The Economics Reality of Renewable Energy Application in Local Households

THE ECONOMICS REALITY OF RENEWABLE ENERGY

APPLICATION 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, MALAYSIA
warazaki@yahoo.com

ABSTRACT: Researchers advocate that the main economic obstacle in the application of
Renewable Energy (RE) in households namely Building Integrated Photovoltaic (BIPV) is its high
capital cost; hence lowering the capital cost of BIPV would ensure mass application of the
product. BIPV price may reduce in the future but it may be too late to curb global warming. The
demand 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. The
former 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 Production
Possibility Framework (PPF) suggests that unless BIPV is within the PPF limit, there is no guarantee
that households would apply the system even if its capital cost is lowered. In addition, there is
simply no apparent demand and supply of BIPV in the local housing market. This was deduced
from sales brochures for 85 residential properties offered at a local property exhibition. It is
believed that whilst households seem to care for the environment, it is unlikely for them to spend
their limited resource on BIPV. Based on these Economics rational, a reduction in the capital cost
does not guarantee mass application of the system. This paper presents a reason that the economics
obstacle in the application of RE such as BIPV is not only its capital cost but also the economics
behaviour 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 have
made Renewable Energy (RE) as the inevitable source of power. There are several innovations of
RE such as wind power, hydro power and solar power. The most convenient form of RE system in
households is Building Integrated Photovoltaic (BIPV) system whereby it is designed to be part and
parcel of the building elements (Smith, 2005). Mainly BIPV consists photovoltaic cells that are
made of two thin silicon layers with different amount of impurities that generate electrical field
when exposed to sunlight and the inverter which converts the direct electrical current (DC) from
sunlight to alternating current (AC) for household’s consumption. The capacity of these cells to
convert light into electricity is measured as watts peak (Wp). This is an international calibration that
defines the power generated by the photovoltaic cells under light intensity of 1000 watts per square
metre, equivalent to bright sun (Smith, 2005). In temperate climate BIPV is customised to be part of
the 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 high
capital 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 BIPV
prevails 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 the
Economics viewpoint.

2. BIPV IS NOT A SUBSTITUTE PRODUCT

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

Table 1: Extraction from Report on Household Expenditure Survey 2004/05 by the

Statistics Department (2006)

Average monthly expenditure for electricity per household 59.33 MYR

Average monthly total expenditure per household 1,953.02 MYR
Average household size 4.30 persons
Average 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 is
MYR26,000 for 30 years service life, the hypothetical “electricity bill” of BIPV would be MYR208.72
per month for household with average monthly income of MYR1,953.02 (Table 2).

Table 2: Hypothetical Monthly “Electricity Bill” Deduced from the Average Household
Monthly 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 MYR

Average monthly consumption of electricity per household 264.47 kWh
Average 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 kWp

Capital Cost of BIPV per 30-year service life 75,140 MYR
Capital Cost of BIPV per one year service life 2,504.67 MYR
Hypothetical monthly BIPV “electricity bill” 208.72 MYR

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

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 The Economics Reality of Renewable Energy Application in Local Households

(Arnold, 2005b). BIPV and mains electricity supply make the electrical appliances function all the
same, but the latter being plenty in supply is a cheaper option than the former. Majority of the
households that use mains electricity would experience high total utility because spending less for
the same output. Having said that, households that apply BIPV have direct contribution to the
betterment of environment and they would experience a utility value that is unique to them despite
having to pay for high capital cost of BIPV.
However, comparatively, monthly BIPV bill is 250% more than mains electricity bill for the
same household. Since the economics gap between the two products is wide, BIPV remains as an
alternative to mains electricity supply, but not a substitute product. It is unlikely for the demand in
BIPV to increase drastically when the mains electricity supply tariff increases at the present rate of
only 1.2% per year. Furthermore, it is anticipated that the recent government budget for year 2009
that plans for households with electricity bill below MYR20 to pay nothing will not help the demand
of 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 institutional
rationale of BIPV justifies that subsidies in such schemes will increase sales and induce investments
in 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 incentive
to install BIPV systems will lower the net present value of the BIPV investment. Both authors
presented a case that is actually in line with the Economics Law of Demand that says, ‘as the price
of good rises, the quantity demanded of good falls; and as the price of goods falls, the quantity
demanded of the good rises, ceteris paribus’ (Arnold, 2005b). The Law of Demand can be
represented in a graph format that shows the inverse relationship between price and quantity
demanded of a specific product, provided always others remain constant. The resulted relationship
is known as the ‘demand curve’ (Figure 1). Any movement along the demand curve (say from
points 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 similar
demand 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 private
residential applications in 2007/08 including show houses by housing developers, a low take up
considering there are thousands of new housings constructed in Malaysia, annually (PTM, 2007).
These applications are generously subsidized under the SURIA 1000 programme by the Malaysia
Energy Centre [Pusat Tenaga Malaysia (PTM)].
According to Law of Demand, the price of BIPV has to be a specific “low” for it to command
a certain “high” demand. Lesourd (2001) in his analysis of the economics of grid-connected
photovoltaic systems and Duke et. al. (2005) in his research concerning residential BIPV expansion
in 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, the
main concern is the timing of BIPV “low” price to effect for “high” demand by households so as not
too 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 of
seven to 10 per cent in the BIPV capital cost (NST, 2008a). As such, it may be possible to reach the
favourable “low” price five years earlier, ceteris paribus (Figure 3).

Price Price (MYR/Wp)

30
high 25
20
15
10
low 5

low high low high

Quantity Demanded Quantity Demanded

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

60
50
MYR per Wp

40
30
20
10
0
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
Year
Individual Installation (PTM)
Average System Cost Deduced by Author
Linear System Cost (PTM)
Linear Trendline Cost Deduced by Author
Linear Trendline Cost (PTM)

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

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 The Economics Reality of Renewable Energy Application in Local Households

Nevertheless, the above is looking at one aspect of the BIPV demand. The other aspects of the
demand that concern social, cultural, etc. for BIPV are critical to the acceptance of such application
in 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 basic
economics concepts of scarcity, choice and opportunity costs in a production (Arnold, 2005b). Scarcity
is the condition where needs and wants for goods are greater than the resources available. In the
context of household, resource is basically household income that is limited; hence, restraining
expenditure. Choice is where household has to decide among many attainable combinations of
several goods. When a choice is made for expenditure on a certain good, household would have to
forego the other due to the limited resource. The most highly valued opportunity or alternative
forfeited is known as opportunity cost. Fundamentally, every time a household makes a choice, it
incurs an opportunity cost.
Although households come in various sizes, they basically experience the very same situation of
scarcity, choice and opportunity cost, but at different degree. Figure 4 represents a hypothetical
PPF for a household. The finite resource of a household, i.e., income is graphically portrayed by the
frontier on the PPF graph. Nevertheless, every household is limited to choosing any combination of
goods (in the category of needs and wants) depending on the interpretation of the household. For
example, 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 when
household gets maximum output in any combination of goods (between needs and wants) from the
limited income – and that would be any point on the PPF curve. Say, a household has to decide on

NEEDS

1 2 3 4 5 6 7 8 WANTS

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

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either combination A or B on the PPF curve (Figure 4). Opportunity cost is illustrated as household
moves the choice from point A to point B. At point A, household’s expenditure is made up of 4.5
needs and 3 wants. If it decides on combination at point B, its resources are spent on 2 needs and
4.5 wants. At point A, the opportunity cost for every 1 want is 1.5 needs. While at point B, the
opportunity 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). In
this instance, whether household chooses point A or B, it depends on the economics value of the
respective opportunity cost. Nonetheless, the higher the opportunity cost of doing something, the
less 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 be
on 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 and
beverages, housing rental, transportation and communication. These items are likely to be on the
needs axis of the theoretical PPF for household. Economists claim that people behavior has a lot to
do with opportunity cost – as well as household where it will prioritise expenditure on needs, rather
than wants. Based on this rational and assuming BIPV is somewhere on the want axis, the opportunity
cost of BIPV (at MYR208.72 per month) could be too high, i.e., at the cost of transportation and
other 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 that
BIPV is at no. 6 on the wants axis; hence appears attainable (Figure 5). This does not mean
household will spend on BIPV because the increase in income has set a different situation for the
household – change in preferences or adjustment to its list of needs and wants.

NEEDS
8

1 2 3 4 5 6 7 8 WANTS

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

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 The Economics Reality of Renewable Energy Application in Local Households

Economics theory of PPF shows that household has to choose its expenditure within the limited
means 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 on
the household’s PPF axis. Even if household income increases or the cost of BIPV reduces, from
economics viewpoint there is no guarantee BIPV will be applied by the household. Household’s
behavior, priorities as well as situation affect its expenditure. When one situation change, it effect
for 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 or
BIPV. This is deduced from the analysis of information on property brochures for MYR2 billion
worth of residential properties offered at the Malaysia Property Exhibition (MAPEX) in Kuala
Lumpur on 17th to 19th June 2008. The rational being property brochures reflect the housing aspects
supplied by the developer; and these normally are the very same aspects that are demanded by
households. It is common sense for sellers to promote what buyer wants and what buyer wants
would 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 market
sentiments.
The analysis includes 85 residential properties brochures that are made up of four types of
dwellings; namely strata, detached houses, linked houses and semi-detached houses (Figure 6). The
percentage breakdown shows that linked houses of various types make up the largest number of
residential properties on offered, i.e., 36.47% whilst detached house is the smallest component at
12.94%.

Strata Title Residences Linked Houses

Semi-Detached Houses Detached Houses

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

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 main
information on the brochure that is being explicitly advertised can be grouped into six categories
(Figure 7).

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Sales Pitch /
Promotions 64.7%

Sales
56.5%
Property
Images 100%

Floor Plans 67.1%

Specifications
43.5%

Location Plan
97.6%

0 20 40 60 80 100

Figure 7: Breakdown of Information Explicitly Presented on Promotional Brochures

for 85 Residential Properties at MAPEX June 2008

It appears that addresses of the properties and their appearances are two important factors that
influence the residential market. The properties appearances are described either by photographs
of the show houses/units, perspectives drawings or artist’s images/impressions. Except for one
developer, all other developers explicitly described the location of the properties with reference to
the 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 properties
highlighted the selling price, and these are mostly below MYR500,000. Most of the high-end residential
properties (say above MYR1 million) have their price tags partially hidden in small prints of the
brochure. Besides that, 55 out of 85 properties (close to 65% of brochures) describe boldly the extra
benefits of the properties. These benefits are not basic requirement for housing but the widespread
advertisement 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 mainly
concerning neighbourhood security, financial assistance, free gifts, smart-home features, etc. No
property offers anything with regards to RE or BIPV. In conclusion, the survey shows no evidence
of demand and supply of RE in the present housing market. For high-end detached house that costs
MYR2 million, the cost of 5kWp of BIPV would be only 6.5% of the selling price. Even at that
comparatively low price, BIPV is not a consideration in the residential market. It can be deduced
that RE is not even on the households’ PPF axis. A survey by PTM (2007) supports this claim and
PTM commented that whilst the society claimed to be aware of the importance of RE for the future
of our environment, they are not willing to spent on it.

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 The Economics Reality of Renewable Energy Application in Local Households

Free Furniture /Appliances 12 IT Security 4

Rental Security 4
Ownership Security 3

Smarthome 8 Financial Assistance 21

Eco-friendly 1

Energy Security 0 Neighbourhood Security 32

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

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 for
mains electricity supply that gives higher total utility value compared to BIPV. Researchers assert
that if the cost of BIPV is low, more households will apply BIPV and this is consistent with the
Economics’ Law of Demand. However, records suggest that the desired “low” BIPV price may
happen too far in the future and maybe less effective in reducing the effect of global warming. The
recent government ruling to abolish BIPV tax will help to reduce the cost of BIPV but the decision
to give free electricity to local households with MYR20 or below electricity bill may not be an
advantage to BIPV. The PPF graph demonstrates that if households choose BIPV, there would be
a high opportunity cost due to its high capital cost and households’ limited resource. This affirms the
unlikely application of BIPV in household. As such, even if there are interventions such subsidies
and tax incentives for BIPV, these are only effective when BIPV remain on the households’ PPF
axis. Else, an increase in household income or reduction in BIPV cost would not guarantee BIPV
application. A survey of the property brochures that represents the housing market sentiment leads
to the fact that there is no demand or supply for BIPV at present; hence affirms that BIPV is not on
the households’ PPF axis.
Indeed RE is inevitable given the state of our environment and the certain depletion of fossil fuel
energy. 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 capital
cost of RE (supply side) but also making it to be on the household’s PPF (demand side). The
Economics 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 to
ponder is the high capital cost may not be the actual hindrance to BIPV in local household – this is
akin to the lack of concern to install smoke detectors even though this important life saving equipment
is generally affordable to households.

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