My neighbor Cindy wants to start a contracting business for installing solar panels (PV Modules). With the ever-growing popularity of ‘green efforts’ among households and businesses she has asked me for my advice before venturing into this industry. Cindy has heard of government incentives for installing solar panels. Cindy is motivated by the green efforts and wants to help reduce the pollution by utilizing a more environmentally friendly means of power. However, Cindy has some reservations before venturing into this industry; will it be profitable enough to risk her life savings? This paper will offer my research and advice in regards to the solar panel industry. I will cover such topics as supply and demand, elasticity, costs of production, pricing, and economic or normal profit or loss so she can make an informed decision about this business.
Relevant Economic Principles:
Before starting this business one thing to consider is supply and demand. In this case, demand is referred to how many solar panels (quantity) are desired by buyers. The quantity demanded is the amount of solar panels people are willing to buy at a certain price. Over the years, the biggest affect on the demand of solar panels has been the price, however, since early 2010 the average price for solar panels have dropped 64% in the United States (Wang, 2014).
Supply is defined as how many solar panels (PV modules) the market can offer. In other words, the quantity supplied is the amount of solar panels producers are willing to supply when receiving a certain price. Last year the global PV solar energy industry produced enough solar panels to supply the entire electricity demand in California; to put this in perspective, California is one of the world’s largest consumers of energy (Umeme, 2014).
California and other western states such as Arizona, New Mexico, and Nevada seem to be most optimal regions for the solar panel industry. California, in particular, is a target market as they have optimal weather and sunshine for solar powered panels. California residents experience some of the highest electricity prices in the county, up to 36 cents per kilowatt-hour for residents. Solar power also costs roughly 36 cents per kilowatt-hour, but support from the California Solar Initiative cuts the price to around 27 cents (Lorenz, 2008). “Homes with solar-power system using photovoltaic (PV) panels sell for an average of $24,705 more than homes without PV systems, while lasting between 30 to 50 years” (Tanaka, 2014). So while homes may be more expensive initially, the home owner can reap the rewards of lower energy costs for the lifetime of their home.
When considering traditional power supplies (i.e. coal, natural gas, and nuclear power), they are categorized as inelastic. When these power provider want to increase revenue they raise prices; they see very little change in the number of consumers when this happens. Solar power on the other hand is more elastic. As the price for solar panels drop, the sales will increase accordingly. This is important when considering a new business venture founded by solar energy. The cheaper the solar panels are, the more customers you will gain.
Supply/Demand Curve Graph and Tables:
Between the years 2000 to 2014 the price per PV module has dropped from $3.80/watt to $0.80/watt. During this same period of time the demand of installed PV’s units has grown to an all time high of 31,000 (Taneka, 2014).
Midpoint Formula: % Change in Quantity / % Change is price
> 1 = Elastic, < 1 + Inelastic
*Solar Power change in quantity = 100%100% / 64% = 1.56 = Elastic
Percentage of price change = 64%
*U.S. developers are likely to install about 3,300 megawatts of solar panels this year, nearly double the amount installed in 2011, according to a study released Wednesday by the Solar Energy Industries Association and GTM Research.
There will be for main determinants that will be subject to change in demand elasticity of PV panels. In no particular order they are as follows.
1. Tastes and Preference – As a society people are becoming more aware of environmental issues such as pollution and global warming. As Solar energy stays on the forefront of cutting edge technology, citizens and businesses will look to consider renewable energy as a primary way to help these green efforts.
2. Income – As we continue to rebound from the largest economic downturn since the great depression, individuals and businesses may look to invest in cutting edge technology as they will have more disposable income. PV’s are currently categorized as a luxury and not a necessity as there are other forms of energy (i.e. coal, power-plants, etc…). One day solar energy may be so affordable that it will be classified as a necessity. If a large amount of consumer’s sees solar energy as a viable source it will continue to stay elastic in nature.
3. Price – As the cost for PV modules continues to drop, the demand continues to rise. This shows that PV’s are elastic in nature. This trend can be expected to continue in the coming years, especially if there continues to be government tax incentives for those who use this form of energy.
4. Number of Buyers – This goes along with what has already been mentioned. As green efforts continue to dominant headlines and as the price for PV modules continue to decrease, the demand for solar energy will rise proportionately (elastic).
Determinants for Solar Power Supply:
1. Price – Probably the most important factor is the cost of producing solar PV panels as compared to the output of the solar PV panels. As the cost continues to decline the cost of production will decline, becoming elastic. Suppliers will have to put less money into the production so the output can increase. 2. Producers – Another factor to consider is the number of producers of PV modules. “Now a research report released Tuesday says another 180 solar panel makers will likely go out of business or be bought by 2015…Namely, the United states” (Wang, 2012). With fewer producers and not as much competition in producing solar panels this could lead to a slightly more inelastic supply curve, but for now it is still considered elastic as there are still various types of producers in which to buy from.
3. Government – Government regulations could play a pivotal role in supply. If Cindy is hesitant about dipping into her savings account to finance her solar company she can look to borrow money from the government. The federal government provides tax breaks and subsidies to those companies 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) 4. Technology – These same tax breaks can be given to technology companies championing the efforts of providing clean affordable energy. As technology is becoming more efficient and advanced the cost of manufacturing and purchasing continue to trend downward.
5. Expectations – If the current trends hold true we can expect the cost of production for solar panels to decrease 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. (Hill, 2013) As the cost for production of PV modules decrease, unemployment will increase because the other forms of energy such as coal and nuclear require much more labor. Solar panels are relatively self sufficient in this manner
Number of Sellers Determinant
As mentioned, over 180 PV producers will be going out of business in 2015. This could potentially buck the trend in regards to the supply of PV units as a decrease in the market could also reduce the supply, resulting in a leftward shift of the supply curve. Without this competition there could be more market control for each of the sellers. However, if the government increases the current tax breaks for clean energy producers it will continue to reduce the cost of producing and installing them. If this happens the demand for solar panels should rise and the number of sellers will start to increase once again.
As individuals and companies continue to pursue other energy options due to the rising costs of traditional energy sources, solar energy seems to be a viable choice. Those looking to contribute to the ‘green efforts’ seems to be a growing trend. Solar energy is environmentally friendly and with the continued decrease in the cost of producing PV modules and installation, Cindy needs to consider whether the supply and demand trends will keep their course in the coming years. If these trends continue Cindy can find herself in a very profitable business, especially with all the federal government kick-backs for clean energy. Even though many PV module producers seem to be going out of business or being bought out, there is still an all time high in demand for these products. I would recommend Cindy to pursue this venture due to the elasticity of demand, technological advances, and lowering costs.
Bastasch, M. (2013, March 13). CBO: Most energy tax subsidies go toward green energy, energy efficiency. Retrieved January 24, 2015.
Hill, J. (2013, November 22). Solar PV Production Costs To Drop In 2014. Retrieved January 23, 2015.
Lorenz, Pinner, Seitz. (2008, July 9). Economics of Solar Power. Retrieved January 21, 2015. Tanaka, S. (2014, May 22). Payback Time for Solar-Power Energy Systems. Retrieved January 23, 2015. The Future of Solar. (n.d.). Retrieved January 23, 2015.
Umeme, D. (2014, November 29). The Future of Solar. Retrieved January 21, 2015.
Wang, U. (2014, June 24). A Guide To Boosting Solar Energy Demand. Retrieved January 21, 2015, from A Guide To Boosting Solar Energy Demand