(The author is a Reuters columnist. The opinions expressed are his own)
By Gerard Wynn
LONDON Oct 16 Falling costs for European roof-top solar power combined with rising utility tariffs allow a new approach to lower subsidies - where households and business no longer need to be paid for the solar power they consume themselves.
Until recently, it has always been more profitable to sell one's own solar energy back into the system overall, thanks to the premium, subsidised prices set for such energy to make investment in solar panels worthwhile.
That led to one of the oddities of the green revolution - that those who instead used the energy at home were still paid to do so.
The difference now, a new report from the European Commission's research arm shows, is that with panels cheaper, subsidies lower and utility prices higher, home producers are already saving money simply by installing new panels and using the energy they create in preference to that supplied by power companies.
In theory that negates the need to subsidise that part of their energy production at all. The grid export price could also be cut from present subsidy levels. But the sums remain complicated.
Most EU countries are subsidising green energy, as they try to meet mandatory 2020 renewable targets and in line with broader goals to cut carbon emissions and so deal with climate change.
Rising household energy bills have seen growing pressure - most recently in Britain and Germany - on subsidy programmes whose cost is passed to consumers. Falling solar costs hold out the prospect for cuts in solar support rates, which would satisfy concerns about costs while allowing continued growth.
Germany is the leader in installed solar power capacity, followed by Italy, Spain and France. Already, all of these countries have cut support rates, to limit costs, and in some cases eliminated subsidies altogether.
Germany reduces its rate of support, or feed-in tariff, on a monthly basis, called degression, by a percentage based on the rate of increase in installed capacity.
The idea is to stimulate investment in project development and expand the market for renewable electricity generation, while at the same time avoiding windfall profits for project owners given rapid recent declines in equipment costs.
Italy has introduced an annual expenditure cap, while Spain has ended support for renewable energy altogether under its plans to reduce the state liability for such projects, after generous support up until 2009.
The study by the EU's Joint Research Centre ("PV Status Report 2013") estimated the cost of solar power using a well-known measure called the levelised cost of energy (LCOE), which divides the lifetime cost of an installation by lifetime electricity generation, where lifetime is defined as 20 years.
LCOE estimates a cost of power generation in euros per kilowatt hour (kWh), which can then easily be compared with other forms of power generation such as coal or gas and with wholesale or residential power prices.
On the downside, it is a rather theoretical measure, which may not be directly relevant to real-world decisions by households whether or not to invest in solar power.
That may instead be driven by a pay back period, for example, where home owners will only invest if they are sure their solar power income will pay the upfront capital costs in say less than five or 10 years.
The JRC study showed that, as a result of falling solar equipment prices and rising electricity bills, solar power generation was now cheaper than utility electricity tariffs in most European countries.
Assuming a relatively expensive 5 percent cost of capital, it calculated solar power generation costs ranging from about 12-15 euro cents per kWh (excluding VAT), depending on how sunny the location was. (Chart 1)
That is below (in some cases far below) residential electricity prices (including VAT) in about 20 EU countries, show 2012 Eurostat data. (Chart 2)
The trouble is that, on average, consumers can only use about a third of their own power generation, the JRC study reckoned, because of a mismatch between peak demand (early morning and evening) and peak solar output (mid-day).
This means that households must still sell most of their solar electricity back to the grid.
The question is at what selling price they can turn a profit.
Given that they are already making money on home solar power consumption, compared with utility tariffs, it would be expected they should be able to make a break even profit at modest selling prices.
Chart 1: (page 28) goo.gl/2DKwju
Chart 2: goo.gl/iddTe4
NO GAME CHANGER YET
The break-even price varies according to the country, including how sunny it is locally and utility tariffs.
The JRC data suggest that for a relatively sunny location with an EU-average utility bill the break-even price with utility tariffs is 8.7 euro cents per kWh of solar power.
At this grid selling price, home owners should not make a loss on their investment over a 20-year lifetime, compared with buying mains electricity from their utility.
In general, most EU countries are still supporting solar power at rates ranging from about 15 to 20 euro cents per kWh, paid for all solar power generation including home consumption and electricity sold back to the grid.
The study shows that governments must not only take into account the impact of falling solar panel prices but rising utility bills when calibrating support for renewable energy.
It is important to note that a break even price would not support a viable industry, given that homeowners would want to make a healthy profit over their utility bills, to make the effort of installing solar panels worthwhile.
But there is room for some support cuts, and a new approach to home consumption.
A game-changer for solar power - and utilities - would come if cheaper batteries then presently available allowed homeowners to store and consume all their own electricity. (Reporting by Gerard Wynn; editing by Patrick Graham)