Through a new methodology based on separated net present value (DNPV), a German research team has found that residential solar power systems will not be economically viable under most market conditions in early 2023. Lower module prices have significantly increased system profitability in recent months. , several influencing factors that change over time can still impact returns.
October 23, 2024 Emiliano Bellini
Researchers from Germany’s Rhein-Main University conducted a study to assess the economic viability of residential solar power systems in Germany’s current market conditions, finding that profitability is becoming difficult under most circumstances. I discovered that there is.
“The main motivation for this study was that previous studies on the economic viability of residential solar PV systems tended to be methodologically questionable from a financial perspective.” Carlo Kremer, lead author of the book, told pv magazine. “For example, traditional net present value (NPV) methods are often used, but risk-adjusted discount rates are not properly determined. Risk is therefore not properly captured in the valuation. has fundamental methodological weaknesses.”
The scientists adopted the Disaggregated Net Present Value (DNPV) method, which they said allows for the valuation of self-consumption solar power investments that properly takes into account the inherent risks. “In this way, this method not only supports investors in properly valuing individual investments, but also helps policy makers develop sound energy policy measures by recognizing the impact of measures on individual investors. It also helps,” Kramer explained.
In a study recently published in the journal Renewable Energy, “Using DNPV to determine the economic viability of residential solar PV systems in Germany: Is the investment still worth it?”, academics The proposed DNPV approach systematically incorporates volume and price risks and captures electricity price risk through option pricing techniques.
They presented a case study of a 10 kW system with a 0 degree inclination installed in Frankfurt. Arrays are compensated for injecting excess power into the grid. They considered an initial investment of 1,737 euros ($1,874) per kW, maintenance and insurance costs, and component replacement costs. The energy price was assumed to be 0.039 euro/kWh and the feed-in tariff to be 0.082 euro/kWh.
All future income and expenditures were discounted using risk-adjusted discount rates according to the DNPV standard. The self-consumption share of the solar power generation system was assumed to be 16%.
“The basic idea of the DNPV methodology is to capture cash flow risk in the form of a synthetic risk premium (i.e. cost of risk),” the researchers explained. “This separates risk from considerations of the time value of money and allows the resulting cash flows to be discounted at the risk-free rate after deducting the cost of risk.”
The analysis showed that the 10 kW system achieved a negative DNPV of -1,664 euros.
“This reflects the situation at the beginning of 2023,” Kremers said. “This shows that despite high electricity prices, typical small residential solar power systems were not economically advantageous at the time, mainly due to high investment costs. , the study also shows that the advantage depends on a number of influencing factors that can change over time, including investment costs, electricity prices, and volatility, as well as own company’s own. It also includes the size of the system compared to its power consumption.”
Profitability has already partially recovered as investment costs have fallen significantly over the last year, Kramer said. Nevertheless, profitability remains dependent on state subsidies through feed-in tariffs. “Against this background, it is important that the German government’s planned EEG reforms in 2025 are carefully designed to avoid once again putting the recovered profitability at risk,” he added. “Current debates sometimes give the impression that politicians think that economic benefits only come from higher electricity prices, but this is not the case. Careful adjustments must be made here if we do not want to risk the expansion of
Mr. Kraemer also acknowledged that statements regarding the profitability of small systems cannot be generalized. “As mentioned above, profitability is already increasing in Germany due to lower investment costs,” he stressed. “Furthermore, economic viability depends on a variety of region-specific parameters.Apart from the investment costs and electricity prices already mentioned, the yield of the system is naturally region-dependent and has a significant impact on economic value. Therefore, all these parameters must be included in the evaluation to provide very individual results.
Kramer assumes that volatility will not fall significantly in the long term and that governments will cut state subsidies for self-consumption solar power systems without fully considering the fiscal implications. The current situation could get even worse, it said. “The common belief that these systems must be economically viable in times of rising electricity prices is not correct,” he concluded. “We need to take a more differentiated view and take more care when adapting state aid.”
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