Europe Focus: Dawning of a New Era beyond Grid Parity
Europe Focus: Dawning of a New Era beyond Grid Parity –
The 3rd Demand Cycle: PV Power Generators
By Parag Bhamre, EuPD Research
The development of the PV sector broadly and in principle can be based and divided on demand cycles which have evolved overtime.
The decade of the 1990’s saw an emergence of environmental idealists (1st demand cycle – Environmental Idealists) who championed the cause of clean energy in certain geographical markets. This led to the development of a PV market volume in terms of installations albeit a limited one.
It was a beginning and governmental agencies steered toward devising policies and frameworks to encourage the use of renewable sources of energy such as PV. Over the last decade, such policies and frameworks have provided a financial impetus, to invest in CleanTech and helped the industry develop. The PV industry in particular grew leaps and bounds during this period and continues to be perceived as a good investment opportunity (2nd demand cycle – Straight Edge Investors). Upon the introduction of feed-in-tariffs various markets witnessed high levels of development.
However, due to the difficult-to-design nature of FiT regime, PV became an investment. At the same time, residential and commercial customers also started to think in terms of IRRs partly because the PV industry strongly promoted the profitability aspect. Therefore, in addition to addressing environmental concerns, the customers also perceived PV as a money making instrument.
Recent times have seen reductions in FiTs in the world’s largest PV markets creating pressure on the manufacturers to reduce overall PV system costs. On one hand, the FiTs are being reduced; the system prices are seeing a southward trend, but on the other the retail electricity prices are only rising. For instance, Germany has witnessed retail electricity price increase of approx. 18% since 1H 2008 until 1H 2011.
Source: Eurostat 2011
With these phenomena happening in conjunction, EuPD Research predicts the 2nd demand cycle that of straight-edge investors for PV will come to an end in the developed PV markets in the near future. If FiTs are continuously revised PV will no longer be able to offer similar IRRs as in the past by simply feeding the electricity into the grid.
EuPD Research predicts that this would mark the beginning of a new 3rd demand cycle – PV Power Generators. This demand cycle would characterize PV as a source of electricity for self-usage (decentralized electricity generation) and contributing to the electricity requirements of the market. A major milestone namely ‘Grid Parity’ would act as inflection point and from where the 3rd demand cycle would take-off as it would make PV generated electricity (per kWh) cheaper than retail electricity costs (per kWh).
(Definition: Grid Parity for PV can be defined as a point in time when the production costs for a unit of PV electricity (e.g.: kilowatt hour [KWh]) equals retail electricity prices from the grid, at the point of use.
On attaining this milestone, the market would not boom immediately but rather this milestone would act as a catalyst for the development of the 3rd demand cycle. It should be noted that a dip in the installed capacity in a major market like Germany can be expected as the market transitions from the straight-edge demand cycle to the PV power generators cycle. However, EuPD Research expects that 3rd demand cycle would further gain momentum as the difference between the levelized cost of electricity and the retail electricity prices widens overtime and PV would be perceived as a money saving instrument rather than money making one.
As the cumulated PV installations increase and given the current status of technological developments related to the electricity infrastructure the PV power generators cycle will bring along with it, its own set of challenges which the PV industry would have to overcome. These challenges can be broadly classified into challenges at the Grid Level and Consumer Level.
Grid Level - Integration of intermittent electricity generation from renewables (PV) into the electricity grid and need for flexibility creation in electricity supply system.
Consumer Level - Limitations on usage of self-generated PV electricity due to significant differences in production patterns through PV and consumption patterns in households.
In an increasingly competitive environment, it would be important for industry stakeholders to differentiate themselves and think about solutions which could solve the challenges at the consumer level during the 3rd demand cycle.
EuPD Research predicts that as this new era develops the PV value chain will be extended to incorporate new solutions such as energy management tools, smart PV inverters and energy storage solutions. Gradually, an optional but new building block ‘Enhancement of System (EOS)’ will start taking shape driven by the technological developments in the medium-term.
PV Value Chain Extension
Grid Parity Study
EuPD Research recently published a study on the topic of grid parity titled ‘Dawning of a New Era – Photovoltaics at the Edge of Grid Parity’. The study examines the evolution of PV markets in the most important electricity markets in the European Union and highlights the trends in these markets. Besides providing information on the electricity markets, the study explains in detail the concept of levelized cost of electricity, grid parity and other major milestones towards PV competitiveness such as incentive parity and generation parity. Furthermore, the study examines the challenges the PV industry will face in the future in these markets and concludes by pointing out opportunities arising out of such challenges for industry players.
For more information please contact Mr. Parag Bhamre: p.bhamre@eupd-research.com | +49-228-97143 68
