Solar energy is considered one of the most abundant and promising sources of renewable energy. It has become the most cost-effective way to accelerate the transition away from fossil fuels, reduce greenhouse gas emissions, and mitigate climate change. As of the end of 2022, the global cumulative installed capacity of solar photovoltaics reached 1,183 gigawatts, with an additional 236 gigawatts installed in 2022. In 2022, solar photovoltaic power contributed 6.2% to the global electricity demand.
However, solar deployment is not a one-size-fits-all solution; it’s a process that involves different choices and trade-offs. This article outlines the two primary options for solar deployment, namely utility-scale solar photovoltaic projects and distributed solar photovoltaic systems. I also briefly introduce their business models, and challenges, and provide examples of countries that have embraced these choices. The upcoming sections will provide a detailed comparison of these two options from various perspectives. It is our hope that this series of articles will assist readers in making informed decisions between these two choices in different circumstances.
What is a utility-scale solar photovoltaic project?
A utility-scale solar photovoltaic project is a large solar power facility that generates electricity from solar energy and sells it to wholesale utility buyers or the market. Typically, these projects are ground-mounted and have a capacity exceeding 5 megawatts (MW). They are connected to the transmission or distribution grid and operated as Independent Power Producers (IPPs) under long-term Power Purchase Agreements (PPAs) with utility companies or other off-takers. These projects are considered ‘grid-side’ (FTM) because the electricity they generate is directly injected into the grid and supplied to end customers.
What is a Solar distribution photovoltaic system?
A distributed solar photovoltaic system is a small-scale solar power system that generates electricity from solar energy and uses it on-site or feeds it into the grid. Typically, these systems are installed on rooftops or integrated into buildings or structures, with a capacity of less than 5 megawatts (MW). They are connected to the distribution grid and operate in a self-consumption mode or through net metering arrangements or rely on utility company feed-in tariffs (FIT). These systems are considered ‘behind-the-meter’ (BTM) because the electricity they generate can be used on-site by the customer before or without passing through the utility meter.
What are the differences in their business models?
Utility-scale solar projects and distributed solar photovoltaic systems have distinct business models, primarily influenced by their contracting mechanisms, pricing plans, and sources of revenue.
Utility-scale solar projects:
The primary contracting mechanism for these projects is the Power Purchase Agreement (PPA), which is a contract between the producer and the consumer, outlining the price, quantity, duration, and terms of the electricity sale. PPAs can be physical or financial, depending on whether the electricity is physically delivered or settled financially. They can also be corporate or virtual, depending on whether the consumer is a large commercial or industrial entity or a retail customer. PPAs are typically awarded by utility companies or off-takers through auctions or bidding, based on the lowest electricity price or Levelized Cost of Electricity (LCOE). The nature of the PPAs, whether physical or financial, depends on market structure and regulatory factors. They can also be corporate or virtual, depending on the consumer’s location and scale. Regulatory barriers, financial risks, and price competition are considerations. The primary source of revenue for these projects is selling electricity to wholesale markets or off-takers. PPAs provide producers with a long-term, fixed source of income and offer consumers stable, low-cost electricity supply.
Solar distribution photovoltaic systems:
Customers can use the electricity generated by distributed solar photovoltaic systems without being connected to the grid, primarily driven by cost savings compared to grid supply. However, the reliability and security of the power supply may require the customer’s premises or their solar system to be connected to the grid. Therefore, the primary policy mechanisms for these systems are net metering or feed-in tariffs (FIT), policies that provide credits or payments for the electricity homeowners export to the grid. Net metering allows homeowners to offset their grid consumption with excess electricity they generate, while feed-in tariffs ensure a fixed price for each unit of electricity fed into the grid. The primary pricing scheme for these systems is retail electricity prices, which is the price homeowners pay for their electricity consumption or receive for exporting. The primary sources of income for these systems are cost savings on electricity and income from the grid. What challenges do each of these options face?
Some of the challenges faced by utility-scale solar projects are:
They may encounter regulatory hurdles and delays in obtaining permits, approvals, and interconnection agreements from various regulatory authorities and stakeholders.
– They could face financial risks and uncertainties in securing funding, negotiating contracts, and competing in wholesale markets.
– They may confront technical challenges and costs associated with integrating large amounts of variable and intermittent solar generation into the grid and providing ancillary services such as frequency regulation and voltage support.
– They might encounter environmental and social impacts, as well as opposition from landowners, residents, or environmental activists who may be concerned about the loss of natural habitats, biodiversity, landscapes, water, waste, or visual and noise pollution.
Solar distribution photovoltaic systems face similar challenges, such as：
– Regulatory obstacles and inconsistencies in obtaining net metering policies or feed-in tariffs, which may vary by state, utility, or customer category.
– Financial barriers and complexities in securing funding, equipment installation, and maintaining performance.
– Technical challenges and costs related to grid connection, managing reverse power flow, voltage fluctuations, and protection issues.
– Information and behavioral barriers, as well as biases, in raising awareness, providing information and influencing customer decisions
Some examples of countries or regions for each option include:
There are various examples of countries or regions that have a significant number of utility-scale solar projects or distributed solar photovoltaic systems. These examples vary depending on their background, goals, and resources. Some of the examples include:
Utility-scale solar projects:
Countries with a significant number of utility-scale solar projects include China, the United States, India, and Australia. These countries benefit from favorable natural conditions, such as high solar irradiance and vast land areas, as well as supportive policies and incentives, such as feed-in tariffs, auctions, tax incentives, or renewable portfolio standards, encouraging the development and deployment of utility-scale solar projects.
Solar distribution photovoltaic systems:
Countries with a significant number of distributed solar photovoltaic systems include Germany, Japan, Italy, and Brazil. These countries have higher retail electricity prices, strong customer demand, and favorable policies and regulations, such as net metering, feed-in tariffs, tax incentives, or subsidies, which have stimulated the adoption and promotion of distributed solar photovoltaic systems.
Utility-scale solar projects and solar distribution photovoltaic systems have their unique structures, business models, characteristics, opportunities, and challenges in different regions and environments. Their advantages and disadvantages are influenced by various factors such as cost, regulation, reliability, development timelines, contracts, pricing, and global contributions. They also have different impacts on the electricity system, the environment, and society.
However, both of these choices play important roles in driving the energy transition and are not necessarily mutually exclusive. In some cases, they can complement each other, such as using distributed solar photovoltaic systems to reduce peak demand or provide backup power for utility-scale solar projects. Therefore, choosing between utility-scale solar projects and distributed solar photovoltaic systems should not be seen as an either-or decision but as a range of possibilities that can be customized based on specific needs and preferences.
In the upcoming sections, I will provide a detailed comparison of utility-scale solar projects and distributed solar photovoltaic systems in terms of business models, advantages, disadvantages, and more. I hope this series of articles helps you understand the pros and cons of each choice and their impacts on the electricity system, the environment, and society. Please stay tuned for more information!