When thinking of starting a contracting business for solar panels, many economic issues and concerns play a factor in the decision making process. Having a concern for the environment and knowing that solar panels have a cost saving for both households and business seems to be reason enough to start a business. However, before making such a financial investment you should first take a look solar panels in the economy in terms of (i) GDP growth rate, (ii) interest rates, (iii) level of unemployment, (iv) business cycle, (v) fiscal policy, (vi) monetary policy, (vii) international trade, and (viii) demographic.
RELEVENT ECONOMIC PRINCIPLES
Looking into macroeconomics issues when considering starting a Solar Panel contracting business, we must identify the Gross Domestic Product (GDP) growth rate. The price of energy and how use it is a determining factor on its GDP growth rate. Solar Panels are a lower cost energy source needed in today’s economy. Having affordable energy helps the economy as its facilities economic growth. The shares of energy in the U.S. has decreased, but it is still a component of the overall economy and the world share of energy. (Institute for Energy Research, 2010) Solar Panels help with the growth of the economy and its economic growth is a major factor in terms of the world energy consumption. Economic growth has fluctuated in its energy demand specifically in recent years by 1.1 percent in 2009 and growing by 4.9 percent in 2010, and then growth of 3.8 percent in 2011 and 2.8 percent in 2012. (EIA U.S. Energy Information Administration, 2013) 1
Figure 25 above shows us the total GDP from 1990 – 2020 provided both historical data and projection to show how the trend of the use of solar energy. “The growth rate slows over the period, peaking at 4.0 percent between 2015 and 2020 and declining to 3.5 percent between 2020 and 2040. Global economic growth in the Reference case is led by the emerging economies. Real GDP growth from 2010 to 2040 averages 4.7 percent for the non-OECD region, compared with 2.1 percent for the OECD region (Figure 25).” (EIA U.S. Energy Information Administration, 2013) After 2020 economic growth will slow down as a results of the emerging economy specifically in China. The U.S. is more aware of the use and value of energy now. More consumers consider Solar Panels as an alternative source for energy and prices decrease and demand increase for Solar Panels.
Next we will look at business cycles in solar panels in the emerging solar industries and how it effect unemployment and inflation. With business cycle we will be able to determine where issues will occur in order to make a sound business decision and see where policy makers will be able to play a part. China considers solar energy a components as they one of the first countries to invest in solar energy and the development of Solar Panels. With the consistent decline in prices for solar panels in both the cost of manufacturing and the cost of installing we are enter into a new cycle of the solar panel industry. The low cost actually is what is driving the industry growth. The industry is now at a business cycle peak and great market to enter with such low prices with results in growth rate, competitive shifts, industry consolidation, vertical integration, economic and trade policy, viable future success scenarios, and maybe even the competitiveness of the U.S. economy as a whole. (Mattson, 2013)
The shift in solar energy has fast development rate and other renewable energy source will not be able enter the market and have a competitive advantage over solar panels. The price of solar is its main winning factor outside of the fact it is better source more safe source of energy for the environment as it reduces polluting. When you compare the price of the current use of electricity against the cost of solar panels for electricity you see what drives growth, which is where the cost of solar electricity = cost of grid electricity. Here are the estimates made of demand at each level of installed cost:
“As you can see, at the $3.50 per watt install cost, where much of the map above goes red, there is almost 100 gigawatts of demand in the U.S. To put that in perspective, the U.S had a record-breaking year in 2012 for solar installations with 3.2 gigawatts installed.” (Mattson, 2013) The solar panel industry can currently be looked at as a negative state as the market is over capacity with many entering the market. However, it is actually on an upswing as the increase of the entry to the market is a result of the low prices and the growth potential. As the government consider solar energy to be best choice of renewable energy. Also with many investors in the market like Warren Buffet who invest over 15 billion in the industry and take advantage of Invest Tax Credits that the government provides. The solar panels in its expansion phase of the business cycle we see the growth of employment and increase of income as more jobs are created for manufacturing solar plants and new emerging solar panel installation companies.
All which are ways that jobs are created and more money is made and available for spending to help increase the economy. As the solar industry reaches it business peak which they are now entering, we now begin to see the over capacity drive the prices down in the market. After such phrase we begin to see the market weaken as companies are no longer making a profits in order to maintain. As a result of manufacturing slow down and jobs are lost. Hence increase in unemployment, causing a recession in the economy. The business cycle that solar panel industry is going through appears to have a more cyclical unemployment when recession occurs as it goes through it cycle. When the business is at its peak solar panels helps the economy as it decrease the unemployment rate and jobs are created.
“The graph above charts the inflation adjusted price of different types of energy, not in terms of gallons, but in terms of gigajoules of energy (a gigajoule is one billion Joules, the standard metric unit for energy). Pricing energy commodities in terms of their energy content makes it easier to compare the relative cost of different sources of energy.” (McConnell) Unemployment and inflation goes hand in hand so as unemployment rates decreases in high businesses of the solar industry, inflation rate decrease as well. Solar Panels industry however goes through cyclical unemployment so it does not affect inflation as much because jobs are not lost for long periods of time. International trade is a strong factor in Solar Panel installation and China considered solar panels to be a commodities and was the first to invest in solar panels manufacturing. Now Solar Panels are an international business and more and more countries see its value.
The U.S. and other countries benefit from international trading and have a comparative advantage, however, some do not see or reap the benefits. The U.S. has had issues with exporting of solar panels, and recently the U.S has challenged Indian government as they feel that Indian is discriminating against U.S. solar cells and modules that are required to be used in the development of Solar power manufacturing as part of the World Trade Organization deal between countries. Where Indian is now developing its own solar cells and modules to use instead of the U.S. solar cells and modules. This act by Indian is affecting the U.S. Solar Product exports and hurting the economy. (Office of the United States Trade Representative, Executive Office of the President, 2014) This inadvertently effects the GDP as exporting is used to calculate the GDP and effects the business cycles as without calculating international trading and funds that are generated the government will not be able to provide the necessary incentives to company’s and manufacturing plants for the development of solar power.
The above is an example of how policy makers step into place in order to balance the economy. Policy makers are needed to make policies to settle fights over solar panels and there are many issues of trade protection because of the rapid growth of the renewable energy. There are fiscal policies that the government can implicate as well as monetary polices that the federal reserve can put in place that help with the push for the use of solar panels to help improve the economy during the recession period in the solar industry that would prevent unemployment and help with stabilizing interest rates. The government can add a carbon tax for the use of fossil fuels and the funds can be used to invest in more renewable forms of energy mainly solar.
The government can provide policies that requires spending federal funds to create employment, while investing in the solar panel industry. Their investments in solar panels can allow them to own building for energy saving of 30% and have a smart electricity grid for energy saving allowing for more funds for jobs to be created for the installation of solar panels. Such monetary policies provides allows bank to have lower interest rates and therefore more loans are taken to invest in solar panel business. The Federal Reserves are provided to stimulate the economy. Solar panel installation is getting to be a big business in California as “Analysts with the U.S. Department of Energy’s (DOE) National Renewable Energy Laboratory (NREL) found that the solar lease business is surging in southern California.” (National Renewable Energy Laboratory, 2012) It is a better cost saving in this area for solar system and customers have better saving in this demographics.
My recommendation is to make the investment as you see from the research and information provided above, the use of solar panels is in a strong position. Its GDP growth rate increases at a strong business peak in the business cycle of solar panels. Interest rates for loans are made available and low as monetary policy all for investment to be made with special investments tax credits. With government assistant and fiscal policy being put in place the unemployment rate will decrease. There are great international trading opportunities that provides an advantage to the U.S. With all this positive effect to the economical and the social aspect of helping to improve the environment with solar power. It is a great investment.
Bee, F. (2014, January 23). Center for Economic and Policy Research. Retrieved from Fivew Economic Policy Charges for 2014 that could Boost Employment and Reduce Climate Disruption: http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/five-economic-policy-changes-for-2014-that-could-boost-employment-and-reduce-climate-disruption EIA U.S. Energy Information Administration. (2013, July 25). Retrieved from International Energy Outlook 2013: http://www.eia.gov/forecasts/ieo/world.cfm Institute for Energy Research. (2010, February 16). Retrieved from A Primer on Energy and the Economy: Energy’s Large Share of the Economy Requires Cautioin in Determining Policies that Affect it: http://www.instituteforenergyresearch.org/2010/02/16/a-primer-on-energy-and-the-economy-energys-large-share-of-the-economy-requires-caution-in-determining-policies-that-affect-it/ Mattson, B. (2013, January 29). GreentechSolar. Retrieved from Guest Post: Brad Mattson on the Real Birth of the SOlar Industry and the beginning of Solar 2.0: http://www.greentechmedia.com/articles/read/Guest-Post-Brad-Mattson-on-the-Real-Birth-of-the-Solar-Industry McConnell. (n.d.). Medium.com: Armchair Economics. Retrieved from Solar Energy:This is What a Disprutive Technology