The European rooftop solar industry is booming. Skyrocketing electricity prices over the past year have led to a considerable opportunity for households and businesses looking to generate renewable solar power to use themselves and sell any excess back to the grid. Rooftop solar added 25GW in the EU in 2022, 8GW more than in 2021, says the industry group SolarPower Europe.
Rooftop solar represents around 60% of overall EU solar capacity additions, and SolarPower Europe anticipates that it will continue to represent the majority of the market “at least until 2026”.
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For businesses working in rooftop solar – such as solar cleantech start-up Otovo – the rewards have been immense. Otovo was founded in Oslo in 2016 as a residential solar marketplace, using unique software to estimate how many panels you can put on a roof, where exactly you should place those panels and who in your local area is best suited to install them.
The year 2022 saw Otovo enter three new markets. It now operates in 13 European countries and is the continent’s largest solar residential marketplace, with the company “growing by 170% in a year”, says Andreas Thorsheim, founder and CEO.
“It has been totally crazy for the European solar industry ever since September 2021, when gas prices started pushing the electricity price so high,” says Thorsheim. “Initially only solar generators in the most liberalised markets benefitted, but soon all markets were [booming].
“We expect the trend to continue, with one to one-and-a-half million solar panel installations on rooftops this year in Europe.”
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By GlobalDataA challenging future for rooftop solar
How long will this trend continue, however? Analysts anticipate European energy markets will remain volatile for some time as the continent secures new fossil fuel export partners and boosts domestic renewable electricity – but when the wholesale power market stabilises, renewables generators are unlikely to see such great profits on self-generated solar power anymore.
The years that follow will see variable renewables penetrate ever further into the European electricity mix: already, wind and solar overtook gas to become the largest source of EU electricity in 2022. While rooftop solar remains dominant in many EU markets, the utility-scale market is ultimately expected to dominate generation: SolarPower Europe anticipates that utility market growth will overtake the rooftop market by 2026.
Eventually, when grids are 100% low carbon and majority-powered by cheap solar and wind – which the EU is aiming for by the mid-2030s – there is a chance that the price difference between rooftop solar and utility solar will be so marginal that installing rooftop solar will no longer make economic sense for households.
“The more solar you have in a certain country or region, the lower the value of the solar electricity generated, because there will be an abundance of electricity whenever the sun is shining brightly, and the value of that electricity will accordingly be low or near zero,” says Tim Schittekatte, research scientist at the MIT Energy Initiative.
Some electricity markets are already experiencing price cannibalisation, where weather-dependent renewables depress wholesale prices at times of high output. Utility solar plants risk having a similarly destructive impact on the profitability of rooftop solar plants, once they become the driving influence on wholesale electricity prices.
Serguey Maximov Gajardo, from the University College London (UCL) Institute for Sustainable Resources, points out that rooftop solar will still make savings on network, policy and operating costs charges. In the UK, wholesale electricity prices have “historically represented only 40% of the retail price”, he notes. However, this is counterbalanced by the fact that there are “massive economies of scale in utility solar generation”, says Schittekatte.
James Price, also from the UCL Institute for Sustainable Resources, anticipates that it will take “a decade or two until utility solar and wind power set prices for a long period of time”. He acknowledges that utility-scale renewables will have to cover significant distribution costs and integration into the system but believes it will nonetheless “be cheaper than small rooftop solar”.
Thorsheim concurs that “the higher the electricity price, the better the business case”, pointing out that when Otovo first began operating in Norway, the market conditions were tough as the country’s high penetration of cheap hydropower (as well as low levels of sunlight) meant there was less opportunity for profit than in markets where the power price is set by volatile fossil fuels.
Thorsheim anticipates that in power markets with high renewables penetration, rooftop solar will ultimately only make sense for “office buildings and commercial developments”, with the business case no longer working for new solar developments on residential buildings.
Net metering versus the ‘sun tax’
There is also a risk that the weakening of the rooftop solar business case will be accelerated by power market reform. The fact that Europe’s electricity market has been at the mercy of fossil fuels has been to the benefit of solar generators, and even immediate responses to the turmoil of the past year – such as price caps or consumer subsidies – can discourage rooftop solar, says Thorsheim. Longer term, the EU is in the midst of reforming its electricity markets to have more predictable, fixed-power contracts, which will reduce the possibility of another rooftop solar profit boom.
Solar net metering – the payment mechanism used in many European countries, where households that own rooftop solar systems receive credit for any surplus power sent to the grid – risks being phased out in markets where rooftop solar penetration is high. Net metering currently acts as a “massive implicit subsidy for solar”, says Schittekatte, because consumers pay a lot less for networks, and in taxes and levies on the power they generate, while the electricity they sell is often credited at the retail – rather than wholesale – price.
In February 2023, the Dutch House of Representatives narrowly voted to phase out the country’s net metering scheme amid warnings that this could put a break on the long-term growth of the rooftop solar market. In California, another market with high rooftop solar penetration, the existing net metering rules will soon be replaced with a less lucrative payment model for solar generators. In Australia, a so-called 'sun tax' was introduced in 2022, which charges solar generators for exporting solar power back to the grid at times when it is not needed, such as on a sunny afternoon when demand is low.
Building a new business model
The problem with the future we seem to be heading towards is that it is incompatible with the requirements of the energy transition. Countries in Europe will need much more rooftop solar than they have now to reach net zero.
“Rooftop solar cannot be doomed, because we need it,” says Laurens de Vries, an expert in energy market design at Delft University of Technology in the Netherlands. “We will not only need to decarbonise current electricity demand but also produce four or five times more electricity to help decarbonise the transport, industrial and heating sectors.
“Many countries in Europe are land-scarce: it simply would not be possible to build all the required solar power without building on rooftops.”
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Even in a business-as-usual scenario, there are reasons why homeowners and businesses would continue installing rooftop solar. “People like to be part of this transition, even if it is not the smartest investment from a system point of view,” says Schittekatte. “People also have energy security concerns, and particularly so in a future where we have more extreme weather.”
Batteries also offer a means of improving the business case of household solar by allowing generators to store and then use or sell electricity at times of higher demand. Heat pumps are another option for households to direct excess generated power towards a useful purpose if there is no business case to sell to the grid. On a larger scale, interconnectors can also help by allowing countries to sell excess power in the grid to neighbours at times of high output.
Already batteries are making massive inroads in rooftop solar markets: some 3.9GWh of residential battery capacity was installed in Europe in 2022, up 71% from the year before, according to SolarPower Europe. Some 420,000 storage batteries were installed alongside photovoltaic units in 2022, meaning that more than one million homes across the continent are powered with joint solar and battery storage systems.
Nevertheless, batteries alone may not be enough to sustain the current rooftop solar business model given that the same flows of use and storage will be occurring at utility-scale solar plants that have batteries attached, but with much greater economies of scale.
More interventionist policy may ultimately be required to ensure buildings are equipped with solar panels. This is already under consideration in Europe; the European Commission has proposed a solar rooftop mandate for all commercial and public buildings by 2027, and for new residential buildings from 2029. Similar building standards requiring solar panels on new homes have already been mandated in California.
There are many challenges to building all the solar that is required for net zero in Europe, from building a skilled workforce and improving transmission and distribution networks, to building up a supply chain and making permitting procedures more efficient. Just as crucial will be ensuring that a clear business case remains for new solar installations – large-scale solar parks as well as rooftop solar, which for now continues to be the driving force behind the solar revolution in Europe.
