MIT SOLAR PRICING SIMULATION REPORT Academic Essay

MIT Solar Pricing Simulation Report

The primary objective of the report is to run a simulation over an 18-year period and analyze the outcome of the decisions made at each decision point. Specifically, the paramount goal is to describe the growth of the solar power industry, particularly SunPower (Your Company) and other manufacturers of photovoltaic panels (PVs). It is particularly interesting to note that while the cost of electricity from PV panels has limited them to niche applications, there is massive potential for growth in the solar panel industry, should solar power become a viable alternative to traditional sources of electricity. In the simulator, the end goal is to maximize SunPower’s cumulative profit over a period of 18 years, taking into consideration the pricing and investment decisions made at each simulated time period.

Decision 1: For Years 2008-2012

For Year 1, the starting market share of SunPower is 2.40%. With a module price of $0.15 and process improvement of 5%, the company’s market share rises to 3.78%, with unit direct cost falling significantly from 2008-2012 (see Figure 1 in the Appendix). At the end of 2012, the company’s annual revenue, net income, and cumulative profit equal to $564.68M, $84.59M, and $263.85M respectively. With no new entrants, industry net income is equal to $3.63B. It is particularly interesting to note that both SunPower and the industry in general are in much better position than during the starting year of 2007. For comparison purposes, SunPower’s annual revenue rises from $220.90M in 2007 to $564.68M in 2012. The same case can be said about the company’s net income (which rose from $4.96M to $84.59M) and share of installed base (from 131.99 in 2007 to 620.23 in 2012). Industry net income has more than tripled during the same period.

Table 1. Key Industry Indicators (2008-2012)

	SunPower (2007)	Sun Power (You)	Other Solar
Market Share (%)	2.4%	3.78%	96.22%
Consumer Net Price ($/kWh)	$0.17	$0.17	$0.17
Module Price ($/kWh)	$0.15	$0.15	$0.15
Unit Direct Cost ($/kWh)	$0.11	$0.10	$0.08
Annual Revenue ($/Year)	$220.90M	$564.68M	$14.04B
Annual Net Income ($/Year)	$4.96M	$84.59M	$3.55B
Installed Base (MW)	131.99	620.23	18.77K
Cumulative Profit ($)	$0	$263.85M	$11.70B
Industry Net Income ($/Year)	$1.20B	$3.63B
New Entrants	0	0

Decision 2: For Years 2013-2017

For the period 2008-2012, SunPower’s market share is equal to 3.78%. With the module price set at $0.13, the company’s market share increases to 5.30%. Unit direct cost continues to fall significantly from $0.11 in 2007 to $0.08 in 2017. It is interesting to note that from 2013 to 2017, the company’s annual revenue rises from $564.68M to $1.18B. The same case can be said about the company’s annual net income (from $84.59M to $179.15M during the same period) and cumulative profit. Over a span of four (4) years, industry net income has more than doubled, from $3.63B to $7.85B. While the aggregate market share of SunPower’s competitors has fallen from 96.22% to 94.70% during the same period, their aggregate cumulative profit has more than doubled (from $11.70B to $41.64B). All other key industry indicators have risen by at least 100%.

Note that SunPower’s decision to cut its module price from $0.15 to $0.13 has significantly increased its market share from 3.78% to 5.30%. Accompanied with declining unit direct cost, the company’s decision to cut its module price has resulted to significant increases in revenues and cumulative profit. From a vantage point, it can be argued that SunPower’s improved market position is either an adverse or unfavorable to its main competitors. On the contrary, this is not certainly the case. As stated earlier, although the aggregate market share of SunPower’s competitors has fallen from 96.22% to 94.70% during the same period, their aggregate cumulative profit has more than doubled (from $11.70B to $41.64B). All other key industry indicators have risen by at least 100%. These figures suggest two things. Firstly, there is massive potential for growth in the solar panel industry. This is evidenced by sharp increases in the shares of installed base of both SunPower and its competitors – indicating strong and sustained demand for photovoltaic panels from 2007 to 2017. Secondly, since there is strong and sustained demand for photovoltaic panels, there is also room for expansion. Note that industry net income has more than doubled from $3.63B in 2008 to $7.85B in 2017.

Table 2. Key Industry Indicators (2013-2017)

	SunPower (2008-2012)	Sun Power (You)	Other Solar
Market Share (%)	3.78%	5.30%	94.70%
Consumer Net Price ($/kWh)	$0.17	$0.15	$0.16
Module Price ($/kWh)	$0.15	$0.13	$0.14
Unit Direct Cost ($/kWh)	$0.10	$0.08	$0.07
Annual Revenue ($/Year)	$564.68M	$1.18B	$23.89B
Annual Net Income ($/Year)	$84.59M	$179.15M	$7.67B
Installed Base (MW)	620.23	1.70K	39.65K
Cumulative Profit ($)	$263.85M	$745.75M	$41.64B
Industry Net Income ($/Year)	$3.63B	$7.85B
New Entrants	0	0

Decision 3: For Years 2018-2022

For the period 2013-2017, SunPower’s market share is equal to 5.30%. With the module price set at $0.11, the company’s market share increases to 9.70%. Unit direct cost continues to fall significantly from $0.08 in 2017 to $0.07 in 2022. It is interesting to note that from 2018 to 2022, the company’s annual revenue rises from $1.18B to $5.04B. The same case can be said about the company’s annual net income (from $179.15M to $1.01B during the same period) and cumulative profit. Over a span of four (4) years, industry net income has more than doubled, from $7.85B to $19.96. While the aggregate market share of SunPower’s competitors has fallen from 94.70% to 90.30% during the same period, their aggregate cumulative profit has more than doubled (from $41.64B to $105.72B). All other key industry indicators have risen by at least 100%.

The figures below suggest that SunPower can still cut its module price without adversely affecting its revenue structure. It is interesting to note that small cuts in SunPower’s module price results to significant increases in the company’s market share. This suggests that the demand for photovoltaic panels is relatively elastic. A small change in the module price of PV panels results to a larger change in its demand. As there is still room for expansion, cutting the module price of PV panels is said to be favorable both in the short-run and in the long-run.

Table 3. Key Industry Indicators (2018-2022)

	SunPower (2013-2017)	Sun Power (You)	Other Solar
Market Share (%)	5.30%	9.70%	90.30%
Consumer Net Price ($/kWh)	$0.15	$0.13	$0.14
Module Price ($/kWh)	$0.13	$0.11	$0.12
Unit Direct Cost ($/kWh)	$0.08	$0.07	$0.06
Annual Revenue ($/Year)	$1.18B	$5.04B	$55.53B
Annual Net Income ($/Year)	$179.15M	$1.01B	$18.95B
Installed Base (MW)	1.70K	5.91K	17.79K
Cumulative Profit ($)	$745.75M	$2.76B	$105.72B
Industry Net Income ($/Year)	$7.85B	$19.96B
New Entrants	0

Decision 4: For Years 2023-2025

For the period 2018-2022, SunPower’s market share is equal to 9.70%%. With the module price set at $0.09, the company’s market share increases to 19.28% (the company’s market share has more than doubled in just two years). Unit direct cost continues to fall significantly from $0.07 in 2022 to $0.05 in 2025. It is interesting to note that from 2022 to 2025, the company’s annual revenue rises from $5.04B to $22.53B. The same case can be said about the company’s annual net income (from $1.01B to $5.53B during the same period) and cumulative profit. Over a span of four (4) years, industry net income has more than doubled, from $19.96 to $46.67B. While the aggregate market share of SunPower’s competitors has fallen from 90.30% to 80.72% during the same period, their aggregate cumulative profit has almost doubled (from $105.72B to $202.26B). All other key industry indicators have risen by at least 100%. These figures suggest that the module price of PV panels continue to fall significantly over the past four years or so. Surprisingly, the revenue structures of SunPower and its competitors are not adversely affected. On the contrary, the solar panel industry appears to be growing rapidly, as evidenced by strong and sustained demand for PV panels (as demonstrated by sharp increases in installed base.

Table 4. Key Industry Indicators (2022-2025)

	SunPower (2018-2022)	Sun Power (You)	Other Solar
Market Share (%)	9.70%	19.28%	80.72%
Consumer Net Price ($/kWh)	$0.13	$0.11	$0.13
Module Price ($/kWh)	$0.11	$0.09	$0.10
Unit Direct Cost ($/kWh)	$0.07	$0.05	$0.05
Annual Revenue ($/Year)	$5.04B	$22.53B	$122.61B
Annual Net Income ($/Year)	$1.01B	$5.53B	$41.95B
Installed Base (MW)	5.91K	22.62K	175.24K
Cumulative Profit ($)	$2.76B	$10.75B	$202.26B
Industry Net Income ($/Year)	$19.96B	$46.67B
New Entrants	0

Recommendations

It is important to reiterate the fact that while the cost of electricity from PV panels has limited them to niche applications, there is massive potential for growth in the solar panel industry, should solar power become a viable alternative to traditional sources of electricity. In theory, solar energy has resource potential that far surpasses the entire global demand for energy (Timilsina et al., 2011; Hoffmann, 2006). Data suggest that cutting the module price of PV panels positively impacts SunPower’s market share, without adversely affecting its revenue structure. Strong and sustained demand for PV panels helps keep unit direct costs down. This translates to significant increases in cumulative profit for both SunPower and its competitors. Thus, it is highly recommended that SunPower continue to cut the module price of its PV panels up to the point where unit direct cost is slightly above the $0.03 level. Nevertheless, since there is still room for expansion, SunPower should continue to invest more money into the solar panel industry, as total industry net income continues to grow significantly.

References

Hoffmann, W. (2006). PV solar electricity industry: Market growth and perspective. Solar Energy Materials and Solar Cells, 90(19), 3285-3311.

Timilsina, G.R. et al. (2011). A review of solar energy: Markets, economics and policies. Policy Research Working Paper 5845. The World Bank Development Research Group.