The authors are analysts of NH Investment & Securities. They can be reached at firstname.lastname@example.org, email@example.com and firstname.lastname@example.org, respectively. â€“ Ed.
Building-mounted solar panels promise great cost efficiency as long as subsidies are provided
As long as subsidies are granted, building-mounted solar panels at apartments remain attractive despite their relatively limited energy efficiency. As noted above, installation costs for solar panels (with 325W capacity) total W500,000, with subsidies of W390,000 offered by the city of Seoul and an additional W50,000 by regional offices. Once panels are installed, they incur inverter replacement costs of W100,000 and maintenance expenses of W100,000 within 20 years of installation.
Looking at annual bill saving effects, we size them at around W44,500 during the first year of installation. But, when assuming that energy efficiency for installed solar panels decreases 0.5% per year and electricity rates increase by 5% every five years, we expect bill saving effects to fade within fifteen years after installation. Estimating power bill savings of W288,568 and taking into account installation costs of W60,000 (ie, costs after subtracting subsidies) as well as the above-mentioned inverter replacement costs and maintenance expenses (W100,000 each), we arrive at an internal rate of return (IRR) of 47% and net present value (NPV) of W55,000â€”implying that it takes only two years to recoup investment in building-mounted solar power panels for apartments when subsidies are granted.
Without subsidies, adoption of solar panels at apartments fails to deliver significant economic benefits
But, without subsidies, investing in solar power panels at apartments does not deliver economic efficiency. During the first year of installation, power generation costs for building-mounted solar panels come to W13.8/kWh when taking into account effects from subsidies but jump about eightfold to W114.7/kWh when excluding them. Admittedly, building-mounted solar panels lead to bill savings worth 204.5/kWh for the first year of installation. But, such bill saving effects lessen over time, as the energy efficiency of installed solar panels decreases year by year. Without subsidies, the increase in power generation costs should start to offset bill saving effects from nine years after installation. Of note, bill saving effects are estimated to completely fade out from 15 years after installation. All considered, we arrive at an NPV of -W355,000 when assuming investment without taking on liabilities and at an NPV of -W320,000 when assuming a debt-to-equity ratio of 30%.
PV facility installation cost to vary depending on storage/discharge patterns
The difference in economic effects between the above-mentioned cases arises mainly because of differences in ESS capacity requirements relating to storage/discharge method. If an ESS only stores (no discharge) electricity generated from solar power facilities during the day (sun shining), average daily storage should amount to 282kWh, requiring ESS capacity of 1.1kWh. However, in the case that an ESS stores power until 16:00 and then discharges the stored power during peak hours, daily electricity storage on the ESS is reduced to 255kWh, an amount that can be covered by 1.0kWh of ESS. The price gap between 1.1kWh and 1.0kWh of ESS is about W100,000.
Discharging during peak load hours more beneficial for grid stability
Expanded use of renewable energy sources is likely to result in the appearance of the duck curve to varying extents throughout the year. In this regard, ESS operations should be designed to reduce power demand during peak load hours to enhance grid stability. Assuming an average 3.3 hour-long discharge from ESSs, related power demand shaving (for peak-hours) should average 24% on a monthly basis (maximum of 46%). And, by reducing ESS discharge hours, peak-hour power demand could be met even more effectively. Noting the fact that power demand varies significantly by season, adjusting discharge hours by season could bring about additional power demand slashing effects.
Installation cost reduction key to improving economic feasibility
In general, facility installation cost decline is to be the most important variable in improving the economic feasibility of renewable energy sources. That said, as for solar power facilities designed to sell power during peak hours, ESS purchase cost reduction is key. A 50% decline in ESS cost should improve IRR from -1.2% to 6.1% and NPV from-W536,000 to W3,000, whereas a 50% decline in solar power installation cost would improve IRR only to 1.8%, and NPV to -W272,000, as ESS cost accounts for the largest portion of facility installation cost. Of note, a simultaneous 50% drop in ESS cost and solar panel installation cost should improve IRR to 6.9% and NPV to W46,000.
Installation cost reduction to arrive sooner than selling price hike
We note that electricity selling prices are determined based on SMP and REC price. In this regard, a rise in SMP and REC price should help to improve the economic feasibility of solar power facilities. Assuming a 50% hike in both SMP and REC price, a facilityâ€™s IRR should improve to 4.9% and NPV to -W94,000. Under the current system, SMP is closely related to oil price, and REC price is a function of market supply and demand, and, in our view, a sharp deterioration in oil prices and supply/demand conditions is unlikely in the near term. Meanwhile, electricity tariff overhauls designed to promote renewable energy sources will likely take some time, in our view. In this regard, we predict that either PV installation or ESS cost cuts will be realized ahead of selling price hikes or regulatory overhaul.