Utility-Scale Solar vs. Distributed Solar: Business Models for Distributed Solar Systems (Part 4)

Introduction

Solar PV technology has come a long way since its discovery almost two centuries ago. Today, solar PV is one of the most promising and fastest-growing sources of renewable energy in the world. However, solar PV is not a one-size-fits-all solution. There are different ways of using solar PV, depending on the scale, location, and purpose of the system. In this series of articles, we have been exploring the two main options of using solar PV: utility-scale and distributed systems. Each option has its own business model, challenges, and examples of successful implementation.

In Part 1 of this series, I introduced the two options with an overview of their business models, challenges, and examples. In Part 2, I compared their pros and cons from the consumer’s and system’s perspectives. In Part 3, I described the main business model for the utility-scale solar PV projects, based on the long-term power purchase agreements (PPAs).

In this Part 4, I focus on the business models for distributed solar PV systems and their advantages and disadvantages.

Unavailability of electricity grid in remote areas, unreliable grid supply, and cheaper electricity than grid supply are the key drivers for deployment of off-grid systems. However, grid-connected systems require different business models than off-grid systems, as they involve different mechanisms of electricity generation, consumption, and exchange. Some of these business models are discussed here.

1. Feed-in-Tariff (FIT)

A FIT guarantees a fixed price for every unit of electricity fed into the grid by the owners of distributed solar PV systems, regardless of the market price or the time of delivery. It provides a stable and predictable revenue stream for the solar PV owners as well as a premium over the retail electricity rate and reduces the risk against the electricity price fluctuation.

Advantages

• Stable and predictable revenue stream for the solar PV owners
• Premium over the retail electricity rate for the solar PV owners
• Reduced risk and uncertainty for the solar PV owners

Disadvantages

• High costs and subsidies for the government or the utility
• Market distortions or inefficiencies
• Political or regulatory changes or uncertainties

2. Net Metering

Net metering is a billing method which allows the solar PV owners to offset their electricity consumption from the grid with their excess generation. Effectively, the owners are paid the same price for the electricity they sell to the grid as they pay for the electricity they buy from the grid. ?

Advantages

• Reduced electricity bills for the solar PV owners
• Same price for purchase and sale of electricity by the solar PV owners
• Simple and easy billing method for the solar PV owners

Disadvantages

• Reduced revenues and profits for the utility
• Technical and operational challenges for the grid
• Equity and fairness issues among different customers

3. Net Billing

Net billing is a billing method that pays solar PV owners for the electricity they add to the grid at a different rate than the electricity they consume from the grid. Net billing credits are usually equal to the wholesale electricity rate, which is lower than the retail electricity rate. Net billing can be seen as a compromise between net metering and FIT, as it provides some incentive for the solar PV owners, but also some compensation for the utility.

Advantages

• Some incentive for the solar PV owners
• Some compensation for the utility
• Compromise between net metering and FIT

Disadvantages

• Still reduced revenues and profits for the utility
• Still technical and operational challenges for the grid
• Still equity and fairness issues among different customers

4. Gross Billing

Gross billing is a type of FIT that pays solar system owners for the total amount of electricity they generate and export to the grid, regardless of the electricity they consume from the grid. The fixed FIT for gross billing may be higher or lower than the retail electricity rate. Other types of FIT pay solar system owners credits at or higher than retail electricity price for the net amount of electricity they export to the grid, after deducting the electricity they consume from the grid.

Advantages

• Incentivise owners to generate as much electricity as possible
• Provides higher revenue for solar system owners than net FIT
• Avoids technical and operational challenges of net metering or net billing (eg, reverse power flow or voltage fluctuations)

Disadvantages

• Imposes high costs and subsidies on the government or the utility
• Creates market distortions or inefficiencies (eg, overcapacity)
• Does not incentivize self-consumption and self-sufficiency for solar system owners

5. Financing (lease vs ownership)

This refers to the choice between leasing a solar PV system from a third party or owning a solar PV system outright. Leasing a solar PV system means that the customer pays a fixed monthly fee to the solar PV provider, who owns, installs, operates, and maintains the system. Owning a solar PV system means that the customer pays the upfront cost of the system, or finances it through a loan, and is responsible for the installation, operation, and maintenance of the system.

Customers who lease or own the solar system will be able to use electricity from the solar system and sell any excess to the grid, according to the business model available.

Advantages

• Lower upfront costs for the customers who lease
• Lower total costs for the customers who own
• More flexibility and choice for the customers who own

Disadvantages

• Higher total costs for the customers who lease
• Higher upfront costs for the customers who own
• Less flexibility and control for the customers who lease

6. Power Purchase Agreements (PPAs)

The long-term PPA based business model described in detail for utility-scale solar power projects in Part 3 of this article series can also be used for distributed solar systems. Under a PPA contract, a solar PV producer agrees to sell electricity to a consumer at a fixed price for a specified period of time. A PPA can be used for both on-site and off-site solar PV systems. For on-site systems, the producer and the consumer are located at the same site, and the electricity is used directly by the consumer. For off-site systems, the producer and the consumer are located at different sites, and the electricity is delivered through the grid. A PPA can be seen as a form of third-party ownership, as the producer owns, installs, operates, and maintains the solar PV system, and the consumer pays only for the electricity they use.

Advantages:

• Lower costs and higher reliability for the consumers
• Higher returns and lower risks for the producers
• Third-party ownership and operation of the solar PV system

Disadvantages:

• Legal and regulatory complexities and uncertainties for both parties
• Less flexibility and control for the consumers
• Long-term and fixed contracts for both parties

7. Community Solar

Community solar is a model of shared solar PV ownership or subscription, in which multiple customers participate in a single solar PV project, either by owning a portion of the system or by purchasing a share of the electricity output.

Advantages

• Access to solar PV for customers who cannot or do not want to install solar PV on their own properties
• Economies of scale, social benefits, and environmental benefits for the participants and the community
• Shared ownership or subscription of the solar PV project

Disadvantages

• Higher transaction and coordination costs for the project developers and managers
• Lower returns and incentives for the participants
• Regulatory and legal barriers and uncertainties for the project

8. Peer-to-Peer Trading

P2P trading is a model of decentralized and direct energy exchange among users, without intermediaries or centralized platforms. It allows the users to set their own prices and terms for the electricity they buy and sell, based on their preferences and needs. P2P trading can be enabled by blockchain technology, smart contracts, and smart meters, which can facilitate secure, transparent, and automated transactions.

Advantages

• Lower transaction and intermediation costs for the users
• Higher price and quality differentiation for the users
• Higher resilience and reliability for the system

Disadvantages

• Higher technical and operational complexity for the users
• Lower standardization and regulation for the users
• Negative impacts on the utility and the grid operator

Conclusion

Business models have played a key role in the widespread adoption and use of solar PV. A business model defines how a business can deliver value to its customers, in terms of a product or service, at a cost acceptable to the customers and a return acceptable to the investors.

In this part 4 of the article series, we have explored the main business models for distributed solar PV systems, which are based on different mechanisms of electricity generation, consumption, and exchange among users. These business models differ from the long-term PPAs that are used for utility-scale solar PV projects, as they involve different types of customers, prices, quantities, and qualities of electricity. We have also discussed some of the benefits and challenges for these business models in different markets and contexts. I hope you have found this article informative and insightful.