Abstract
While Germany has led the market in photovoltaic (PV) implementation throughout the last decade, there has been increasing criticism of PV support policies due to their high cost. Although declining, the levelized cost of electricity (LCOE) from PV is still above the German wholesale electricity price. However, using LCOE as an evaluation yardstick falls short in at least 2 respects: It neither takes into account integration costs rising with PV penetration (ie, undervaluing its actual cost) nor avoided externalities of replacing conventional for renewable generation (social cost overvaluation). We thus calculate the social profitability of PV in Germany by including not only private costs and benefits but also integration costs to the electricity system and avoided environmental externalities, using the internal rate of return and the profitability index as indicators. Our results show that when these factors are considered, the social profitability of PV in Germany is higher than 10% at the lower bound of the social cost of carbon (150€/tCO2) up to a penetration level of at least 15% and positive up to a penetration level of at least 25%. Results also show the level of private profitability if all externalities were internalized and assert that subsidies are justified to align private and social profitability. The proposed method could be used as a complementary indicator to private profitability by public institutions, development banks, and companies with social responsibility values.
Highlights
Germany has led the photovoltaics (PV) implementation market throughout the last decade, with the highest installed capacity per capita and the second highest in absolute value after China.[1]
Van den Bergh and Botzen[49] argue that the average estimates from integrated assessment models (IAMs) are gross underestimates: first, because they include both low and high social discount rates, which undermine the present value of future damages, and second, because they ignore factors such as (1) uncertainty about greenhouse gases (GHG) concentrations, (2) costs of a large rise in temperature, (3) overall higher climate damages, (4) low‐ probability/high‐impact climate change (CC) risks, and (5) risk aversion. According to this meta‐analysis, the lower bound of the social cost of carbon (SCC) should be at least 125$1995/tCO2.** The fact that IAMs do not generally take into account the existence of tipping points and positive CC feedback loops, which is likely to be a source of undervaluation, in addition to the latest developments in earth and climate sciences, which point at higher climate sensitivity than expected,[50] permafrost tipping point risks,[51] higher than expected sea level rise,[52,53] and even climate‐driven polar motion,[54] lead us to expect that the SCC might be even higher than the lower bound of 150€2015/tCO2 suggested by van den Bergh and Botzen.[49]
The dashed and the dotted lines show social rate of return (SRR) of 5% and 10%, respectively. Both cost and value approaches agree that PV profitability at current penetration (8%)[57] is above 10% at the lower bound of the SCC (150€/tCO2), and around 5% at a SCC as low as 50€/tCO2
Summary
Germany has led the photovoltaics (PV) implementation market throughout the last decade, with the highest installed capacity per capita and the second highest in absolute value after China.[1] PV costs have been declining during the last 3 decades at a learning rate (ie, cost decline per each doubling in installed capacity) between 20% and 24%,2-4 PV support policies have been under increasing criticism due to their high costs. While PV is quickly achieving grid parity in many parts of the world,[5] its levelized cost (LCOE) is still above wholesale electricity prices in Germany.[4] increasing PV penetration causes rising integration costs to the electricity system—due to its variability, uncertainty, and location specificity.[6,7] all generation technologies cause external costs not included in their market prices,[8] causing social damages, which are usually ignored in traditional cost‐. Any comprehensive cost‐benefit analysis of generation technologies should take into account private costs and benefits and the integration costs caused to the electricity system and the avoided or additional environmental externalities of switching between technologies
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