SELF CONSUMPTION OF PV ELECTRICITY

July 2013

Position Paper

1. INTRODUCTION

In 1996, the liberalization process launched in the energy sector had one major objective: ensuring affordable energy prices for all European consumers and businesses while giving them the possibility to choose freely their energy suppliers on the basis of competitive offers. In the meantime, the situation has improved but is far from being perfect. This process - started 17 years ago - will be completed fully only when consumers and businesses are free to choose between a classical electricity supplier and themselves; in other words, when they can produce and consume their own electricity, a process that is called “self-consumption”, once such an option becomes competitive with the grid electricity offer. Following the recent calls of the European Commission to develop strategies in order to “empower consumers”,1 this briefing paper explores the benefits of self-consumption of PV-generated electricity, as well as the remaining barriers and challenges to deploy it throughout Europe. In doing so, it shows that, if based on a sustainable business model and on a proper integration into the grid, self consumption could turn PV into one of the preferred choice of consumers and businesses. For the sake of clarity, one should distinguish between two different mechanisms – both of them allowing for self-consumption of PV electricity - currently being implemented in the EU:

Definitions

Self-consumption: The possibility for any kind of electricity consumer to connect a photovoltaic system, with a capacity corresponding to his/her consumption, to his/her own system or to the grid, for his/her own or for on-site consumption, while receiving value for the non-consumed electricity which is fed into to the grid.

Net-metering: A simple billing arrangement that ensures consumers who operate PV systems receive one for one credit for any electricity their systems generate in excess of the amount consumed within a billing period. In this case, production and consumption are compensated over a larger time frame (up to one year), and the network should be regarded as a long term storage solution, with the PV electricity being occasionally injected and consumed later on.

1 See “Making the internal energy market work”, COM(2012)663 final or “Renewable energy: a major player in the European energy market”, COM(2012)271 final.

2. CURRENT PRACTICES

Self-consumption mechanisms have recently been promoted in several European countries. In some cases, pure net-metering schemes have been developed (such as in Belgium, Denmark and the Netherlands), while other countries have favored mechanisms promoting an instantaneous consumption of the electricity produced. Various intermediate schemes exist between these two approaches. In Spain, self-consumption (without any specific premium) has been authorized since November 2011 under certain conditions for systems up to 100kW. Discussions are however still ongoing regarding the introduction of a partial net-metering scheme, in which the compensation of electricity flows would be calculated on a yearly basis while some grid costs might have to be paid by the PV system owner. The evolution in Germany towards incentivization of self-consumption started in 2011 with a premium tariff for self-consumed electricity. The remuneration was even higher if a rate of self-consumption over 30% was reached, encouraging prosumers to increase their direct consumption ratio. Since then, the decreased generation cost of PV has prompted German authorities to consider self-consumption incentivization without a premium tariff: with the retail price of electricity in most cases currently higher in the residential segment than the generating cost of a PV system, self-consumption becomes obviously more profitable than an awarded Feed-in-Tariff (FiT). In addition, the review of the German Renewable Energy Act (EEG) in 2012 has introduced a limiting factor for grid injection which is favoring direct consumption: with only 90% of the production eligible for a FiT (for systems above 10kWp), the legislation promotes self-consumption over pure production. In Italy, the country’s fifth energy bill – Vth Conto Energia – introduced a specific self-consumption premium scheme which is in place as from Q4 2012 and is very similar to the scheme introduced in Germany in 2011. The Scambio sul posto scheme is an alternative to Vth Conto Energia. It ensures an economic remuneration for the amount of energy produced and injected into the grid and consumed instantaneously: this is an initial (and complex) attempt to favour direct consumption, featuring a mix of net-metering aspects (especially for grid costs) and self-consumption (for electricity costs). However, to implement the self-consumption in a sustainable way it could be useful to increase the power limit to access to this scheme (for example from 200 kW to 5 MW). In general terms, recent experience shows that net-metering schemes prove to be an efficient tool to kick-start a market or to develop a specific segment representing a limited installed capacity. With increasing PV penetration levels however, pure net-metering schemes ensuring a compensation of grid charges are raising the question of the system operators’ remuneration in the long run, and therefore potentially represent a barrier to innovation at the distribution level. The figure below provides an overview of existing self-consumption/net-metering schemes in the EU.

Figure 1 – Overview of main net-metering and self-consumption schemes in Europe

Source: EPIA

Self-consumption mechanisms are progressively being developed in the EU, but should be encouraged further given their multiple benefits.

3. BENEFITS OF SELF CONSUMPTION

A. FACILITATE THE TRANSITION TOWARD THE POST FEED-IN-TARIFFS ERA Self consumption will ensure the deployment of PV by reducing overall supporting costs and facilitate the transition towards the post Feed-in-Tariffs (FiTs) era. With increasing share of self-consumption indeed, the current reliance of PV generators on a dedicated financial support (such as FiTs or Green Certificates - GC) will be reduced and ultimately suppressed: an increasing part of the revenue stream will in this case be ensured by the savings made on the electricity bill, measured against the retail electricity price on a specific market. In addition, direct consumption schemes have a major advantage over FiTs: they consider only the difference between consumption and production, and therefore promote the very nature of decentralized PV. While FiTs refer to all electricity flows, self-consumption schemes focus on the net balance and look more closely at the physical reality of electricity exchanges between the prosumer and the grid.

B. KEEP GRID COSTS UNDER CONTROL THROUGH A REDUCTION OF PEAKS If properly designed, self-consumption can ease the planning and operation of distribution grids. Firstly self-consumption reduces the amount of electricity instantaneously injected into the grid at midday, thus shaving peaks of PV production (figure 2). Secondly, where combined with other decentralised solutions (heat pumps, decentralised storage, air conditioning), self-consumption can also help shave consumption peaks in the evening. In the medium term, the capacity to respond to DSOs needs or market price signals will also help support distribution grids operation - and even sometimes avoid costly grid reinforcements.

Figure 2 – PV production peak-shaving strategy at household level

Source: Total

C. DRIVE ENERGY CONSERVATION AT CONSUMER LEVEL The energy efficiency gap is one of the most important challenges of EU energy policy making. Long since identified, often lamented but never successfully addressed, the EU is not on track to achieve its energy efficiency target. Self-consumption can make a significant contribution to close this gap. A key success factor for tapping into the potential that lies in energy conservation is the behavior of energy consumers. Self-consumption directly rewards consumers’ efforts to optimize energy consumption. It accelerates the market uptake of energy optimization applications such as real-time

monitoring and in-house display applications. Hence, by supporting self-consumption more explicitly than is currently the case, the EU can accelerate the implementation of energy efficiency objectives.

D. HELP LEVERAGE PRIVATE INVESTMENTS Meeting the EU’s ambitious 2020 targets in the field of climate protection, energy efficiency and renewable energy will require substantial investment from a wide range of actors. Unleashing the full potential of self-consumption across Europe will make a significant contribution to finance the energy transition. This trend has already started. Private investment in small distributed renewable energy was the second most important source of renewable energy finance after asset finance in G-20 nations in 2010. The strong growth in small distributed capacity in Europe was mostly driven by solar PV. Hence, enabling the final consumer to invest in renewable energy generation will open and sustain a source of finance that is less exposed to financial market risks and uncertainties.

E. GIVE EUROPE A NEW COMPETITIVE ADVANTAGE Europe’s importance as an end-consumer market of PV applications creates opportunities for companies active in Europe to develop a leading edge understanding of the needs of end-use consumers. For some time, dynamics were mostly determined by optimizing returns under a FiT system. Now, the transition towards a more competitive market and the development of self-consumption in some countries (e.g. Germany, UK, and Italy) provides some first market experiences in self-consumption oriented end-user applications. Such a trend will also push market players to propose new solutions in order to smarten the interface between the prosumer and the rest of the electricity system, a field of expertise in which the first–mover advantage will be decisive.

4. CURRENT BARRIERS AND CHALLENGES

A. THE ABSENCE OF REAL COMPETITIVE AND LIBERALIZED RETAIL ELECTRICITY MARKETS As explained above, in a self-consumption mechanism, an increasing part of the revenue stream will be ensured by the savings made on the retail electricity bill. Hence, competitive and liberalized retail electricity markets allowing for cost-reflective prices are an absolute pre-requisite for making self-consumption a competitive solution. In 2011 however, electricity prices at retail levels are still regulated in 17 Member States as shown in the figure below. As highlighted by the Agency for Cooperation of Energy Regulators (ACER) in its 2012 Market Monitoring report, “the share of households supplied at regulated electricity prices (approx. 127 million households) out of the total households (approx. 247 million) supplied with electricity in the analysed countries (the EU-27 and Norway) was higher than 50% in 2011”. If set at a level which is not cost-reflective, regulated prices may hinder competition and therefore represent an entry barrier to self-consumed PV electricity.

Figure 3 – Retail electricity price regulation across Europe - 2011

Source: ACER Market monitoring report 2012, CEER National Indicators (2012).

Interestingly enough, while progressive market coupling is reducing the price differentials between countries, a very large variation of retail electricity prices can still be observed across Europe (figure 3). This is mainly due to the three following elements:

The taxes: over the period 1998-2011, data from the European Commission’s Energy Observatory show that “any liberalization effect on the energy component in end consumer bills has been curtailed in most Member States by a strong rise of taxes on selected energy products”. The situation varies a lot from one country to another, with taxes representing

less than 10% of the retail electricity prices for domestic consumers in the UK, while this

share rises to more than 50% in Denmark2.

The transmission and distribution grid charges: these can make up an important part of the electricity bill as well and are distributed very differently from one Member State to another.

The “energy component” of the electricity bill: here it should be noted that there is no direct and systematic link between the evolution of wholesale electricity prices and the retail electricity prices for domestic consumers. The example of Germany is presented in the figure 4 below. As underlined by ACER, “in general, it can be noticed that the energy component of retail prices in countries without regulated prices correlate better with wholesale prices than in countries with regulated prices. This is intuitive, as the retail commodity element in countries with regulated prices in place is not exposed to the full dynamics of the market”.

Figure 4 – Correlation between wholesale prices (power Exchange day-ahead prices) and retail prices (energy component only, excluding network charges, taxes and levies) – example of Germany

Source: ACER Market monitoring report 2012

The combination of all these factors lead to a situation where electricity prices at retail level are varying significantly from one Member State to another (figure 5).

2 DG ENER Energy Market Observatory, Price developments on the EU retail markets for electricity and natural gas in the EU: preliminary finding (2012).

Figure 5 – Electricity post-tax total prices in EU-27 plus Norway – 2010 and 2011 (EUR cent/kWh)

Source: ACER Market monitoring report 2012, Eurostat (2012),CEER National Indicators (2012).

Aside from these varying components in the end-user electricity bill, several other elements still impede the deployment of self consumption in many countries, such as for instance the still high concentration in retail electricity markets.

B. A LACK OF CONSUMERS AWARENESS AND OF UNDERSTANDING ABOUT THE MOTIVATION TO SWITCH TO EXISTING ALTERNATIVES Ensuring that consumers will turn to PV electricity requires understanding the determinants behind the consumers’ choices regarding their electricity supplier. However, consumers are today not massively switching to another supplier, while obviously more competitive offers already exist on the market: Data from ACER (figure 6) indeed depict very low customer switching rates.

Figure 6 – Consumer switching rates from one energy supplier to another across the EU

Source: ACER Market Observatory 2012, CEER National indicators (2012)

Although switching to another supplier is not a pre-requisite to develop self-consumption, better understanding the consumer behavior will be important to position a “PV offer” in the broader portfolio of existing solutions.

As shown recently by the Customer-Led Network Revolution (CLNR) project3, it however seems that consumers are today more willing to consider Time of Use (TOU) electricity tariffs, if they stand to benefit from lower electricity charges.

C. THE CURRENT UNDER-DEVELOPMENT OF ENABLERS: SMART METERS, STORAGE AND FINANCING In order to make sure that final consumers can reap the benefits of a full liberalization of retail electricity markets, the level and timing of self-consumption should be able to respond to external signals. This can be done via smart meters which could also facilitate the communication with DSOs, TSOs or another third party, thus relieving the local grid (and hence reducing network investments). The European Commission has recommended that smart meters be equipped with a set of minimum functionalities4. These include: metering of active and reactive power injections and withdrawals, two-way communication between the smart meter and the external grid, remote and frequent readings and remote maintenance and control of the meter by the grid operator, provision of frequent updates of the readings to the costumer, data storage and retrieval for the costumer, possibility of automatic transfer of information about advanced tariffs options to the customer. In March 2009 (when the Commission’s recommendation was issued), only 10% of EU households had “some sort of smart meter installed”5. Directive 2009/72/EC concerning common rules for the internal market in electricity requires Member States to equip 80% of the households for which a cost-benefit analysis is positive with smart meters by 2020. A report summarizing the results of the cost-benefit analyses will be issued by the Commission in the second half of 2013. Today already, it appears that some countries have negatively assessed smart meters roll-out (Belgium, Czech Republic and Lithuania).

Another facilitator for the development of efficient self-consumption is storage, either at prosumer or at community level. Currently, the market penetration of storage devices is still very low. Such devices are still quite expensive and dedicated policies to encourage their market uptake do not exist in Europe. The recent announcement in Germany about an incentive scheme for batteries installed in combination with PV systems of up to 10 kW will however bring some experience. With a decreasing cost of storage systems, the wish to better reap the benefits linked to increased self-consumption rates could represent an indirect incentive for storage. According to EPIA calculations6, assuming that storage brings the self-consumption rate to 70% and considering the declining PV Levelised Cost of Electricity (LCOE), a residential PV system owner will have between €0.05/kWh and €0.19/kWh available to invest in a complementary storage device by 2020. The question however remains on when to charge and discharge storage systems so as to also generate added value for the local grid situation and for the system operation. As consumers become a new source of investment for the development of PV, new consumer financing structures and facilities are starting to be considered and developed.

3 For more information, see http://www.networkrevolution.co.uk 4 2012/148/EU: Commission Recommendation of 9 March 2012 on preparations for the roll-out of smart metering systems. 5 Commission’s press release “Energy: Commission paves the way for massive roll-out of smart metering systems”. 6 EPIA, Connecting the Sun, Solar Photovoltaics on the road to large-scale grid integration, 2012.

D. THE GRID INTEGRATION AND SYSTEM OPTIMIZATION CHALLENGE Since the excess of electricity which will not be self-consumed will have to be injected into the electricity system, new grid integration measures will have to be implemented, as described by EPIA in its recent report “Connecting the Sun”7. One important question will be how to ensure an optimal use of self-consumption so as to reach an optimum at household, distribution and system levels. Since the standard load profile of electricity consumers does not fit with the usual PV system output, complementary technical measures may be needed to ensure a better match of the two. As highlighted above, storage could play an important role, which in return raises the question of the overall competitiveness of combined solutions. However, the fact that interactions between the consumer and system levels still need to be explored should not be used as an excuse for not developing self consumption.

E. THE INVESTMENT CHALLENGE AT DISTRIBUTION LEVEL The IEA has estimated that the cumulative investment in distribution grids in Europe between 2012 and 2035 amounts to $ 778 billion8. In a majority of cases, these investments will have to be done by Distribution System Operators (DSOs). These investments are triggered by a series of evolutions such as the deployment of smart meters, the upgrade or building of new lines or grid components (transformers) or the integration of an increasing share of distributed generation. The evolving role of DSOs, notably to properly integrate distributed generation, will require more resources, as well as an increased capability to plan investments. The existing grid tariff level and structure in the vast majority of EU countries (figure 8) is decided by national regulators, so as to allocate the grid costs to the different behavior of grid users. Tariffs with high fixed term, based on power, better reflect the grid costs which are mainly fix costs, but discourage energy efficiency behavior of consumer. On the other hand, tariffs with high variable term based on consumption, put revenues of DSOs at a risk when consumption is reduced.

7 EPIA, Connecting the Sun, Solar Photovoltaics on the road to large-scale grid integration, 2012. 8 IEA, World Energy Outlook 2012, New Policies Scenario, table 6.5.

Figure 7 – Examples of electricity bill structures in 5 European countries – total energy grid

price in € cent/kWh in 2010

Source: SunEdison

Though technically justified by complex models, the regulators decision concerning the structure of the bill is a political one based on a compromise between two legitimate objectives. Any agreed upon structure favors some consumers and penalizes others, in terms of economic contribution to grid costs. In the current discussion about grid tariff reforms, self-consumption of PV electricity cannot be held responsible for a redistribution of grid costs per se, since decreasing reliance on the grid through self-consumption has an effect on the system similar to energy efficiency gains, which nobody would put into question. Accordingly, with an increasing number of people deciding to self-consume PV electricity, the question of a sustainable model to ensure the remuneration of DSOs in which each stakeholder will have to play its role is raised, in particular in countries with high variable grid tariffs.

F. THE REGULATORY AND MARKET DESIGN CHALLENGE National regulatory frameworks will play a crucial role in favoring or limiting the development of self-consumption. A basic pre-requisite is to ensure that everywhere in Europe, consumers will be allowed to consume directly the electricity they are producing. On a more macro-economic level, retail and wholesale markets will need to be better coupled. Large volumes of self-consumed PV electricity could at high penetration levels modify the load profile and thus the trade on the spot market. At the same time, there is a need to ensure that benefits generated by renewables on the wholesale market are properly passed on the final consumers. Finally, and even if the remuneration of the PV generator will rely less on the wholesale electricity

prices, the question remains on how to valorize the excess of electricity that needs to be injected into the grid9.

5. POLICY RECOMMENDATIONS

If properly implemented, self consumption of PV electricity can reduce and ultimately suppress the reliance on dedicated financial support, ease system integration and keep grid costs under control. The followings steps should therefore be implemented without delay:

A. PHASE-OUT REGULATED ELECTRICITY PRICES AT RETAIL LEVEL Under the supervision of the European Commission, regulated electricity prices at retail level should be phased out. Member States should in parallel ensure that final consumers are able to better reap the benefits of a liberalized retail electricity market.

B. LIFT ALL REGULATORY BARRIERS TO SELF CONSUMPTION Every consumer in Europe should be allowed to consume the electricity she or he is producing. While some countries start favoring self consumption, others do not allow for it or have set up schemes which discourage consumers to go for such an option. The upcoming European Commission’s guidance on the reform of national support schemes should help Member States to establish regulatory frameworks favoring self consumption.

C. ENSURE A FAIR DISTRIBUTION OF GRID COSTS As previously highlighted in this paper, remuneration mechanisms necessary to cover the investments in the distribution grids will have to evolve in order to face a series of evolutions. In general terms, new financing models will have to ensure that each stakeholder will play its role. A differentiation of grid charges could be envisaged, reflecting the impact that a final consumer has on the grid. When it comes to PV prosumers, the following arrangement should be pursued: For the consumption component:

The electricity withdrawn from the grid (i.e. not produced by the PV system but consumed) should be subject to the same grid tariff rules as those applied to any other electricity consumer. As outlined above, this could be subject to a possible differentiation of grid charges on the basis of the impact that a final consumer has on the grid. Against this backdrop, self-consumed electricity should not be exposed to any grid costs and taxes, since it remains within a close system interacting neither with the distribution grid nor with the market. The effect of self-consumption on the reallocation of grid costs in this case is very similar to energy efficiency measures. The prosumer will simply have a different load profile, which should be addressed as any other evolving consumer’s load profile. This should be

9 This question will be explored further in the upcoming EPIA Briefing Papers.

taken into account when assessing the effect of self-consumption on the reallocation of grid costs when it comes to discussions about future energy market designs.

For the production component:

For electricity injected into the grid in the European power system, costs of network operation for all power producers are generally borne by consumers, rather than generators. This rule should also apply for PV.

Once market failures are addressed and competitiveness is achieved, PV generators could progressively bear more responsibilities in terms of balancing. However, it should be noted that today’s market rules prevent a large majority of PV generators from participating in intra-day markets, so that they do not have a direct possibility to reduce their imbalances. It will therefore be important to develop frameworks favoring aggregation strategies and intra-day markets which are fit for variable RES, before attributing specifically any balancing costs to PV generators.

In general terms, arrangements for existing PV installations should be maintained and retroactive changes should be forbidden.

D. SUPPORT THE DEPLOYMENT OF ENABLERS

Together with the roll-out of smart meters and the deployment of Demand Side Measures, storage at household or at local level will favor the development of self consumption. When defining functionalities of smart meters, European Standardisation Organisations should consider the ability to bi-directionally communicate on active/reactive power input/off-take; in addition, they should foresee the possibility of a greater remote controllability of power flows.

Aside from the R&D efforts which should be intensified, storage should be developed further. In particular, an assessment of the storage potential should be conducted at national level by 2014 and communicated to the European Commission. This could be reflected in the upcoming discussion paper on storage that should be published by the European Commission.

A better participation of demand in system management should be incentivized through the network codes currently being developed by ENTSO-E. More generally, strategies to develop demand response should be encouraged at European level.

E. MAKE THE BEST USE OF THE FLEXIBILITY PROVIDED BY THE PROSUMER Self consumption appears as a genuine solution to develop PV. This will however require either adapting the load profile of electricity consumers to the PV production pattern, in particular through Demand Side Measures, or storing PV electricity to match the consumption needs over the day. In this sense, the prosumer will also become an increasing source of flexibility for DSOs. With higher penetration rates of PV, this capability to adapt can be valorized as an ancillary service provided to the DSO against a fair remuneration:

PV electricity (stored or not) can be used in some cases to stabilize local grids rather than

being self-consumed; Demand Side Measures can be used in some cases to better manage the system instead of

adapting to the PV production pattern.

DSOs should explore ways of valorizing and remunerating these capabilities, which may effectively limit overall grid costs.

F. ENSURE A FAIR REMUNERATION FOR THE EXCESS OF ELECTRICITY INJECTED INTO THE GRID Even with high levels of self consumption, part of the electricity generated by a PV system will have to be injected into the grid. Developing an adequate power market design that allows for an appropriate remuneration of renewables in the long run will therefore be crucial if current support mechanisms are to be ultimately replaced. However, different distortions, barriers and fundamental market design problems will have to be solved before that. In particular, ensuring an access to wholesale electricity markets will be key to valorize PV electricity and allow small prosumers to receive a fair remuneration for their excess of production, reflecting the real value of PV electricity at the time it is sold. Aggregation will play as a facilitator in this process and should therefore be facilitated through dedicated regulatory national frameworks.

EPIA Policy and Communications Working Group: Chairs: Oliver Schaefer, Stella Willborn Vice-Chair: Sebastian Goeke Work leaders: Javier Areitio Toledo, Valerick Cassagne Contact: Alexandre Roesch – a.roesch@epia.org