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Price formation of electricity and solar overproduction

A typical villa owner not connected to district heating spends between 12 000 and 25 000 kronor a year in electric bills. A solar installation with 34 panels will produce 12 000 kronor worth of power every year. Investment cost is 120 000 kronor, which gives a direct payback time of 10 years. In the remaining 20 years the investment makes another 240 000 kronor of pure profit.

These rough numbers are accurate in most cases and work as a baseline to start the planning of a solar investment. This blog post will focus on the economics of residential solar power as there is no doubt that solar energy is a financial investment and the generous 30% investment subsidy given till end of 2020 makes the economics even more favorable.

The earning concept is very simple for anyone who has ever paid an electric bill: when you use power in your house, it flows to the house from the grid through the utility meter and you get charged for the electricity you use, measured in kilowatt hours or kWh. When you have solar panels on your roof, the system is connected to the opposite end from the grid connection, so the power it produces first goes to the loads in the house and less power is drawn from the grid. Only after the entire load of the house is served, the system starts feeding power into the grid past the electrical meter.

The savings are born two ways: by reducing the amount of power you buy and by feeding power to the grid and getting paid for it. The price of what you pay and what you get for electricity are almost the same, so in a way it works like spinning the meter backwards. This would in fact be the simplest way of doing it, but currently there are other ways to get the same effect, which we’ll describe in detail.

Another topic we’ll cover is the offers from energy companies to pay handsome bonuses for the electricity sold to the grid. After taking a closer look at the numbers, it becomes apparent that these deals are not very attractive.

As a note, in this text I will use PV as a short for solar electrical. PV stands for photovoltaic, which is the common term for electric solar panels.

 

1. PV production and house power consumption

Around two thirds of the energy use is buildings in Sweden is heating . The below example is for an electric heated house (same pattern but less pronounced for heat pump), because they are very common and use a lot of electricity. If your house is connected to district heating or you have a wood boiler, the electricity use is more evenly distributed over the year because it’s not used for heating. If you have an oil boiler, very likely the first step is to replace it with a more efficient heating method and then think of solar energy as a supporting investment.

In the Swedish climate the PV production and typical electricity consumption of a house are the opposite. Fortunately, that doesn’t impact the profitability of the system, because the price for the purchased electricity is very close the what you get paid for selling it to the grid. It doesn’t matter if you use the electricity you produce or sell it to the grid, the value is roughly the same.

The graph above shows the monthly distribution of used power vs. PV production.

  • House in question is a 120 m2 villa with direct electric heating.
  • Yearly power consumption is 17 000 kWh,
  • Solar system has 34 solar panels totaling 10 kW.

PV system produces only 60% of the yearly consumption, but still 6 months of the year more electricity is sold to the grid than bought. For a house of this size with district heating the annual electricity use would be only around 6 000 kWh, so the system size would need to be downsized.

 

2. Understanding your electric bill

How many of us actually know how much does electricity cost? We probably have an idea how much we spend every month, but to say accurately how much does it cost per hour to cook a stew in the oven is not that straightforward because the actual price is broken down to two separate accounts and several costs and taxes.

In the Sweden like most of Europe, electricity distribution and sales are de-coupled. This means that while one company owns the power lines coming to your house, you can buy the energy from any of the 80 electric companies in the country. This is because there is a natural monopoly for the distribution of power as it makes sense for only one company to own power lines in a certain area. However, the electrons have no such restrictions, which is why the energy can be sold independently of the transmission.

There is no possibility to change your grid company (elnättsbolag), but you can freely choose any electric company (elhandelsbolag). Next, we’ll break down the multitude of charges, taxes and fees in the both accounts and calculate a total price of purchased electricity. Then we’ll do the same for sold power.

Transmission contract

When you look at your transmission invoice, you’ll probably see something like the following breakdown:

Antal Pris Belopp
Abonnemang 31 dagar 5000 kr/år 431 kr
Överföringsavgift 2000 kWh 16 öre/kWh 320 kr
Energiskatt 2000 kWh 33.1 öre/kWh 662 kr
Moms 25 % 353 kr
Total 1,766 kr

Note that the Energy tax (Energiskatt) was previously included in the energy contract (Elhandelsavtal), but was transferred to transmission contract (elnättsavtal) in 2018. The biggest component is the energy tax which you actually even have to pay value-added tax for. The transmission cost (Överföringsavgift) is always a fixed rate month to month set by the grid owner. This cost has steadily increased over the time, even when the electric energy prices have been constant.

The subscription (abonnemang) is a fixed amount based on the size of your main fuse (säkring). Most houses have 16 or 20A and the price increases with the fuse size. For a solar installation the objective is to stay within the existing fuse size in order not to increase the fixed cost. This becomes an issue only for systems over 11 kW in size.

Energy Contract

The sale of the electric energy is not a monopoly and you can buy the electrons from any of the 80 or so electricity wholesalers (elhandelsbolag) in Sweden. The price of the electric energy is a bit more complicated than the transmission, because there are several different contract types to choose from:

  • Floating (rörlig)
  • Fixed (fast)
  • For both variations there are different contract lengths (ongoing, 1-year, 3-year) with the longer contracts having a smaller surcharge

Floating Price (rörlig pris)

In essence, the price of the electric energy is determined on the Nordic wholesale market. Private customers have option to follow the monthly average price with a floating (rörlig) contract. This means that every month you pay a different price depending on the market conditions. On top of the spot price the energy company will charge a surcharge (påslag) which varies per the company and the contract lenght. As any freely traded commodity, electricity prices fluctuate per supply and demand, but for the past 5 years they have been quite steady around 30 öre/kWh. This changed though with the drought of 2018 causing electricity prices to double in a couple of months, which we’ll cover later.

Antal Pris Belopp
Mönadsavgift 1 månad 252 kr/år 21 kr
Elpris Rörlig 2000 kWh 35 öre/kWh 700 kr
Påslag 2000 5 öre/kWh 100 kr
Moms 25 % 180 kr
Total 1,001 kr

Breakdown of the cost components in a floating contract. Compared to the transmission contracts the fixed fees are typically much lower and most of the price is paid per consumption. Electricity price (Elpris Rörlig) varies every month per the average price of Nordpool spot and the added fee (Påslag) depends on the energy contract.

Fixed Price (fast pris)

Other electric energy contract type is fixed price (fast pris), where the price is locked for 1 or 3 years. For a longer contract you get a discount on the price, but you’re also locked in for a longer time if the wholesale prices go down. With a fixed contract you will know exactly how much you pay every month and the price can be cheaper or more expensive than floating depending on how the market price develops during your contract period.

Fixed price contracts also follow the wholesale market, but with a longer delay. If you locked your price to a fixed price contract when the price was historically low, you are probably better off than with a floating contract and vice versa.

Comparing energy contracts

Because it is very easy for customers to compare and swap contracts, there is not that much price difference on the fixed prices or the fees added to the floating price. There are several websites to compare different contracts, but unfortunately there are so many different types, that comparing different alternatives takes some patience. Note also that even though you are able to change the energy company, the impact of that change is less than 10% of the total price for a floating contract. For a fixed contract the saving potential can be more significant, which is definitely worth checking when the contract expires.

Calculating the transmission and energy contracts together, fixed costs are only 20% of the total so there is a lot of savings potential from reducing the consumption. One third of the PV system production is used within the house decreasing the amount of electricity bought. The other two thirds are sold to the grid, which is why next topic is the price formation of the sold power.

3. Selling overproduction

The compensation for selling the solar power back to the grid consists of the same components as the bought electricity. They are actually credited back in the following month’s transmission and energy bills. In the below table are summarized side-by-side the price components for a floating contract. The final prices are very close to each other. For a fixed price contract the only difference is that the price of electricity and surcharge are combined into one price.

Pris för överskottsproduktion Pris för köpt el
Elhandelsavtal Elhandelsavtal
Elpris (Spot) 35 öre/kWh Elpris Rörlig 35 öre/kWh
Balanskostnad -1.9 öre/kWh Påslag 5 öre/kWh
Elcertifikat 15 öre/kWh Moms 10 öre/kWh
Elnättsavtal Elnättsavtal
Nättnytta 4.5 öre/kWh Överföringsavgift 16 öre/kWh
Skatteverket Energiskatt 33.1 öre/kWh
Skattereduktion 60 öre/kWh Moms 12.3 öre/kWh
Total 113 öre/kWh Total 111 öre/kWh

 

Energy price (Spot)

For the sold energy, just like on your normal floating energy contract, the price for energy is the monthly average spot price. Some energy companies, but not all, take a balance cost of few öre that they reduce from the spot price. Some companies on the other hand offer a bonus on top of the spot price. A good tool to compare different companies is http://www.prosument.se/.

Electricity Certificate

Elcertifikat is a green certificate that is granted to renewable energy. Some energy companies buy the certificates directly, which is an easy way to collect those costs. Alternative is to trade them oneself on Energimyndighetens CESAR-portal (https://cesar.energimyndigheten.se). A certificate is the equivalent of 1 MWh or energy, so a typical system produces 6 certificates per year. The average prices have been around 150 kr/MWh, but peaked in 2018 alongside the electricity prices.

Nättnytta

Transmission company pays a fee called “nättnytta” which accounts for the savings in delivered energy in the grid. In addition of not having to pay the transmission fee (överföringsavgift) PV producers also get rewarded for supplying power to their neighbors and reducing the stress in the grid.

Skattereduktion

In addition to the above mentioned compensations, Skatteverket credits 60 öre/kWh for the sold production. This tax reduction is to compensate for the taxes paid for purchased electricity (Energy tax plus VAT) that is offset with sold production.

Because of this, the tax reduction is only paid for the overproduction covering own consumption. If the overproduction exceeds the bought energy, no tax reduction is given. All the other compensations will still be paid, but half of the value is lost. This is an important design aspect and the reason why independent professionals should be used to help in the purchasing process of a PV system. Some contractors size systems aggressively to make the project more valuable, but this will not be in the full benefit of the customer.

Nordpool Spot price

Because of the latest developments in the Nordic electricity market Nordpool Spot, I must dedicate a chapter to a brief explanation of the energy markets. In the graph below are listed monthly average prices for the past 5 years. It is important to note that when the electricity price of private customers rises, it is usually attributable to the other components, not the actual energy price on the commodities market. However, since the spring of 2018 have the prices been almost double to the average.

Price hike of summer ’18

Hydropower and nuclear both make about 50% of the Swedish electricity generation. Because of the drought the flow in the dams was lower than usually decreasing their output. At the same time some nuclear plants had to stop operation unexpectedly. Nuclear reactors need cooling which is why they dump a significant amount of hot water in the nearby bodies of water (in the United States they use evaporation for cooling, which is why you don’t see the Simpsons style cooling towers in Sweden).  In order not to overheat the seawater and cause damage to marine life these plants actually had to be shut down.

The lost capacity had to be made up with power plants that normally never run expect in the coldest winter months. Their operating costs are much higher than hydro and nuclear, which caused to price hike. At the writing, the prices are still significantly higher than usual and it is expected to take a long time to fully recover the pre-drought levels of hydro.

For a residential PV producer, the benefit is tangible. Sunny clear days increased production significantly and the final sales price for these kilowatt-hours was 25% higher than normally (Price of energy is only one part of the total compensation). One must not read too much into abnormalities in weather though since there are several different years during the 30+ year lifetime of a PV installation.

Bundling of PV installation and electric contract

Utilities have been quick to enter the solar market selling solar installations to their transmission customers. It is important to note, that a transmission company also is an energy company so it is in their interest to attract more energy customers. This is why several companies offer a bonus price when you purchase the solar installation from them locking in new customers.

Usually the installation prices from the energy companies are significantly higher than from independent contractors. Based on Grønbid’s research the prices are 20% or 24 000 kronor higher than the average. To offset the high investment cost companies like Vattenfall and Kraftringen offer between 100 and 25 öre on top of the spot price for the first year.

Even with Vattenfall’s 1 kr/kWh bonus price, if the first year has normal irradiance, the value of the bonus price is 6700 kronor, (production 10 000 kWh, 2/3 sold to grid) which makes you 17 300 kronor worse than using an independent contractor. There is no feasible scenario to make the trade-off between high installation cost and bonus price work from the customer’s perspective.

Summary

Because the compensation for sold solar energy is so close to the price of purchased electricity it doesn’t make difference if you sell your own production or use it in the house as long as on an annual level the sold energy doesn’t exceed purchased. When thinking about investing in solar, it is good to use an independent party in the purchasing to:

  • Ensure correct system sizing
  • Select the most suitable energy contract
  • Guide you through how to get paid for Electricity Certificates
  • Do a transparent bidding process with pre-selected contractors

There was a lot to cover in this article and I hope after reading it you are better informed about electricity pricing. Because of the energy tax and transmission cost, there is an effective bottom price for electricity, which insulates the solar investment against very low electricity prices. On the other hand the producer will get full benefit from high energy price because of the Spot price component in sold electricity.

The next step to enjoying revenue from solar energy is subscribing to GRØNBID’s platform and we will launch a group purchasing campaign in your neighborhood.


About the Author : Tuukka


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