the economics reality of renewable energy application in local households

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The Economics Reality of Renewable Energy Application in Local Households

THE ECONOMICS REALITY OF RENEWABLE ENERGYAPPLICATION IN LOCAL HOUSEHOLDS

Wan Rahmah Mohd Zaki, Abdul Hadi Nawawi and Sabarinah Sh Ahmad

Faculty of Architecture, Planning and Surveying, Universiti Teknologi MARA, Shah Alam, [email protected]

ABSTRACT: Researchers advocate that the main economic obstacle in the application ofRenewable Energy (RE) in households namely Building Integrated Photovoltaic (BIPV) is its highcapital cost; hence lowering the capital cost of BIPV would ensure mass application of theproduct. BIPV price may reduce in the future but it may be too late to curb global warming. Thedemand of BIPV is a critical success factor for the application of the system in local households.To demonstrate this, an imaginary monthly electricity bill for BIPV derived from households’statistical record is compared to a monthly electricity bill from the mains power supply. Theformer is expensive by 250% making it unlikely to be the choice of power supply in households.An assessment of households’ economics behaviour using Economics’ theory of ProductionPossibility Framework (PPF) suggests that unless BIPV is within the PPF limit, there is no guaranteethat households would apply the system even if its capital cost is lowered. In addition, there issimply no apparent demand and supply of BIPV in the local housing market. This was deducedfrom sales brochures for 85 residential properties offered at a local property exhibition. It isbelieved that whilst households seem to care for the environment, it is unlikely for them to spendtheir limited resource on BIPV. Based on these Economics rational, a reduction in the capital costdoes not guarantee mass application of the system. This paper presents a reason that the economicsobstacle in the application of RE such as BIPV is not only its capital cost but also the economicsbehaviour of households that must be further understood.Keywords: Economics, Renewable Energy, BIPV, Household

1. INTRODUCTION: BIPV AS RE

The current pressing agenda to curb global warming and the depletion of fossil fuel energy havemade Renewable Energy (RE) as the inevitable source of power. There are several innovations ofRE such as wind power, hydro power and solar power. The most convenient form of RE system inhouseholds is Building Integrated Photovoltaic (BIPV) system whereby it is designed to be part andparcel of the building elements (Smith, 2005). Mainly BIPV consists photovoltaic cells that aremade of two thin silicon layers with different amount of impurities that generate electrical fieldwhen exposed to sunlight and the inverter which converts the direct electrical current (DC) fromsunlight to alternating current (AC) for household’s consumption. The capacity of these cells toconvert light into electricity is measured as watts peak (Wp). This is an international calibration thatdefines the power generated by the photovoltaic cells under light intensity of 1000 watts per squaremetre, equivalent to bright sun (Smith, 2005). In temperate climate BIPV is customised to be part ofthe building elevation and in the tropics the system is designed to suit the roofs.

However, BIPV is still a long way from being a common source of power supply in households.Researchers investigating the application of BIPV in various countries claim this is due to the highcapital cost of the system (Guerin, 2001; Lesourd, 2001; Oliver & Jackson, 2001; Bakos et al., 2003;

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Duke et. al., 2005; Sanden, 2005; Yue & Yang, 2007). To date, the high capital cost of BIPVprevails and there are hardly any takers for self-sponsored full-fledged BIPV in Malaysia (PTM,2008). This paper explores the reason for households’ lukewarm acceptance of BIPV from theEconomics viewpoint.

2. BIPV IS NOT A SUBSTITUTE PRODUCT

BIPV capital cost is considered expensive when compared to the alternative, i.e., mains electricitysupply. According to the Statistic Department of Malaysia (2006), the average household expenditureon electricity is MYR59.33 per month (Table 1). This is only 0.03% of the total expenditure ofaverage household per month.

Table 1: Extraction from Report on Household Expenditure Survey 2004/05 by theStatistics Department (2006)

Average monthly expenditure for electricity per household 59.33 MYRAverage monthly total expenditure per household 1,953.02 MYRAverage household size 4.30 personsAverage no. of income recipients per household 1.80 persons

Even though BIPV does not generate monthly “electricity bill”; a hypothetical “electricity bill”can be deduced from the data in Table 1. Considering the present cost of 1kWp of BIPV isMYR26,000 for 30 years service life, the hypothetical “electricity bill” of BIPV would be MYR208.72per month for household with average monthly income of MYR1,953.02 (Table 2).

Table 2: Hypothetical Monthly “Electricity Bill” Deduced from the Average HouseholdMonthly Expenditure for Electricity Published by the Statistics Department (2006)

Mains electricity tariff @ 1st 200 kWh is 21.8 sen, next 800 kWh @ 24.4 sen (TNB, 2008)

Average monthly expenditure for electricity per household 59.33 MYRAverage monthly consumption of electricity per household 264.47 kWhAverage annual consumption of electricity per household 3.137.64 kWh

1 kWp BIPV = 1100 kWh annual power consumption @ RM26,000 per kWp (PTM, 2008)

BIPV requirement per 30-year service life 2.89 kWpCapital Cost of BIPV per 30-year service life 75,140 MYRCapital Cost of BIPV per one year service life 2,504.67 MYRHypothetical monthly BIPV “electricity bill” 208.72 MYR

Although both sources of power supply generate electricity and satisfy similar household needsand wants, they do not fair the same in giving the utility value to the household. Utility in Economicsis a “measure of satisfaction, happiness or benefit that results from the consumption of a good


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(Arnold, 2005b). BIPV and mains electricity supply make the electrical appliances function all thesame, but the latter being plenty in supply is a cheaper option than the former. Majority of thehouseholds that use mains electricity would experience high total utility because spending less forthe same output. Having said that, households that apply BIPV have direct contribution to thebetterment of environment and they would experience a utility value that is unique to them despitehaving to pay for high capital cost of BIPV.

However, comparatively, monthly BIPV bill is 250% more than mains electricity bill for thesame household. Since the economics gap between the two products is wide, BIPV remains as analternative to mains electricity supply, but not a substitute product. It is unlikely for the demand inBIPV to increase drastically when the mains electricity supply tariff increases at the present rate ofonly 1.2% per year. Furthermore, it is anticipated that the recent government budget for year 2009that plans for households with electricity bill below MYR20 to pay nothing will not help the demandof BIPV (NST, 2008b).

3. BIPV AND THE LAW OF DEMAND

To overcome the high capital cost of BIPV, Sanden (2005) in his study of economic and institutionalrationale of BIPV justifies that subsidies in such schemes will increase sales and induce investmentsin larger factories, which in turn would drive down the capital cost of BIPV. Meanwhile, Yue &Yang (2007) through his study on various renewable energy sources in Taiwan deduced that incentiveto install BIPV systems will lower the net present value of the BIPV investment. Both authorspresented a case that is actually in line with the Economics Law of Demand that says, ‘as the priceof good rises, the quantity demanded of good falls; and as the price of goods falls, the quantitydemanded of the good rises, ceteris paribus’ (Arnold, 2005b). The Law of Demand can berepresented in a graph format that shows the inverse relationship between price and quantitydemanded of a specific product, provided always others remain constant. The resulted relationshipis known as the ‘demand curve’ (Figure 1). Any movement along the demand curve (say frompoints A to B) is always relevant for a specific time period.

The present scenario of BIPV application in local household can be described using a similardemand curve (Figure 2). In 2006, the capital cost of BIPV was MYR31.41 per Wp; say, point A’in Figure 2. At this price and assuming commissioning takes 2 years, there are only 15 BIPV privateresidential applications in 2007/08 including show houses by housing developers, a low take upconsidering there are thousands of new housings constructed in Malaysia, annually (PTM, 2007).These applications are generously subsidized under the SURIA 1000 programme by the MalaysiaEnergy Centre [Pusat Tenaga Malaysia (PTM)].

According to Law of Demand, the price of BIPV has to be a specific “low” for it to commanda certain “high” demand. Lesourd (2001) in his analysis of the economics of grid-connectedphotovoltaic systems and Duke et. al. (2005) in his research concerning residential BIPV expansionin the USA suggest that the “low” price of BIPV has to between USD1 to USD2 per Wp (MYR3.8– MYR7.2 per Wp) for it to be widely applied, say, point B’ in Figure 2. However, at this point, themain concern is the timing of BIPV “low” price to effect for “high” demand by households so as nottoo late to have a meaningful effect on Earth. Based on BIPV system cost recorded by PTM(2008) that would probably happen in year 2025, ceteris paribus (Figure 3). The recent Malaysia


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Budget 2009 has seen the import tax for BIPV being abolished. This may result for a reduction ofseven to 10 per cent in the BIPV capital cost (NST, 2008a). As such, it may be possible to reach thefavourable “low” price five years earlier, ceteris paribus (Figure 3).

Figure 3: BIPV System Cost based on Historical (2001-2005) and Forecast (2006-2010) by PTM (2007);and Recent New Ruling by the Government in Malaysia Budget 2009

Average System Cost Deduced by Author

Linear Trendline Cost Deduced by AuthorLinear Trendline Cost (PTM)

Linear System Cost (PTM)

Individual Installation (PTM)Year

MY

R p

er W

p

60

50

40

30

20

100

2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Figure 1: The Demand Curve Figure 2: Hypothetical Demand Curve for BIPVin Households (2006)

Price Price (MYR/Wp)

Quantity DemandedQuantity Demanded

low high low high

high

low 5

10

15

20

25

30


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Nevertheless, the above is looking at one aspect of the BIPV demand. The other aspects of thedemand that concern social, cultural, etc. for BIPV are critical to the acceptance of such applicationin households, more so as it involves millions of households with different priorities.

4. BIPV AND PRODUCTION POSSIBILITY FRAMEWORK

A theory called Production Possibility Framework (PPF) is popularly used to demonstrate the basiceconomics concepts of scarcity, choice and opportunity costs in a production (Arnold, 2005b). Scarcityis the condition where needs and wants for goods are greater than the resources available. In thecontext of household, resource is basically household income that is limited; hence, restrainingexpenditure. Choice is where household has to decide among many attainable combinations ofseveral goods. When a choice is made for expenditure on a certain good, household would have toforego the other due to the limited resource. The most highly valued opportunity or alternativeforfeited is known as opportunity cost. Fundamentally, every time a household makes a choice, itincurs an opportunity cost.

Although households come in various sizes, they basically experience the very same situation ofscarcity, choice and opportunity cost, but at different degree. Figure 4 represents a hypotheticalPPF for a household. The finite resource of a household, i.e., income is graphically portrayed by thefrontier on the PPF graph. Nevertheless, every household is limited to choosing any combination ofgoods (in the category of needs and wants) depending on the interpretation of the household. Forexample, a car can be a ‘need’ to a family of 7, but only as a ‘want’ to a household of two.Regardless, every household would strive to make efficient its resources. Efficiency exists whenhousehold gets maximum output in any combination of goods (between needs and wants) from thelimited income – and that would be any point on the PPF curve. Say, a household has to decide on

Figure 4: Hypothetical Production Possibility Framework (PPF) for a Household

WANTS

NEEDS

6

5

4

3

2

1

1 2 3 4 5 6 7 8


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either combination A or B on the PPF curve (Figure 4). Opportunity cost is illustrated as householdmoves the choice from point A to point B. At point A, household’s expenditure is made up of 4.5needs and 3 wants. If it decides on combination at point B, its resources are spent on 2 needs and4.5 wants. At point A, the opportunity cost for every 1 want is 1.5 needs. While at point B, theopportunity cost of 1 want is 0.44 needs. Economists argue that every decision is made at a margin,which means household will weigh every additional benefit to the additional cost (Arnold, 2005a). Inthis instance, whether household chooses point A or B, it depends on the economics value of therespective opportunity cost. Nonetheless, the higher the opportunity cost of doing something, theless likely it will be done (Arnold, 2005a; Arnold, 2005b).

Based on these arguments, for BIPV to even be considered by household it has to physically beon the PPF axis. If BIPV is not listed on either axis, then household would be indifferent to “low”BIPV price. Statistics Department (2006) found that the main household expenditure is on food andbeverages, housing rental, transportation and communication. These items are likely to be on theneeds axis of the theoretical PPF for household. Economists claim that people behavior has a lot todo with opportunity cost – as well as household where it will prioritise expenditure on needs, ratherthan wants. Based on this rational and assuming BIPV is somewhere on the want axis, the opportunitycost of BIPV (at MYR208.72 per month) could be too high, i.e., at the cost of transportation andother needs – and it is unlikely for such needs to be forfeited given the limited income.

Say, the household income increases and the PPF1 frontier shifts outwards to PPF2 and thatBIPV is at no. 6 on the wants axis; hence appears attainable (Figure 5). This does not meanhousehold will spend on BIPV because the increase in income has set a different situation for thehousehold – change in preferences or adjustment to its list of needs and wants.

Figure 5: An Outward Shift in the Hypothetical Production Possibility Framework (PPF) for a Household

NEEDS

1 2 3 4 5 6 7 8 WANTS

8

7

6

5

4

3

2

1


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Economics theory of PPF shows that household has to choose its expenditure within the limitedmeans and that opportunity costs occur at every choice of expenditure. Being relatively expensive,BIPV comes with a high opportunity cost that it is unlikely for household to opt for it. In addition,Statistics Department (2006) does not provide evidence to establish a definite location for BIPV onthe household’s PPF axis. Even if household income increases or the cost of BIPV reduces, fromeconomics viewpoint there is no guarantee BIPV will be applied by the household. Household’sbehavior, priorities as well as situation affect its expenditure. When one situation change, it effectfor many other changes.

5. RE AND THE RESIDENTIAL MARKET

Reality checks on the residential market shows there is practically no demand or supply for RE orBIPV. This is deduced from the analysis of information on property brochures for MYR2 billionworth of residential properties offered at the Malaysia Property Exhibition (MAPEX) in KualaLumpur on 17th to 19th June 2008. The rational being property brochures reflect the housing aspectssupplied by the developer; and these normally are the very same aspects that are demanded byhouseholds. It is common sense for sellers to promote what buyer wants and what buyer wantswould be the main features advertised in the property brochures that are used as marketing tools.Some information on the brochures is being emphasised while certain information is being downplayed.It is thus assumed that the way this information is being presented reflects the residential marketsentiments.

The analysis includes 85 residential properties brochures that are made up of four types ofdwellings; namely strata, detached houses, linked houses and semi-detached houses (Figure 6). Thepercentage breakdown shows that linked houses of various types make up the largest number ofresidential properties on offered, i.e., 36.47% whilst detached house is the smallest component at12.94%.

Assessment of these promotional brochures shows that certain information are being “highlighted”or expressed boldly, while some other information are “partially hidden” in small prints. The maininformation on the brochure that is being explicitly advertised can be grouped into six categories(Figure 7).

Figure 6: Types of 85 Residential Properties Offered at the MAPEX June 2008

Linked Houses

Detached Houses

Strata Title Residences

Semi-Detached Houses


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It appears that addresses of the properties and their appearances are two important factors thatinfluence the residential market. The properties appearances are described either by photographsof the show houses/units, perspectives drawings or artist’s images/impressions. Except for onedeveloper, all other developers explicitly described the location of the properties with reference tothe public amenities in the vicinity. The next popular information is the floor plans of the properties,where 67% of the properties on offered deliberate on the actual internal layouts. 56% of the propertieshighlighted the selling price, and these are mostly below MYR500,000. Most of the high-end residentialproperties (say above MYR1 million) have their price tags partially hidden in small prints of thebrochure. Besides that, 55 out of 85 properties (close to 65% of brochures) describe boldly the extrabenefits of the properties. These benefits are not basic requirement for housing but the widespreadadvertisement suggests that the demand for residential properties is significantly influenced by these“nice to have” items (Figure 8).

The breakdown of ‘nice to have’ offers for 55 residential properties show that they are mainlyconcerning neighbourhood security, financial assistance, free gifts, smart-home features, etc. Noproperty offers anything with regards to RE or BIPV. In conclusion, the survey shows no evidenceof demand and supply of RE in the present housing market. For high-end detached house that costsMYR2 million, the cost of 5kWp of BIPV would be only 6.5% of the selling price. Even at thatcomparatively low price, BIPV is not a consideration in the residential market. It can be deducedthat RE is not even on the households’ PPF axis. A survey by PTM (2007) supports this claim andPTM commented that whilst the society claimed to be aware of the importance of RE for the futureof our environment, they are not willing to spent on it.

Figure 7: Breakdown of Information Explicitly Presented on Promotional Brochuresfor 85 Residential Properties at MAPEX June 2008

Sales Pitch /Promotions

Sales

PropertyImages

Floor Plans

Specifications

Location Plan

0 20 40 60 80 100

64.7%

56.5%

100%

67.1%

43.5%

97.6%


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6. CONCLUSION

The cost of applying BIPV in households has always been expensive when compared to the alternative,i.e., mains electricity supply. They are not substitute of each other and households will likely opt formains electricity supply that gives higher total utility value compared to BIPV. Researchers assertthat if the cost of BIPV is low, more households will apply BIPV and this is consistent with theEconomics’ Law of Demand. However, records suggest that the desired “low” BIPV price mayhappen too far in the future and maybe less effective in reducing the effect of global warming. Therecent government ruling to abolish BIPV tax will help to reduce the cost of BIPV but the decisionto give free electricity to local households with MYR20 or below electricity bill may not be anadvantage to BIPV. The PPF graph demonstrates that if households choose BIPV, there would bea high opportunity cost due to its high capital cost and households’ limited resource. This affirms theunlikely application of BIPV in household. As such, even if there are interventions such subsidiesand tax incentives for BIPV, these are only effective when BIPV remain on the households’ PPFaxis. Else, an increase in household income or reduction in BIPV cost would not guarantee BIPVapplication. A survey of the property brochures that represents the housing market sentiment leadsto the fact that there is no demand or supply for BIPV at present; hence affirms that BIPV is not onthe households’ PPF axis.

Indeed RE is inevitable given the state of our environment and the certain depletion of fossil fuelenergy. Furthermore, household is probably the best sector to adopt the system due to its quantity.However, the success of RE application in local household is not only governed by the low capitalcost of RE (supply side) but also making it to be on the household’s PPF (demand side). TheEconomics reality of the demand side of BIPV presented in this paper reasons for households’behavior to be further explored in order to promote BIPV, specifically and RE, generally. A point toponder is the high capital cost may not be the actual hindrance to BIPV in local household – this isakin to the lack of concern to install smoke detectors even though this important life saving equipmentis generally affordable to households.

Figure 8: Breakdown of ‘Nice to Have’ Items as Sales Pitch for 55 Residential Propertiesat MAPEX June 2008

Free Furniture /Appliances 12

Ownership Security 3

Smarthome 8

Eco-friendly 1

Energy Security 0

IT Security 4

Rental Security 4

Financial Assistance 21

Neighbourhood Security 32


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