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Is there a future in solar panels in flanders?

“I’ll put my money on the sun and solar energy!
What a source of POWER!”
– Thomas Alva Edison, 1931

In recent years, the gradual reduction of government subsidies and other financial support for solar panels has reduced their profitability. For those becoming ‘prosumers’ by buying solar panels, this reduction has lengthened the payback time on their solar panel investment from a range of 4-6 years in 2011 to a range of 12-17 years today.

In this article, we address 3 questions – two from the prosumer perspective, and one from the market parties (supplier, distributor & government) perspective:

  1. From the prosumer perspective:
    • How will profitability of investing in solar panels as a private prosumer evolve in the coming years?
    • As of when will investing in solar panels be profitable without any financial support mechanism?
  2. From the market parties perspective:
    • What will be the impact on the different market parties when current financial support mechanisms stop?

But before we can address these questions, we must first look at the different support mechanisms currently in place and at the key parameters impacting the profitability of solar panel investments.

There are 4 financial support mechanisms for solar panels that are gradually being reduced or discontinued:

  1. Tax deduction: Until the end of 2011, 40% of the investment cost of solar panels could be deducted from your taxable income. Today, this support mechanism no longer exists.
  2. Green power certificates: The Green Power Certificates have been reduced from €450/MWh for 20 years (in 2006), to €22/MWh for 15 years (in 2013).
  3. No injection grid fee tariff: Initially, injecting electricity in the distribution grid was free of charge for the prosumer. As of 1 January 2013, the prosumer must pay an injection grid fee tariff of about €53.50 per installed kW[1].
  4. Compensation mechanism: The electricity meter counts back when energy is injected in the distribution grid[2]. This implies that injected energy is valorised at the (high) sales price at which the prosumer buys his energy.  This mechanism is still in place, provided the prosumer chooses a fixed injection grid fee tariff.

In addition to the above support mechanisms, there are two key parameters that impact the profitability of solar panels:

  • The investment cost: Over the last 10 years, the initial investment cost has halved and is now about €1,800/kWp[3]. In addition to this initial cost, there is the cost of replacing the inverter every 12 years (= €1,600)[4].
  • The electricity sales price on the residential market is currently about €217/MWh and is expected to increase annually by 3.5%[5].

Prosumer perspective

To answer the first two questions regarding profitability from the prosumer’s perspective, we made a financial model to simulate the profitability of a solar panel investment for 4 scenarios.  We assume the following for all 4 scenarios:

  • The solar panels have a lifetime of 25 years
  • The prosumer consumes 6.4 MWh annually
  • The prosumer has a solar installation of 5 kWp.

The complete set of parameter values used for each scenario is listed at the end of the article.

Scenario 1: Compensation mechanism in 2013

The first scenario is the base scenario and simulates the current situation: that is, the prosumer benefits from the compensation mechanism, the current electricity sales price is €217/MWh with an annual increase of 3.5%, and the prosumer pays €1,800/kWp for his solar installation.

This results into: Scenario 1
Initial Rate of Return – IRR (%) 8
Payback time(years) 12
Initial investment cost (€) 9.000

Table 1: Parameters for scenario 1 – compensation mechanism 2013

Scenario 2: Compensation mechanism in 2023

The second scenario simulates a situation in 2023 in which: the prosumer can still benefit from the compensation mechanism but no longer from green power certificates, the electricity sales price has risen to €295/MWh with an annual increase of 3.5%, and the prosumer pays €1,000/kWp for his solar installation.

This results into: Scenario 2
Initial Rate of Return – IRR (%) 20
Payback time(years) 6
Initial investment cost (€) 5.000

Table 2: Parameters for scenario 2 – compensation mechanism 2023

Due to the decrease in the cost of solar panels and the increase in the electricity sales price, the profitability increases substantially. We believe that, given such positive returns for prosumers, the market parties that pay for the compensation mechanism will want to stop this last support mechanism. So, let’s look at scenario 3.

Scenario 3: No compensation mechanism 2023, without prosumer effort

The third scenario simulates a situation in 2023 in which: there are no more support mechanisms (the compensation mechanism is also discontinued), the electricity sales price has risen to €295/MWh with an annual increase of 3.5%, and the prosumer pays €1,000/kWp for his solar installation. The prosumer does not change his consumption behaviour.

This means that electricity injected into the distribution grid is measured separately from the electricity taken off the distribution grid via a smart meter, and it is valorised at an injection commodity price that suppliers want to pay. Of course, this price will be lower than the price charged for consumption (which includes not only a consumption commodity price but also a consumption grid fee price and taxes). We conservatively estimate the supplier will at least want to pay €50/MWh injected.

This results into[6]: Scenario 3
Initial Rate of Return – IRR (%) 16
Payback time(years) 7
Initial investment cost (€) 5.000

Table 3: Parameters for scenario 3 – no compensation mechanism 2023, without prosumer effort

So, even without a compensation mechanism, the profitability still seems worthwhile by 2023.  However, when the prosumer changes his consumption behaviour, he will be able to increase the profitability even further.  We clarify this point in scenario 4.

Scenario 4: No compensation mechanism 2023 with prosumer effort

The fourth scenario simulates a situation in 2023 in which: there are no more support mechanisms (the compensation mechanism is also discontinued), the electricity sales price has risen to €295/MWh with an annual increase of 3.5%, and the prosumer pays €1,000/kWp for his solar installation. The prosumer does change his consumption behaviour.

Without a compensation mechanism, the prosumer will benefit most when he can consume the energy he produces. In this case, he can avoid having to pay an expensive price of €295/MWh for that energy; and, if he does not consume the produced energy but injects it into the distribution grid, he will receive only €50/MWh.

Based on historical production profiles and the standard consumption profile as per SLP21, we determined that, at a produced energy/consumed energy ratio of 0.7[7], the current coverage factor of the produced vs. consumed energy = 33%, which means that, out of every 1,000 kWh of energy produced, 330 kWh is consumed by the prosumer, and 670 kWh is injected into the distribution grid.

The coverage factor impacts the profitability of solar panels considerably and can be influenced by behaviour change and new technologies. The prosumer can alter his consumption by adapting his behaviour (positive effect of 5 to 10% on coverage factor), and new technologies will make it easier to alter consumption as well. Consumption load can be shifted, resulting in a higher coverage factor, by (for example): Schedule Washing and dry cleaning, storing energy in batteries, storing energy in the form of heat, …

In this scenario, we assumed that the coverage factor increases from 33% to 42% via a combination of behaviour change and technological support.

This results into: Scenario 4
Initial Rate of Return – IRR (%) 20
Payback time(years) 6
Initial investment cost (€) 5.000

Table 4: Parameters for scenario 4 – no compensation mechanism 2023, with prosumer effort

This profitability corresponds with the profitability of scenario 2 (compensation mechanism 2013, no prosumer effort) – meaning that, with a small effort, the prosumer can reach the same profitability. 

Overview four scenarios

This results into: Scenario 1 Compensation 2013 Scenario 2Compensation 2023 Scenario 3No compensation 2023 – no prosumer effort Scenario 4 No compensation 2023 – with prosumer effort
Electricity sales price (€/MWh)[i] 217 295 295 295
Total Consumption (MWh)[ii] 6,4 6,4 6,4 6,4
Total Production Capacity (kWp)[iii] 5 5 5 5
Production utilization (h)[iv] 85% 85% 85% 85%
Coverage production vs consumption profile (%)[v] n/a n/a 33% 42%
Variable grid tariff injection (€/MWh) [vi] n/a n/a 4,51 4,51
Fixed grid tariff injection (€/kWp)[vii] 53,5[8] 73
Cost solar panels (€/kWp)[viii] 1.800 1.000 1.000 1.000
Cost replacement inverter every 12 years (€)[ix] 1.600 1.600 1.600 1.600
Green solar power certificates (€/produced MWh)[x] 22 n/a n/a n/a
Commodity injection price (€/injected MWh)[xi] n/a n/a 50 50
Energy price evolvement (%/year)[xii] 3,5% 3,5% 3,5% 3,5%
Life cycle solar panels (years)[xiii] 25 25 25 25
Initial Rate of Return –IRR (%) 8,0% 20% 16% 20%
Payback time(years) 12 6 7 6
Initial Investment Cost (€) 9.000 5.000 5.000 5.000

Table 5: Overview used parameters within different scenarios

Figure 1: Cumulative cash flow for the four different scenarios

Market parties perspective

Not only will the government benefit when the compensation mechanism is stopped[9], but the suppliers might benefit from this as well. The total benefit for the different market parties can be calculated by comparing either:

  • the difference between the cash flow of each market party as per scenario 2 (compensation 2023) and as per scenario 3 (no compensation 2023, no prosumer effort), or
  • the difference between the cash flow of each market party as per scenario 2 (compensation 2023) and as per scenario 4 (no compensation 2023, prosumer effort).

If the compensation mechanism is no longer in place, this will result in an increase in the prosumer’s consumption energy invoice[10].  This generates extra revenue for three parties: Supplier (35%), Distributor (42%) and Government (23%).

This revenue could be used partly to support the investment cost of the smart meters at the prosumers and partly to pay an injection commodity price.

The net present value of the cash flows (timing 25 years, discount rate 10%) per access point is positive for the Supplier and for the Government and negative for the Distributor (as it does not compensate the fixed injection tariff which will no longer be valid).

  Compensation 2023 versus No compensation 2023 NO prosumer effort Compensation 2023 versus No compensation 2023 WITH prosumer effort
Supplier 1.470 € 702 €
Distributor -350 € -1.271 €
Government 1.055 € 550 €

Table 6: Net present value by access point (discount rate=10%, 25 years)

Conclusion

Let us conclude by answering the 3 initial questions:

  1. The profitability of investing in solar panels in Flanders will start to increase steadily again – provided that the historical downward trend of solar panel costs and the historical upward trend of electricity prices both keep their historical pace in the future. We believe these are valid assumptions for Flanders over a period of 10 years.
  2. If you assume an IRR between 10-12%, we believe that, in about 5 years, investment in solar panels will be profitable without any financial support mechanism.
  3. If the compensation mechanism would be discontinued, we estimate that the suppliers would benefit the most, and the additional generated revenue, both for suppliers and government, would most probably be more than enough to cover the investment costs for converting to smart meters for prosumers.

If you would like to obtain more information regarding this article don’t hesitate to contact Frank Sels via frank.sels@trilations.com

 Authors: Alex Curtoud & Bert Schepers

Sources

X, CREG, Voorstel netvergoeding infrax 26 November 2012, http://www.creg.info/pdf/Beslissingen/121206-Voorstel_netvergoeding_Infrax.pdf (consolidation 15 April 2013).

X, VEA, Definitief rapport VEA – 8 januari 2013, Bijlage 1: centraal parameterdocument, http://www2.vlaanderen.be/economie/energiesparen/milieuvriendelijke/monitoring_evaluatie/2013/VEA_Parameterdocument_jan2013.pdf (consolidation 15 April 2013).

[1] The exact amount varies by distribution grid operator(DGO), we took the price of the DGO Infrax. The prosumer also has the option of paying a variable injection distribution grid fee by injected kWh; however, in this case, he can no longer benefit from the compensation mechanism, which will be disadvantageous for the majority of the prosumers. X, CREG, Voorstel netvergoeding infrax 26 November 2012, http://www.creg.info/pdf/Beslissingen/121206-Voorstel_netvergoeding_Infrax.pdf ( reduced below X, CREG, netvergoeding) (consolidation 15 April 2013)

[2] The compensation mechanism is only valid for a decentralised installed capacity =< 10 kW

[3] Based on an installation of 5 KWp – X, VEA, Definitief rapport VEA – 8 januari 2013, Bijlage 1: centraal parameterdocument,http://www2.vlaanderen.be/economie/energiesparen/milieuvriendelijke/monitoring_evaluatie/2013/VEA_Parameterdocument_jan2013.pdf ( Reduced below X, definitief rapport VEA) (consolidation 15 April 2013)

[4] X, definitief rapport VEA (consolidation 15 April 2013).

[5] X, definitief rapport VEA (consolidation 15 April 2013).

[6] We did not take into account that, without a compensation mechanism, it will be more profitable for the prosumer to have a day-night tariff, resulting in higher profitability.

[7] In the financial model, we set the total consumption at 6.4 MWh and the total production at 4.25 MWh (= 5 kWp * 85% production usage) => produced energy 4.25 / consumed energy 6.4 = 0,7.

[8] X, CREG, netvergoeding, (consolidation 15 April 2013).

[9] Extrapolating the overall impact on the economy of the potential decrease in activity of companies producing and installing solar panels.

[10] Provided there is no massive shift in consumption load.

[i] X, definitief rapport VEA (consolidation 15 April 2013).

[ii] X, CREG, netvergoeding (consolidation 15 April 2013).

[iii] X, CREG, netvergoeding (consolidation 15 April 2013).

[iv] X, CREG, netvergoeding (consolidation 15 April 2013).

[v] Estimated via analyses by TRILATIONS

[vi] X, definitief rapport VEA (consolidation 15 April 2013).

[vii] X, CREG, netvergoeding (consolidation 15 April 2013)

[viii] X, definitief rapport VEA (consolidation 15 April 2013)

[ix] X, definitief rapport VEA (consolidation 15 April 2013)

[x] X, CREG, netvergoeding (consolidation 15 April 2013)

[xi] Estimated via analyses by TRILATIONS

[xii] X, definitief rapport VEA (consolidation 15 April 2013)

[xiii] Estimated via analyses by TRILATIONS

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