A recent academic paper published in the journal Energy Policy argues that the impacts of solar power could be as significant as the transformation from TV to the internet.

It will mean the emergence of energy ‘prosumers’, fundamentally altering our relationship with energy whilst driving innovation and demanding new business models. Government and business will need to move fast and flexibly to manage a transition over which they have limited control.

Competitive Solar Power

Schleicher-Tappeser’s paper starts by observing that many countries are rapidly reaching the point where it is in the economic self-interest of individual households and businesses to install solar PV technology, even without any Government subsidy. In other words, the cost of generating ‘rooftop’ solar power – accounting for all upfront costs and commercial discount rates – is becoming lower than the average price of electricity from the grid.

Such ‘grid parity’ was achieved in Germany in 2012, partly as a result of higher prices for grid-purchased electricity than other countries, but also due to the rapidly falling costs of solar panels. Even in parts of the UK, with lower levels of solar irradiation, grid-parity may be reached within 3 years.

Underpinning this phenomena is solar PV’s unique quality amongst power generation technologies in that it can be effectively installed at very small scales with the energy directly used by the producer. Thus unlike wind farms or nuclear power stations, rooftop solar does not have to compete with the wholesale electricity price that suppliers pay, but rather the much higher retail electricity price that users pay.

The new energy ‘Prosumer’

It is true that in countries such as Germany and the UK energy produced from rooftop solar is not always a good match for the demand profile of a household or business. One solution is to sell any unused excess back to the grid. If this is not allowed, or if at any given time a household can only sell at a price substantially lower than the average price it buys at, there will be a strong incentive to either store the energy on site for use later, or change behaviour to use more energy whilst it is available.

With these options, households and businesses with rooftop solar will no longer be passive consumers of energy provided by the grid, but instead will become energy ‘prosumers’ – producing, consuming, managing and trading energy “according to their own logic”.

But how likely are such changes to be taken up en masse? According to Schleicher-Tappeser, it is only a matter of time. By 2016 in Germany – under highly conservative assumptions (only modest technology cost decreases, no subsidy, no selling to the grid and no storage) – it would already be economic for a household to use solar to meet 20% of its electricity needs. Once batteries to store energy are also included in the calculation (at current prices), this increases to over 40% of its electricity needs.

Favourable numbers like these are only likely to improve over time as technology costs continue to fall. When large numbers of current consumers turn into future prosumers, the wider impacts are potentially enormous. What’s more, Governments will effectively lose control as its traditional method for limiting deployment – decreasing subsidy – is no longer relevant. At this point solar PV becomes a truly disruptive and game-changing technology.

Market Impacts

One important effect could be that wholesale energy prices are forced down. With more demand met by on-site solar panels, fewer of the larger-scale high marginal cost power plants which set the wholesale price will be needed at any one time. This phenomena has already been seen in action in Germany in relation to solar PV, and in Ireland in relation to wind. In turn this is likely to undermine the business models of existing and new gas fired power plants in particular, which rely on high peak prices to repay investments.

In parallel, retail prices could be forced up. Whilst national grids will undoubtedly still be needed in the energy systems of the future, as more energy is produced by smaller scale solar PV for direct use, proportionately less electricity will be flowing through the grid itself. The very substantial grid upkeep and upgrade costs will therefore need to be met by the ever diminishing proportion of overall electricity that is provided through the grid.

Consumer Impacts

What this means for the average household or business consumer will depend on circumstances. Although Schleicher-Tappeser’s paper does not delve into this area, it seems likely that those able to become prosumers will reap benefits that outweigh the costs. However those that still get all or most of their electricity from the grid may be disadvantaged as price rises disproportionately affect them. In such a scenario it is easy to imagine negative impacts on important social issues such as fuel poverty, unless mitigated by further actions.

Unleashing Innovation

As solar power achieves grid parity and uptake increases, large markets are likely to be created for technologies which give prosumers autonomy to store self-generated solar energy and manage its use, thereby further improving the economics of solar PV. Rapid innovation and cost reductions in new batteries and heat storage techniques, electric vehicles and other ‘smart’ technologies would be incentivised in a self-reinforcing process as retail electricity prices rise, especially if prosumers cannot sell excess to the grid.

Innovation would also be driven in other areas. A number of different disciplines will need to be seamlessly bought together to give prosumers what they need – PV installation, communication and control technologies, financial products to name a few. Whether service providers can develop the business models to do this in a low risk way and overcome barriers such as high upfront capital costs will be critical to the speed of uptake. A recent McKinsey report has outlined the widespread market opportunities that solar power will create in the coming decade.

The Role of the Grid

The traditional role of national grids is already shifting where increasing levels of renewables bring with them greater intermittency of supply. The widespread emergence of energy prosumers will likely exacerbate such pressures.

A key question in relation to small scale solar is whether the grid and its associated institutions merely act as a back-stop to provide (expensive) electricity to prosumers when needed, or whether they take the role of ring-master in proactively co-ordinating generation, storage and consumption across spatial scales.

Schleicher-Tappeser argues that whilst large scale integration of grids on a continental scale is of course needed, it is equally important for management to occur at the scale of local communities and regions. Whilst the former is being actively pursued in Europe in line with the traditional grid and utility logic of large scale infrastructure, the latter has received little attention to date.

One important mechanism to coordinate the overall energy system and integrate prosumers into the larger whole will be tariffs for buying and selling electricity which vary with both time and location. This would incentivise energy flows in either direction between prosumers and the grid to help balance production and consumption at the required geographic scale. However, significant institutional and regulatory barriers currently prevent such decentralised management.

Government Response

Depending on the pace of such disruptive change once unleashed, Government’s will need to act quickly and flexibly to maximise the benefits and minimise risks. Steering the development of a new energy system capable of integrating different scales from individual prosumers to continent-wide interconnectors will be no easy task, especially once the economics of prosumer action at the lowest level means Governments lose much of their control over this key part of the evolving system.

Due to lower levels of solar irradiation than many other countries, the UK may have a short window over the next few years to watch and learn from the experience of others. We would be wise not to waste this opportunity.