Solar Power Profitability with Demand Response and Carbon-Corrected Electricity Prices

Abstract

We study the economic profitability of small-scale photovoltaic (PV) systems in the insolation conditions close to the Arctic Circle. We show moderate rate of returns (1.0 % in the Northern and 1.4 % in the Southern Finland) for the PV system investments with time-of-use hot water heating. Optimized hot water heating increases the rate of return by 0.6 percentage points. We internalize the negative externalities of greenhouse gas emissions from electricity generation by presenting the hourly electricity prices as a function of emission permit costs. A 10 €/tCO2 increase in carbon price improves the PV investment rate of return by 0.3 percentage points.

Keywords: Solar PV, Demand response, Social cost of carbon

JEL Classification: Q41, D10, C61