The adoption of solar energy technologies has recently gained considerable global momentum as an alternative option to generate electricity. It can be centrally generated by utilities in large solar power stations, or generated in a decentralized fashion by small, photovoltaic distributed generation systems that are near the end consumer, and can be installed for residential, commercial, and industrial use.
Photovoltaic distributed generation possesses some attractive attributes: it can defer investment in utility power generation, reduce energy transmission losses, reduce carbon emissions, and boost the renewable energy industry and the associated employment that comes with it.
Meanwhile, and from the consumers’ point of view, a photovoltaic distributed generation system can be considered an economically feasible choice depending on technological, environmental, and regulatory factors, making it either financially viable and attractive, or unreasonable and costly. In the residential sector, the typical system has a capacity below 20 kilowatts, and households are usually motivated to install them to reduce their monthly electricity bills.
If a household installs a PV system, there are likely to be several occasions when the electricity generated by the system is higher than the electricity demand. That excess energy is dealt with in three ways: either it is discarded, stored in a battery, or exported to the grid. The commercial appeal of distributed photovoltaic generation increases if the end-user earns financial gains from electricity exported to the grid.
To better understand the PV system’s financial viability, the King Abdullah Petroleum Studies and Research Center published a Commentary titled “Demystifying Policy Support Mechanisms for Distributed Solar Photovoltaic Systems.” In the publication, the researcher noted that several factors influence the PV systems’ attractiveness, such as the system’s installation capital cost, the local solar irradiation conditions, the household’s load profile, the prevailing electricity price, and the regulatory policies that govern PV distributed generation deployment.
The researcher discussed how different regulatory policies could incentivize PV distributed generation. There are many types of financial incentivizing policies around the world, such as Investment Credits, Feed-in Tariffs, and Net Metering. The Investment Credit mechanism is the easiest to understand and implement, in which the government provides a direct one-time payment to households to cover all or part of the capital cost required to install the PV system. However, Feed-in Tariffs and Net Metering are more complex.
The Feed-in Tariff works by measuring how much electricity the household exports to the grid by smart meters, and paying money to them for every exported unit of energy (kilowatt-hour), which can be different from the electricity selling price. On the other hand, Net Metering follows the same process, but buys back any exported electricity at the same price at which it is sold.
The Commentary also included hypothetical examples of household consumption using the distributed generation solar PV system, assuming that the household members would travel during July and August, and purchase electricity for $ 0.10 per kilowatt-hour from the utility. If a distributed photovoltaic system is installed, the household will buy less energy from the grid, because the generation system mainly meets part of the load first. Then, the surplus generation – if any – will be exported to the grid.
The researcher assumed that the utility compensates the household for the exported electricity by $0.05 per kilowatt-hour. It pays to the household in cash, or by carrying over the balance for use in the next electricity bill. If the baseline of the total annual electricity bill for the household is $1,010, the bill will decrease substantially if a PV distributed generation system is installed and can go as low as $808 or even $760 in the Feed-in Tariffs and Annual Net Metering scenarios, respectively.
Although the most beneficial policy mechanism for the consumer is the annual net measurement, this is the costliest policy mechanism for the government. Hence, when devising policies that support photovoltaic distributed generation, the economic costs of doing so should be weighed against the benefits it would provide. In doing so, policymakers can maximize the photovoltaic distributed generation’s gains from a holistic economic perspective.