The economy of photovoltaics explained

Photovoltaics are not only beneficial for the environment as a clean energy source, but are also an investment which can be profitable. The photovoltaic industry has experienced a compound annual growth rate of over 50% over the last 10 years, accompanied by a four-fold reduction of costs. The unsubsidised cost of electricity generated by PV systems has correspondingly seen substantial reductions, making it increasingly competitive with retail electricity prices and opening the way for a range of market opportunities. Attractive policy incentives (e.g. feed-in tariffs and tax breaks) have also facilitated the adoption of PV. But yet, solar is considered a risky investment, due to the high up-front capital needed. There are ways to minimize the risk and estimate solar potential, however this article will be focused on the different business models and support schemes in place that are facilitating the adoption of PV.

Business Models

There are various ways in which the owner of the system can make profit from it, and vary by the application segment. Self-consumption, power purchase agreements, cooperatives and virtual power plants are the most common models in Europe, and are not mutually exclusive. The actual business model in use can be a combination of several approaches.

Self consumption

Self consumption is obvious, the owner uses the energy generated by the system for own use. Usually, this includes households and companies that have large energy requirements such as manufacturing facilities, warehouses, hotels, shopping malls, business centers and other cases where the consumption curve is similar to the power generation curve. That allows for a high self consumption rate. The model assumes that the retail price of electricity is higher than the export price for excess electricity fed back into the grid, and that therefore there is a financial incentive to self-consume. There are some countries where this does not apply – such as any country that has pure net metering and France and Turkey where the export price can be higher than the retail price.

Net metering

Net metering is not strictly speaking a business model or a financing scheme. It is in effect a support scheme or regulatory framework for solar (like a feed-in tariff, premium or green certificates system) that creates a different business model for self-consumption style systems. In a net metering or net billing support scheme excess solar electricity is remunerated via either reverse metering or financial credits. It in effect uses the grid as storage for excess electricity. The owner of the system is reimbursed on the bill the amount of electricity fed in to the grid.

Power purchase agreements (PPAs)

A Power Purchase Agreement is a contract between an electricity generator and an offtaker (a consumer or reseller) which sets a price per kWh for a relatively long period of time e.g. 5-20 years. Additionally the contract usually states a defined minimum amount of electricity to be supplied per year.

There are several variations of power purchase agreements. The main difference between them is the buyer of the produced electricity.

The wholesale (or utility) PPA business model is used for ground-mounted solar farms feeding power into the grid and selling power on the wholesale market. The owner establishes a Power Purchase Agreement contract with a grid operator such as a licensed electricity supplier or balancing party. The licensed supplier or balancing party then sells the electricity on the open market and to its customers.

In the case of Onsite private wire PPA, the owner of the system sells the electricity to a consumer that is directly connected to the PV by a private wire. The advantage of the onsite private wire PPA is that the electricity is not transmitted via the public grid and therefore, in most countries, is not liable for grid charges. Where possible, the generator then signs a spillover or excess PPA with a licensed supplier and any excess electricity (e.g. power generated at weekends or public holidays) goes via a separate connection between the installation and the grid.

Synthetic PPA model is best explained with a diagram.

Assume that the Generator and the Corporate Consumer set a price of 100EUR/MWh as their fixed price. The sum of the Corporate Consumer’s contracts with the Generator and the Licensed Supplier must always come to 100EUR/MWh. If retail prices go up and the Licensed Supplier starts charging the Corporate Consumer 110EUR/MWh, then the Generator has to pay the Corporate Consumer 10EUR/MWh. If retail prices go down (which rarely happens) and the Licensed Supplier starts charging the Corporate Consumer 90 EUR/MWh, then the Corporate Consumer has to pay the Generator 10EUR/MWh. The Generator benefits as it gets a higher than wholesale price for its power. The Corporate Consumer is effectively taking a gamble that retail prices are going to rise over the next 20 years, and is locking in its power prices at a low level over the long term.

Virtual Power Plants

Virtual Power Plants (VPPs), also known as aggregators, are a business model where different technologies and users are combined or aggregated into one pool of electricity and are operated together as if they were one power generation facility.

On the supply side this can include solar, micro combined heat and power, wind, biogas, small hydro, back-up diesel generators and battery storage. On the demand side this includes power consumers that have capacity to increase or decrease their power demand, including interruptible load such as heating and cooling and electric hot water heaters.

The aggregator company sells the electricity or ancillary services via an electricity exchange. The goal is to create a generation profile that allows the participants in the Virtual Power Plant to take advantage of peak prices at certain times of day.


Feed in Tarrif

The feed in tariff is a support scheme where the system owner is paid a fixed price per kWh electricity produced. FITs typically offer a guaranteed purchase agreement for long (15–25 year) periods, and the price per kWh is higher than the retail price. As the percentage of adopters increases, the FIT is reduced to the retail rate.

From the balkan region, Serbia, Bulgaria, Albania, Greece have a feed in tarrif support scheme or a variation of it in place. Macedonia used to have a feed in tariff, but has now moved to a premium based support model.

Feed in Premium

Under a feed-in premium (FIP) scheme, electricity from renewable energy sources (RES) is typically sold on the electricity spot market and producers receive a premium on top of the market price of their electricity production. FIP can either be fixed (i.e. at a constant level independent of market prices) or sliding (i.e. with variable levels depending on the evolution of market prices). Fixed FIP are simpler in design but there is a risk of overcompensation in the case of high market prices and of undercompensation in the case of low market prices. Therefore, fixed FIP are usually combined with predetermined minimum and maximum levels (“floor” and “cap”) either for the FIP or for the total remuneration (FIP + market price). Sliding (or “floating”) FIP are calculated on a continuous basis as the difference between market prices (usually averaged over a certain period of time, e.g. one month) and a predefined reference tariff level (often corresponding to existing FIT). If market prices are higher than the reference tariff level, no FIP is paid. 

Tax credits

An incentive which allows taxpayers to subtract the amount of the credit they have accrued from the total they owe the state.


Governments often offer grants for solar equipment intended for households. Subsidized loans with a reduced interest rate are also available.

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