Cindy wants to invest in a new business that involves the installation of solar panels. In order to make an informed decision on this business venture, she will need to review potential profit/loss in the solar panel industry by considering future prospects for this type of business. Cindy also needs to decide whether she will invest her own funds or borrow the money to start the business.
The imminent growth of the solar photovoltaic (PV) industry is almost certain. When observing the rising costs of coal and natural gas prices, the decrease of PV system costs, and the government support of solar technology, the PV market looks to have a significant increase in volume over the next few years. According to SolarBuzz, a website dedicated to Solar Power and Energy, The solar PV industry has reached a critical tipping point, with end-market demand hitting record levels almost every quarter. This growth is being driven by leading module suppliers and project developers that returned to profitability during 2013, and which have now established highly-effective global sales and marketing networks.” (NPD Group, Inc., 2013)
The article also states that “demand in Q1’14 will also achieve record-breaking status, as the strongest first-quarter ever seen by the PV industry.” (NPD Group, Inc., 2013) The cost of production for solar panels has decreased significantly. “The average cost for tier 1 solar photovoltaic manufacturers is expected to fall 6% during 2014, continuing the downward trend set in place since 2008, bringing the overall cost to a record low of $0.20 per watt, according to the latest research from NPD. (NPD Group, Inc., 2013) Further consumer incentives include lower utility bills, increased tax credits and higher resale values. “Homes with solar-power system using photovoltaic (PV) panels sell for an average of $24,705 more than homes without PV systems, research finds.” (Tanaka, 2014)
The government supports the concept of solar power and aims to make it a major energy source. “Solar power as cheap as coal… that is the holy grail of the solar power industry” (R. Glenn Hubbard, 2012) Government support includes generous subsidies to the consumer and producers of the PV industry. “Government agencies, utilities and others offer a variety of tax credits, rebates and other incentives to support energy efficiency, encourage the use of renewable energy sources, and support efforts to conserve energy and lessen pollution.” (Energy, 2014) I see four main factors influencing the price elasticity of demand: •Availability of close substitutes.
Are there many available close substitutes for solar panels? The demand will tend to be elastic if Cindy and her customer can switch among the various types of PV’s for the same desired feature. •Are PV’s a necessity or a luxury?
Currently, PV’s would be considered an elastic form of energy because there are other forms of electricity (coal/power plants). We once considered personal computers a luxury and they are now a necessity. Perhaps PV’s will be viewed the same way in the future. •How much of my income will PV’s consume?
A large portion of consumer’s income equals elasticity. What portion of income can your client devote to the cost of solar panels? If it is a large share (elastic), what tradeoffs will client need to consider to make it a worthwhile purchase? •What is the time horizon when making decisions on PV’s? PV systems have productive life cycles of 30-50 years. (Brownson, 2014) A longer time horizon is said to be elastic.
Upon review of various criteria such as elasticity of demand, cost of production, etc, I would encourage Cindy to pursue this business venture. This sector is set to grow exponentially in the future. The fall in solar PV prices as well as other incentives will cause higher demand for installation. This will benefit Cindy’s new business venture by bringing more installation business and lower input costs. This can be seen in the demand supply figure:
It also makes good economic sense for Cindy to borrow money for her solar panel business venture as the government provides various subsidies to businesses involved in clean energy. “In total, the federal energy tax subsidies will cost more than $16 billion in 2013, up from only $5 billion in 2005.” (Bastach, 2013) Cindy can benefit from a piece of the clean energy subsidy pie.
Bastach, M. (2013, March 13). Most energy tax subsidies go toward green energy, energy efficiency. Retrieved from The Daily Caller: http://dailycaller.com/2013/03/14/cbo-most-energy-tax-subsidies-go-toward-green-energy-energy-efficiency/ Brownson, J. (2014, May 25). Department of Energy and Mineral Engineering. Retrieved from Penn State University: https://www.e-education.psu.edu/eme810/node/593 Energy, U. D. (2014, may 25). Tax Credits, Rebates, and Savings. Retrieved from Energy.gov: http://energy.gov/savings NPD Group, Inc. (2013, December). Solarbuzz. Retrieved from Solarbuzz: http://www.solarbuzz.com/news/recent-findings/strong-growth-forecast-solar-pv-industry-2014-demand-reaching-49-gw R. Glenn Hubbard, A. P. (2012). Economics. VitalSouce bookshelf version. Tanaka, S. (2014, May 22). Payback Time for Solar-Power Energy Systems. Retrieved from The Wall Street Journal: http://online.wsj.com/news/articles/SB10001424052702304198504579571960667560156?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702304198504579571960667560156.html