Better off on my own? The drivers of residential self-consumption in Europe

Grid defection, or at least partial grid defection, is an increasingly attractive alternative for residential customers.

• The financial attractiveness of PV + battery energy storage system (BESS) is highly sensitive to changes in policy (e.g., feed-in tariffs [FITs], investment grants, fiscal benefits) and the structure of tariffs (e.g., fixed or variable rate).
• Partial grid defection using solar PV or solar PV + BESS is already competitive with retail rates in Germany and Italy owing to different incentive schemes.
• New business models, such as virtual power plants (VPPs) and new tariff structures, are already emerging to capitalize on grid defection for long-term customer retention

Why do consumers defect from the grid?

Economic benefit is the main driver of the increase in on-site generation at the residential level. The combination of increasing retail power prices and the decline in both solar PV (36% decline over the past 6 years) and residential battery costs (64% decline over the past 6 years) has increased the attractiveness for a consumer of investing in a grid-defection system. Despite technology cost reductions, grid-defection support policies, such as surplus remuneration and tax and investment incentives, will continue to contribute to the economics, and hence the rollout, of grid-defection systems. The retail price structure (fixed versus variable components) is key to the profitability of grid-defection systems and could be used by governments as a means to control the amount of power self-consumed.

Social factors also contribute to the rollout of grid-defection systems, but this is secondary to the economic benefits. Being seen as "greener" and participating toward the wider energy transition is becoming a more significant driver. Customers want to be seen as environmental pioneers through installing solar generation and storage. They are taking control of their energy supply and want to increase their autonomy. In countries such as Germany, this has been closely linked with growing disaffection with large, traditional energy suppliers.

Future-proofing may also be a factor as consumers see (full or partial) grid defection as a way to hedge physically against power retail price escalation driven by "the virtuous circle of self-consumption". Over the past five years the more than 120 GW of subsidized renewables were added to the European grid driving the overall power system cost from 34 to more than 50 billion euros per year. As consumers are leaving the grid, and power demand is stagnating in Europe, these costs are transferred to fewer consumers, increasing further the retail price and improving the economics for further grid defection.

Self-consumption "sweet spots" in Europe

Today, Italy and Germany are the main markets for PV self-consumption. This is driven largely by subsidies, investment grants, and tax breaks. Italian consumers benefit from a net metering scheme and tax breaks (up to 50% of total invested costs), while Germany benefits from an FIT (12.2c€/kWh) for excess PV generation. Self-consumption will continue to be an attractive solution-even without subsidies for PV or battery installations. Countries with high retail prices (e.g., Germany ) or high solar outputs (e.g., Italy) have the necessary fundamentals to make PV or PV + battery installations competitive with the retail price for grid power. While full grid defection will continue to be uneconomic, costs will continue to decrease and retail tariffs will stabilize. IHS Markit expects both PV and PV + BESS solutions to be competitive after 2020 in Germany and Italy, even without support schemes.

France has a large potential for self-consumption but visibility on future tariff structure remain the largest obstacle for further development. In France, residential self-consumption was finally approved by the French parliament in August 2016. An investment grant, reaching 800 €/kW and a surplus remuneration scheme were introduced early this year. Despite high solar outputs, delay in publishing the retail tariff structure for grid defection projects is slowing down residential grid defection projects developments.

100% grid defection physically unrealistic but virtually feasible

Although it is realistic for customers to achieve a self-consumption ratio of 50-70% by installing a battery alongside their PV systems, the hardware costs and the potential physical space limitations to achieve 100% self-consumption are prohibitive. Stakeholders have started to act as electricity suppliers and offer customers propositions whereby the customer achieves 'virtual' independence such as virtual metering and flat electricity rate.

Going forward the combination of IoT (Internet of things) and Distributed Ledger technologies (Blockchain) would be key enabler to further virtual and physical grid defection.

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Posted 30 October 2017

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.