The Economic Inefficiency of Grid Parity: The Case of German Photovoltaics

Since PV grid parity has already been achieved in Germany, households are given an indirect financial incentive to invest in PV and battery storage capacities. This paper analyzes the economic consequences of the household's optimization behavior induced by the indirect financial incentive for in-house PV electricity consumption by combining a household optimization model with an electricity system optimization model. Up to 2050, we find that households save 10% - 18% of their accumulated electricity costs by covering 38 - 57% of their annual electricity demand with self-produced PV electricity. Overall, cost savings on the household level amount to more than 47 bn €2011 up to 2050. However, while the consumption of self-produced electricity is beneficial from the single household's perspective, it is inefficient from the total system perspective. The single household's optimization behavior is found to cause excess costs of 116 bn €2011 accumulated until 2050. Moreover, it leads to significant redistributional effects by raising the financial burden for (residual) electricity consumers by more than 35 bn €2011 up to 2050. In addition, it yields massive revenue losses on the side of the public sector and network operators of more than 77 and 69 bn €2011 by 2050, respectively. In order to enhance the overall economic efficiency, we argue that the financial incentive for in-house PV electricity consumption should be abolished and that energy-related network tariffs should be replaced by tariffs which reflect the costs of grid connection.