Convenient and Inconvenient Truths about Self-Consumption

Before anything else, I would like to clarify that I envision self-consumption as an inciting option for the electricity consumer. What's more, I vehemently endorse it, but not before recommending the electrical consumer to be fully informed before diving into this new possibility of self-producing energy at home. I do not blindly advocated it by default, nor is it the only solution for someone who wants to reduce their bill and carbon footprint. In this article, I set forth my opinions with some grounding points that lie at the heart of the discussion, some of which may sound as sterling news to you, and others perhaps not so much.

Convenient truths

1-    Self-consumption reduces the electrical consumption derived from the network for a home or a business, with the ensuing reduction in emissions and the collateral economic savings of the kilowatt-hours not purchased, as well as – depending on the type of self-consumption – a propitious income per residual kilowatt-hour that is be poured into the network.

2-    Self-consumption has become manifestly cheaper in recent years, and not only is it attaining affordable levels for a family household, but it is inciting new business models where the entire investment is subsumed at no initial cost to the consumer. Many marketers already offer installation and take care of all the steps, including maintenance services.

3-    Self-consumption reduces invoice volatility, partially isolating it from fluctuations in fuel prices and changing energy policies hanging from political switchovers.

4-    Self-consumption is all the more profitable the more consumption moves towards sunny hours, such as the use of the oven, washing machine, dishwasher, heat pump or electric vehicle charging.

5-    Self-consumption encourages local employment, both for the installation, panel maintenance as well as other components.

6-    Self-consumption reduces losses in transmission and distribution networks, since electricity is consumed as it is produced, thus dodging loss that is inherent to the transit of energy through hundreds of kilometers of cabling.

7-    Self-consumption takes advantage of rooftop surfaces without current special use (ignoring surface occupied for some years now by solar thermal systems for water heating).

8-    With regards to self-consumption capacity, Spain is lagging behind countries like Germany, Italy, and even England, despite the fact that these countries have less sun as a resource.

9-    It never made sense to discourage self-consumption through the ‘sun tax’. The recent suspension of said tax is fairly reasonable and pragmatic according to European regulations and according to the rights of consumers to freely choose their energy supply basket.

Inconvenient truths

1-    Self-consumption is less energy efficient than solar energy on a large scale, or utility scale. Effectively, at the same installed power (and efficiency of the chosen panel), large-scale solar generates more kilowatt-hours due to its generally better orientation, especially if they are equipped with solar trackers which is the most sought-after technology trend today, and even more so with bifacial panels, which seem to foreshadow the future trend. To put it another way, the same energy can be produced nationally with less installed capacity in large solar plants, than in myriads of small plants distributed over rooftops across half of Spain. This perceptible energy gain far exceeds network losses eschewed with self-consumption, effectively making large scale solar plants more efficient for the overall national system.

2-    At a macroeconomic level, self-consumption is less economically efficient than large-scale solar energy by a typical factor of 1.5 to 3 times, depending on the size of the installation, necessary roof structures, commercial offerings, etc. At recent prices for small domestic installations, the installed kilowatt of self-consumption can cost threefold the investment of large installations –including the corresponding VAT. This means that if we wished to cover X% of national electricity consumption with photovoltaic energy, achieving it through large-scale technology would cost half that of small-scale distributed panels. Note that a considerable portion of the cost reduction would be attributed to the fact that less employment would be required in large-scale, so said saving would come at the cost of creating fewer jobs.

3-    The expansive development of self-consumption does not reduce the need for electricity networks in Spain since networks are designed to provide unremitting back-up to the system, especially during the most critical instants, typically after sunset. Similarly, the firm generation capacity in the electrical system required to avoid blackouts is immutable, irrespective of self-consumption development and growth.

4-    At AFRY we project a ‘pool’ price downturn during sunshine hours in the medium and long-terms due to the high solar power that will be installed across the Iberian market. This means that savings from self-consumption due to lower energy purchases in daylight hours will eventually shrink. The same rule applies to the sale of surpluses to the grid, which will deplete and become less lucrative. But shouldn’t a decrease in pool prices during sunlight hours be good news for the consumer?

5-    At AFRY we also project a shrinkage in access tolls in the low and medium-terms, due to the termination of regulated payments related to the historical deficit rate and due to the gradual reduction of subsidies to existing renewables, even after considering possible additional regulated costs associated with the 'Energy Transition'. This means that the savings on self-consumption due to avoided tolls will be trimmed. But shouldn’t low tolls also be expectant news for the consumer?

6-    Solar panels have a typical degradation rate of 0.3% to 1% per year, depending on their quality and cost. This implies that at 20 years the panel will produce at least 10% less, thus further truncating savings from self-produced energy.

7-    The three previous points imply that the real economic savings of self-consumption for small consumers, including all costs, will most likely be lower than what all economic feasibility studies concurrently construe. Part of the reason is that, due to the difficulty of making detailed prospective studies and the eclectic amount of uncertainties in the future, all studies I have encountered are based on extrapolating past simulations with data from the previous year, i.e. 'If you had installed a solar panel last year, given the avoided tolls and hourly pool prices, your annual bill would have been €25/month lower, or the equivalent to €300 less throughout the year. As this installation costs around €3,000, the payback would be 10 years.’ Or, ‘an investment of €3,000 with 20 years saving €300/year gives you an IRR of 8%’. In business models in which the marketer charges a monthly fee, whilst undertaking the annual investment and maintenance, the calculation to be made if said fee is lower than the avoided savings should read the following: ‘We charge you a fee of €20/month covering rent and maintenance, so you will get a net saving of €5/month and €60/year.’

Should the foregoing projections be fulfilled (though projections are never guaranteed!), decreasing savings simply imply that the installation will not be as profitable as initially thought – or perhaps not profitable strictly speaking, depending on the annual purchase and associated maintenance price. Moreover, the reverse possibility also exists with regards to variable tolls and/or growing energy prices during sun hours. As it happens, the latest government proposal is to rise the variable term of grid tolls and reduce the fixed term per contracted capacity, aiming at increasing energy efficiency and interest in self-consumption -at the cost of disincentivising peak load control and economic interest in distributed storage.

8-    The economically optimal sizing of self-consumption systems must be done on a case-by-case basis and there is a wide caseload variety according to the consumption hourly profile. But in general, the optimum sizing is a relatively small panel, around 10% to 20% of the contracted capacity, and self-producing around 10% to 30% of annual consumption. It should be small enough to hardly ever pour surpluses into the network, even though 'the network' will reward them at market prices. Any ‘economically oversized’ system can also produce net savings, but lower than a smaller installation. In any case, any consumer who is thinking of expanding their self-consumption capacity to abate climate change or to appease market volatility, whilst putting net bill reduction as a peripheral outcome, they can and should install a panel as large as they wish!

9-    As of today, self-consumption systems with batteries are far from being economically profitable – except for atypical cases such as irrigation systems or consumption far away from the network. This does not mean that whoever who seeks to maximise their self-consumption percentage should not install a battery. It seems fair to say that the motivation to maximise the level of self-consumption, despite being economically inefficient, is as worthy a noble cause as buying a large and expensive but low-consumption appliance. Not every purchase decision should be based on cost. Fortunately, the realm of innovation counts on ‘early adopters’ and selective consumers who make decisions based on the excitement and endorsement for the new technologies!

10- The total photovoltaic self-consumption capacity that will be installed in the Spanish system, has an adverse impact on large-scale plants capacity. This is because large-scale plant investments will be primarily provoked by wholesale market price signals, the 'pool', which is indifferent to whether a solar panel is installed on a roof or in a large plant across the Andalusian plain. With regards to solar power from auctions with government incentives, it is worth discussing the motivation of future governments; but in broad lines and fast-forwarding to the future, it can be said that any installed solar kilowatt for self-consumption is not an additional but a substitute for a large-scale solar kilowatt, in the same way that planting your tomatoes in your own garden would not add but would substitute the wholesale cultivation of tomatoes. This means that, in the long haul, installing a panel for self-consumption does not guarantee a bigger help towards preserving the planet, not more than letting "the market" install it in large plants would, and which will keep doing so.

11- Although it would not be sensible to penalise self-consumption, it would neither make much sense to economically incentivise it in Spain – as other neighbouring countries have, developing large amounts of self-consumption based on regulated incentives. Nor would it help implementing a toll design that strongly weights the variable term at the expense of the fixed term in order to maximise savings. If anything, we are heading towards a system with more fixed costs across both networks and renewable generation, and with greater exigency to tame system peak demand. Hence, it would be highly beneficial to add weight in the fixed term, alongside a moderate variable term, given that savings in the variable term are already entailed when consuming less and buying less energy in the pool. In the future we will have to adjust tolls based on the necessary incentives, but it does not unequivocally follow that self-consumption per se should be an end more imperative and advantageous than large-scale solar energy, no matter how many countries with less available land – and other surely valid motivations – may have decided to encourage this solar modality in the past. There also seems to be no special reason to encourage tomato self-cultivation…

12- If you want to do your part in preserving the planet and mitigating climate change, adjusting your hourly consumption has a stronger impact than installing a self-consumption panel. This connotes shifting or automating electricity consumption towards the early morning or dawn, and soon enough to noon since a lot of solar energy will be penetrating at mid-day in the short term. Ideally, this will occur in a more dynamic fashion based on times of lowest price, which will be more frequent and fluctuating. This is daily data that you can access in advance in various reliable media sources (for example, at https://www.esios.ree.es/es/pvpc).

So, should I or shouldn’t I install a self-consumption system? Pardon me for not providing you for a simple Yes/No recommendation, first and foremost because there are many cases and there is no one single answer applicable to everybody. What I do recommend is the following:

-  Properly inform yourself. Understand what the commercial offer actually entails, the reasonability of underlying assumptions, the recurring costs that it does include, and request or estimate the excluded costs.

-  Do not get carried out by 'the bigger, the better' and aim for optimal sizing together with your technical advisor, simulating the impact of larger or smaller panels. If your noble motivation is not exclusively economic, go ahead and go bigger, but then do not complain if your effective saving is not ‘the bigger’!

-  If you have time and you are passionate about it, go for a self-consumption system with no hesitation, because you will not make a mistake even if you witness lower profitability than what you anticipated. You will have contributed to mitigating climate change at least faster than the market will do with large renewable plants; you will have helped to creating local employment; and you will have a less volatile invoice year after year. You will have probably even started to organise your consumption towards the hours of sunlight. And, in addition, you will have earned yourself an honourable and boastful topic of conversation with the in-laws or with that friend who loves climate change mitigation, whilst becoming part of the disruptive and sustainable wave!

-If you do not have time or you do not see it clearly, you are not worse of a citizen if you choose not to install a self-consumption system. You can contribute very actively to decarbonisation by reducing and adapting your electrical consumption to the conditions of the system. The high renewable penetrations that we want to install by 2050 and beyond are as likely possible, and equally difficult, with or without your self-consumption.

Javier Revuelta is an industrial engineer from ICAI with an MBA from INSEAD Business School. Javier is a Senior Principal at AFRY (formerly P?yry), an engineering, design and consulting company in sustainability and digitisation. AFRY Management Consulting is a services consultancy leader within the energy sector.

Joana Barragan is a mechanical engineer with an MSc in Engineering with Finance from UCL and an MSc in Sustainable Energy Futures from Imperial College London. She is an energy analyst at AFRY, currently covering the Iberian gas and power markets.