Implicit Subsidies for Solar Systems through Self-Consumption?

Self-consumption is an important driver for more solar systems: when homeowners produce electricity on their own roofs and use it directly on-site, they not only save on electricity costs but also avoid a large portion of grid tariffs and levies. This is beneficial for homeowners and the expansion of solar energy, but simultaneously undermines fairness in grid infrastructure financing. An analysis.

The Axpo Energy Reports have measured and compared the "subsidy need" for various technologies. Subsidy need is defined as the difference between costs and expected operating revenues. It should not be understood as direct cash payments, but rather as the necessary total financial incentive to make the system economically viable. For small solar systems, less than a quarter of this required support is paid through direct subsidies such as one-time grants. The rest benefits homeowners in other ways – primarily through savings, meaning implicitly. An important factor here is the lower grid cost contribution through self-consumption.

Self-consumption occurs when a consumer uses electricity that they themselves produce on-site (i.e., not via the power grid). For example, when a household uses electricity from its solar system to power a heat pump. While it's beneficial and helpful for households to use their own electricity to reduce electricity costs, self-consumption saves more than just the cost of electricity that would otherwise be purchased from the local utility. Electricity prices also contain additional costs and financing mechanisms, such as grid tariffs for financing the power grid and levies such as the Swiss “Netzzuschlag”. Approximately half of the total electricity price consists of these mechanisms. The consumer with their own electricity production – the so-called prosumer – also saves these costs for the amount they consume themselves. While this is certainly good for the prosumer, the missing contributions to grid costs and levies must be paid by other consumers, and their tariffs rise.

Why Self-Consumption Today Usually Doesn't "Save" Grid Costs

Networks are currently financed primarily through consumption-dependent grid tariffs. However, network costs are mostly not generated by the amount of energy transported, but by the infrastructure setup and peak load of the network. It is estimated that approximately 60 to 70 percent of grid costs are purely due to structural requirements – particularly the number and location of grid connection points and the required line length (BFE study from 2021). The actual transported energy accounts for only about 30 to 40 percent.

So if a prosumer reduces their grid electricity consumption by 50 percent through self-consumption, they then pay only 50 percent of their previous contribution to grid financing and other levies and system costs. Meanwhile, the power grid remains available at any time with its previous capacity for them – it's ultimately a form of insurance. They will likely still draw full capacity during certain hours, for example when the solar system isn't producing.

If prosumers don't pay grid tariffs and levies for self-consumed kilowatt-hours, the underlying costs don't disappear. Instead, they are shifted to the remaining kilowatt-hours purchased from the grid. Particularly households without PV – namely tenants – thereby bear more of the network costs. In addition to growing solar expansion, the extension of self-consumption through collective self-consumption arrangements or reduced grid cost participation through local energy communities is further exacerbating the problem.

New Tariff Models Required

The problem here lies not in self-consumption itself, but in the fact that consumption-dependent grid tariffs are no longer appropriate and reasonable given the new situation. Grid tariffs should rather set the right incentives so that self-consumption is not rewarded across the board, but only when it specifically smooths electricity peaks in the grid and ideally reduces the need for grid expansion. For example, the wider adoption of dynamic grid tariffs could be useful – supported by dynamic energy products in an open market. At the same time, even with better incentives for self-consumption, overall costs will only decline moderately (see above). Studies demonstrating a significant effect are lacking. Therefore, to ensure fair grid financing, it will be necessary to finance networks more strongly through fixed base amounts – possibly differentiated according to connection capacity – or through so-called capacity tariffs. Prosumers could still save costs with such alternative tariff models through clever use of their flexibility, but would also more effectively reduce grid costs.

Transparent Discussion Necessary

Swiss electricity production is becoming increasingly decentralized. It makes sense that prosumers can consume locally produced electricity and thereby save corresponding electricity costs. However, today's grid financing through consumption-dependent grid tariffs was not designed for increasing self-consumption and acts like a implicit subsidy for solar systems. The savings from grid tariffs can be seen as an intentional incentive to further support the expansion of renewable energy, or they can be criticized on fairness grounds. Even with more dynamic grid tariffs and better incentives, the problem of fair grid financing won't completely disappear. For the future, sustainable and viable solutions are needed. The optimal design of grid tariffs will continue to be discussed, but this discussion must certainly be conducted with full transparency. 

This is a joint article by Fabian Feger, Head Corporate Regulatory Management, and Carlo Schmitt, Regulatory Manager.