thousand pounds to invest, then putting your money into renewable energy projects either on your roof or remotely via Ripple is – in my estimation – a pretty reasonable thing to do. Whatever the location, this reduces the demand for electricity generated by gas-fired power stations and so reduces our country’s carbon dioxide emissions.

Arguments about this being unfair are – I think – spurious. We live in a society in which almost all economic activity generates a ‘trickle-up’ effect that enriches the already wealthy and in general gives rise to net carbon dioxide emissions. In this context, spending resources on renewable energy projects is amongst the least worst things we can do – and helps to build a renewable energy infrastructure from which we will all benefit.

 

Tags: Solar, Solar PV