Using a new methodology based on decoupled net present value (DNPV), a German research team has found that residential photovoltaic systems were not economically viable under most market conditions in early 2023. While lower module prices have significantly improved system profitability in recent months, several influencing factors that change over time can still impact revenue.
Researchers from the German Hochschule RheinMain have investigated the economic viability of residential PV systems in current market conditions in Germany and have found that profitability becomes a challenge under most circumstances.
“The main motivation for the study was that previous research on the economic viability of residential PV systems from a financial perspective was methodologically questionable,” said the study’s lead author, Carlo Kraemer. pv magazine. “For example, the traditional net present value (NPV) method is often used, but without a proper determination of risk-adjusted discount rates. Therefore, risks are not correctly reflected in the evaluation. Moreover, the NPV method has fundamental methodological weaknesses.”
The scientists have adopted the Decoupled Net Present Value (DNPV) method, they said enables a valuation of PV investments with self-consumption, correctly taking into account the inherent risks. “In this way, the method not only supports investors in the correct evaluation of individual investments, but can also help policy makers develop sound energy policy measures, knowing the implications of the measures for individual investors,” Kraemer explains.
In the study “Using DNPV to determine the economic viability of residential photovoltaic systems in Germany: is the investment still worth it?”, which was recently published in Renewable energythe academics explained that the proposed DNPV approach systematically includes quantity and price risk and captures electricity price risk through option pricing techniques.
They presented a case study for a 10 kW system deployed in Frankfurt Tilt angle of 30 degrees with azimuth of 0 degrees. The array is compensated for injecting excess power into the grid. They took into account an initial investment of €1,737 ($1,874)/kW, maintenance and insurance costs, as well as component replacement costs. An energy price of €0.39/kWh was assumed and the feed-in tariff was €0.082/kWh
Cash flows are adjusted by the synthetic insurance premiums to account for risk and then discounted based on a risk-free rateaccording to DNPV standards. It was assumed that the PV system would have a 16% share of self-consumption.
“The basic idea of the DNPV method is to capture the risk of the cash flows in the form of synthetic risk premiums (i.e. the cost of risk),” the researchers explained. “This decouples risk from the time value of money and, after deducting the cost of risk, allows the resulting cash flows to be discounted at the risk-free rate.”
The analysis showed that the 10 kW system achieved a negative DNPV of -€1,664.
“This reflects the situation at the beginning of 2023,” said Kraemers. “It shows that a typical small residential PV system was not economically beneficial at that time, despite high electricity prices, mainly due to the high investment costs. However, the research also shows that the benefit depends on a number of influencing factors that can change over time. Consider investment costs, electricity prices and volatility, but also the size of the system in relation to your own electricity consumption.”
According to Kraemer, pProfitability has already partially recovered as investment costs have fallen significantly over the past year. Nevertheless, profitability is still dependent on state subsidies through the feed-in tariff. “Against this background, it is important that the German government’s planned change to the EEC in 2025 is designed with caution so as not to jeopardize restored profitability again,” he added. “Current discussions sometimes give the impression that politicians think that the economic benefit is only given by high electricity prices, which is not the case. If we do not want to jeopardize the rapid PV expansion in Germany, we must make a careful adjustment here.”
Kramer too recognized That the statements about the profitability of small systems cannot be generalized. “As mentioned above, profitability in Germany has already increased due to the decrease in investment costs,” he emphasized. “Moreover, economic viability depends on several parameters that are regionally specific. Apart from the investment costs and electricity prices mentioned above, the yield of the system is of course dependent on the region and has a major influence on the economic value. That is why all these parameters must be included in the evaluation and then deliver a very individual result.”
Kraemer assumes that volatility will not decrease significantly in the long term and says that the current situation will become even worse if governments reduce state subsidies for self-consumption PV systems without sufficiently taking into account the financial consequences. “The general idea that these systems must be economically viable in times of high electricity prices is not correct,” he concluded. “A much more differentiated position must be taken and caution must be exercised when adjusting state subsidies.”
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