Energy Reports (Dec 2023)
Regulation of photovoltaic prosumer plants: An analysis through a dynamic expression of the avoided cost
Abstract
Driven by technical advances and favorable regulatory measures (albeit only in some countries), the deployment of electricity generation at very small scales, or micro-generation, is shaping a new segment of the electricity system which has been called “Residential Energy Sector” or “Micro-Generation Sector”. Known as “self-production” or “self-consumption” years ago, the main objective of on-site, or demand-side, microgeneration is to provide electricity services to homes and businesses from their own plants. While the concept of avoided cost has been used in the past, a dynamic model which takes into account the different influencing factors has not been previously developed. This paper closes this gap in the literature. It proposes a dynamic, easily replicable model which contains the main factors which influence the avoided costs and facilitates the analysis of the investment decisions taken by residential prosumers. The results show that, compared to other variables, the evolution of retail prices is the most relevant factor affecting the avoided cost, suggesting that their gradual increase could lead to the substitution of plants before the end of their useful life. However, the importance of retail prices and their unknown evolution gives investment decisions on residential plants an inherent uncertain character. Therefore, a higher retail price can encourage the investment by reducing the recovery period. If the accumulated avoided cost equals the initial investment earlier, this reduces both the uncertainty (the period is shorter) and the psychological impact of a strong initial expense. Although regulatory factors (e.g., the existence of subsidies and the conditions of grid exchange) do not have a large economic impact, those factors contribute to the change in the psychological framework which future prosumers will face. In particular, they partly offset the detrimental impact of the initial upfront costs on the decision to invest, even if the revenues and other advantages offset such initial amount of investment.
