Macroeconomic Analysis of Solar Panel Industry

Macroeconomic Analysis of Solar Panel Industry

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Macroeconomic Analysis of Solar Panel Industry

This article provides the prospect of solar panel electric power generation industry, especially for the local part of the business that are to install the system. The solar panel industry mainly targets the installation in a small scale such as on a family house unlike other major power generation using coal, oil, hydraulic, or nuclear sources although the large scale solar panel power project plant using a vast land to place solar panels exit. The question is whether it is profitable to venture into the solar panel installation business which work as a contractor for the solar panel companies that manufactures, market and sell to the consumers who would like to install the panel at their home or building. The success of the business is basically dependent on the demand from people who want to install a solar system and the supply which involves the cost. All the hype about the environmentally friendly power generation technology seems to be able to maintain the decent level of demand for the next several years and the subsidy from the U.S. federal government to provide the incentives for installing solar panels should help keep this high demand. On the other hand, the consumption behavior of people can largely be influenced by the macroeconomic events in the current, future and expectations. This article of “postal service considering cutting 12,000 jobs” explains the current and future solar panel industry and offers the recommendation supported by economic theory and current economy and even introduces alternative opportunity (booming of the housing market) for those who are concerned about the environment and would like to make a contribution in the field.
Industry of Solar energy
At first, it is important to investigate the industry itself more deeply. Is the demand for the solar panel really expected to be held high enough to be worthy to invest? The nature of marketing the solar panel is that the consumer needs to put up a fairly large cost to install and ten or more years or so to finally realize the cost saving by decreasing the subsequent monthly electricity bill which they would be paying to the regional electric company. The system installation cost will become lower with the government subsidy which works as incentivizing the installation. However, if it is really beneficial and cost-saving, there is no need for a subsidy to give people incentive to purchase the product, and it will be very difficult to convince people to purchase a product that has so much uncertainty in finally yielding a benefit as long as ten years after for the price of a luxury vehicle.

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The basic economic theory of substitution effect tells that the opportunity cost of installing solar panel can be too high because the household can buy another durable goods such as a large van or anything which gives them the rapid utility upon the purchase. One of the uncertainties in regard to the solar panel power generation system is that the panel may not function as it is supposed to for the next ten years. It simply may break down before the duration of cost saving reaches. Moreover, there is no successful example that this plan has worked out because it is a new practice.
Another question is whether U.S. can provide the panels as cheap as possible to be affordable to U.S. consumers. The answer is that the panels could be provided but not by U.S. manufactures. The U.S. government subsidized the California based- solar energy firms Solyndra through American Recovery and Reinvestment Act Reconstruction Act by the Obama administration in 2009 and had filed a bankruptcy in 2011 and sold to Chinese solar panel firm for a fire sale price. The main reason is that the production of solar panel has become very competitive and Solyndra could not contain the cost with unexpected lower market price. The consequence is that the jobs will be shipped overseas even if the domestic demand could be actually high. Because the labor cost is very low in China, the virtual mobility of labor by the international trade hurts U.S. workers and increase the unemployment.
The macroeconomic perspective on the solar panel industry as well as overall U.S. economy is not so bright. As the “official” unemployment rate is still high while the actual “unemployment rate” would be more severe in the real sector, many households will not be able to afford the large investment for their house power generation. The figure 1 shows the historical unemployment rate in the United States. The latest rate is 6.7%.

Figure 1. Unemployment Rate (Bureau of Labor Statistics)

As many of the government program, the incentive program does not make a contribution to improve the U.S. macro economy. If the Keynesian economic policy were correct, the U.S. economy would have been fully recovered by the current 2014. As mentioned, the manufacturing jobs of solar panels are shipped overseas, which is helped by the government program funded by the tax money. Despite the premise that the solar energy is clean and less costly and despite the boom in the oil fracking extraction business the energy price has been never lower. There is already a concern to bear on the energy cost now, and it is too little to worry and think of the benefit of ten years later. The high energy cost also strains operational profitability of private firms in every industry. The figure 2 shows the historical crude oil price. The recent data should be categorized historically into the high prices.

Figure 2. Crude Oil Price (Federal Reserve Bank, St. Louis)

With increasingly more government regulations including environmental regulations, it is not expected that the U.S. economy can grow as much as the past. The very environmental regulation increases the cost of doing businesses and they may just shut down and move to different countries where the regulation is not strict. The average annual U.S. GDP growth rate is 3.24 % from 1947 until 2013, but it will be difficult to hold it as high as the past. The fact that the Federal Reserve’s continuing attempt to keep the interest ultra-low using the conventional instrument of federal fund rate and unconventional quantitative easing is the evidence that the U.S. economy has not been recovered and the fact is well-recognized by the officials despite the optimistic announcement. Having recognized there is a fluctuation of boom and bust in the business cycle, when the long-term economic perspective is dire, the consumers will not be able to spend what little is left after the increase in tax and health insurance expense into something give benefit in far-distance future.

Figure 3. U.S. Real GDP (Federal Reserve Bank, St. Louis)
Another strand of concern in the U.S. economy is an increased amount of large public debt. If there is another or more of sequesters, then some government programs including the subsidy program for the solar panel installation may stop. Not only the side effect of sequesters, the political tension creates the uncertainty in the U.S. economy which drags down every macroeconomic key indicator. Even if the debt ceiling level is raised, it just adds an uncertainty in the economy because the resolution simply allow the debt level to even go up, which would put pressure on the interest rate if the foreign bond buyers question the creditworthiness of the U.S. debts. The table shows the record of debt ceiling raise and this does not seem to be able to continue forever and there is not solution out there except for increasing more government expenditure to control the economy which perpetuate plunging into the debt.
Even if the U.S. population is kept high partly because of the immigrants from the neighbor countries, they usually do not buy houses. Because the housing have been oversupply which is one of the cause of the 2008 financial crisis, it is difficult to expect that there is a dramatic increase in the solar panel demand. Observing the historic housing starts data which counts the number of new houses built, the current level is historically very low level.

Figure 4. U.S. Housing Starts (Federal Reserve Bank, St. Louis)
Furthermore, what is particularly important for the solar panel installation business is the number of installations in making profit. Since there is not much difference in the quality and price in the system, in order to make a profit for the contractors they have to be able to install a certain number of orders to break even and one household needs only one solar panel to stall and they are supposed not to replace it another ten years. Despite the official data that the real GDP has been recovered and on the growth path as in figure 3, the inequality between the rich and the poor is even increased this past few years reflected by the Occupy Wall Street movement. Therefore, only small number of wealthy households may demand to install the solar panel, the majority of 99% will not afford the system at all. Any other clean energy source is likely to be a bad investment (if a macroeconomic analysis were to be done) because of the monopolistic nature of conventional power sources.
In summary, it is not recommended to get into the solar panel installation business. Because of the pessimistic perspective of the U.S. economy, the demand of the solar panel will not be high enough to keep the business afloat. If the environment and pollution is main concern, there is an opportunity to look into the organic food business instead of the solar panel installation business. As explained, the environmental regulation together with other federal level land zone regulation, the food price has risen and is expected to rise farther. Forbes reported that the global food prices hit new all-time high. Not to mention that it is sometimes recommended as an investment advice to raise chickens and own a cow as an asset. Furthermore technology to grow your own food using the method called aquaponics. The system can be installed indoor or outdoor where edible plants are grown while fish are farmed at the same time and uses their deposits as nutrients. This type of product can make a better business than the solar panel business because of the low investment cost when the economic prosperous is not expected in the near future.


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