A new BloombergNEF (BNEF) and Schneider Electric report finds rooftop solar market still largely untapped, with potential to exceed 2,000GW of solar and 1,000 gigawatt-hours of energy storage by 2050.

Customer-sited solar is a major untapped opportunity that could see 167 million households and 23 million businesses worldwide hosting their own clean power generation by 2050, according to the new joint report by research firm BloombergNEF (BNEF) and Schneider Electric. These deployments will unlock major decarbonisation benefits, yet policy and tariff design will be critical to enabling them.

The new report – ‘Realizing the Potential of Customer-Sited Solar’ – finds that rapidly falling costs of solar technology have already made it economical for homes and businesses to generate their own power in some markets. In Australia, for example, the payback period for households investing in solar has been favourable, at less than 10 years, since 2013. As a result, adoption has already taken off, with more than 2.5GW of residential solar added in 2020 alone.

These solar installations can generate economic returns for the hosting homes and businesses, as well as wider benefits in terms of carbon emissions reductions, peak load reductions, and employment opportunities.

“Customer-sited solar is a huge opportunity that’s often completely overlooked. Thanks to falling costs and policy measures, it’s already being rapidly deployed in some markets. Its massive scale-up is very likely,” said Vincent Petit, Head of the Schneider Electric TM Sustainability Research Institute, and SVP of Global Strategy Prospective & External Affairs at Schneider Electric. “This is vital for decarbonising the power sector and offers huge additional consumer benefits. It’s time to embrace this transformation.”

Kick-starting the market

Experience shows that solar adoption mainly occurs when there is an economic case for the households and businesses investing in the technology, usually in the form of high internal rates of return (IRR) or short payback periods. In regions where the economics have not yet reached such tipping points, policy-makers are introducing targeted incentives to create favourable market conditions and bring forward deployment.

One such example is France, where existing incentives mean that residential solar can earn internal rates of return of around 18.5 per cent (a five-year payback), and commercial installations achieve 10.4 per cent IRR (or a nine-year payback). This has stimulated gradual growth in the market, to about 500MW of installations in 2020.

A key consideration at the early stage of market development is to avoid an unsustainable boom. Policy designs should account for the fact that solar costs will continue to fall over time, and moderate the support to reflect these changing dynamics.

Solar for new-build homes and businesses

The economic case for adding solar during construction of new buildings is particularly strong. This is because so-called ‘soft costs’, such as marketing and sales costs, as well as labour and construction costs, can be reduced, while the benefits remain the same. In California, the economic case for adding residential solar on existing homes is already good at 20 per cent IRR, but the new report estimates that this figure is twice as high, at 40 per cent IRR, when solar is added at the point of construction. In France, the IRR for residential solar could be boosted to 28 per cent when added during new construction.

Introducing energy storage and flexibility

As solar markets develop and mature, policy-makers and regulators must gradually shift their emphasis toward unlocking flexibility and encouraging the adoption of energy storage. This is because high levels of solar adoption can lead to excess energy production during the day, while also possibly destabilising the power grid. At this stage, the addition of energy storage becomes valuable, as it allows the renewable electricity to be stored for use during evening hours.

“The evolution of customer-sited solar is to add some form of flexibility, which has the ability to unlock a much higher penetration of solar,” said Yayoi Sekine, BNEF’s Head of Decentralized Energy. “The most obvious form of flexibility is batteries, but energy storage will come in many forms, including shifting demand and using electric vehicles.” 

Tools to encourage energy storage include adjusted export rates (the payments offered to solar owners when they export energy to the grid), time-of-use retail electricity rates (which reflect the lower generation costs of solar during the daytime), enabling payments for storage to provide grid services (sometimes called aggregation payments), and implementation of demand charges (primarily for business customers). These levers are generally meant to make rates more reflective of generation and grid costs but are also likely to encourage energy storage. 

In California, for example, reducing export rates to 35 per cent of retail tariffs – this would damage the economics of solar overall, yet would shift the emphasis over to solar systems paired with storage, which would still generate a 13 per cent IRR. For commercial and industrial installations, adding so-called aggregation payments for batteries would boost IRRs to 22.8 per cent, making ‘solar-plus-storage’ a more attractive option than solar alone.

The report investigates these mechanisms in depth, and provides individual use case analysis for France, Spain, Australia, California (US) and New Jersey (US) as examples of markets at different stages of maturity. The full report is available here (see bottom of the page to download): https://about.bnef.com/blog/careful-policy-design-could-unlock-massive-rooftop-solar-market-around-the-world/