Fundamentals of Global Energy Business

Assignment # 2

3) Rooftop Solar Photovoltaics (PV)

An opportunity exists to purchase a small rooftop solar PV company in Tempe, Arizona. The company has
been in business for three years, acquiring PV panels through a four-year contract with a single supplier in
China. The company installs solar panels on homes under standard solar power purchase agreements in
which homeowners essentially buy their power from the solar PV Company rather than buying the solar
panels directly. The company has been modestly but reliably profitable based on several key factors: good
products and service, a reputation for integrity, growing operational efficiency, reliable financing, federal
tax rebates and subsidies to consumers, and the ability of customers to sell excess power back to the local
utility at retail rates. The company’s operations and reputation remain solid, but rebates and subsidies are
diminishing, and the local utility is about to go to its regulator to ask for grid connection fees from
homeowners, and a reduction of its required payments for excess power, from retail rates to wholesale
rates.

This report performs a complete thesis of the pros and cons associated with making an investment in taking
this opportunity. Risks involved, opportunities for growth, external factors and political implications are
thoroughly explored in this report.
The first section of this report investigates the various internal and external factors associated with report
with the help of a cost benefit analysis:
Strengths:
1. The company has an already established business and has trust of consumers.
2. The company has built a good reputation in the market and has an efficient workforce to run the
business forward.
3. The company works on a tried and tested business model which has brought a steady profit in the
past.
4. The company already has a strong product base.
Weakness:
1. The company is dependent on consumer’s will and favorable utility policy to succeed.
2. The company’s product base is imported from china, hence supply is not very reliable.
3. Part of the consumer’s inclination towards the company’s product is due to government subsidy
and not due to company’s own effort.
4. The company makes initial investment on behalf of the consumer in purchasing solar equipment.
Hence investment has to be made first before profits can flow in.
Opportunities:
1. The company can capture the market by a change in its business model if the competitors are driven
out because of abortion of subsidies.
2. Since the company has a strong reputation it can drive other consumer’s out by making a huge
initial investment.
 3. The company can expand its supplier base by taking on board other suppliers to reduce the cost of
solar hardware it supplies.
4. The company can help consumers secure a good rate from utility by negotiation through its own
channel.
Threats:
1. The business model is dependent on the utility’s willingness to buy electricity from the consumer.
2. The utility may decrease the rate at which it purchases electricity from the consumer and if this
happens the company will have reduced profit.
3. The government may abrogate the subsidies and rebates any time thereby reducing the profits made
by the company.
4. New grid interconnection fee if levied will serve as a barrier to entry for the consumers.
This opportunity has a significant link with the political landscape in the area since the comparative
advantage in the entire business model depends on the rebate and subsidy which the government gives to
new consumers who install solar panels from this company. If the government retains that subsidy then the
business has a much wider consumer base who can afford solar panels. If the government subsidy is
removed then consumers will not find incentives to move towards this product.
Market Framework Analysis:
The output market for this company is dominated by the monopolistic element of a single dominant utility.
The company will be forced to take the price that the utility company will set in the market. The input
market for this company demonstrates the market conditions of imperfect competition, where the company
can source it’s raw material i.e. solar panels from an unlimited number of suppliers globally, but the
company has decided to work with a single supplier for the sake of establishing a business relationship and
aiming to secure an even lower price banking on this relationship.
If the utility pays a significantly higher rate to the company for the energy the company sells into the grid,
profit for company will increase and hence it will be a very favorable opportunity to invest and take. If the
price the utility pays is barely on the margin then the company will be making less profit and less return on
investment will result.
On the other hand on the supply side, since the market is competitive, company should always be looking
to find low cost suppliers. This will reduce the initial investment on part of the company and give a quick
return on investment, although this might not mean a proportionately greater return.
Political Framework Analysis:
A specific political issue relevant to this opportunity is the price that the utility pays to the company for
each unit of energy purchased. Here, the utility is in a monopolistic condition, it being the sole purchaser
that is able to purchase the electricity from company. No other competitor can purchase electricity from
this company since only the utility has the required infrastructure to do so, and it has been designated by
the government to function in this monopolistic condition.
Now since the utility enjoys such a favorable market condition, there is a need to regulate this market
through government forces and this is a political factor because where government regulation is involved
lobbyists and political actors come into play.
The regulation that has to be levied on the utility can be decided in the executive forum where those who
make the decision will be elected representatives of the assembly or could be bureaucrats or technocrats
(heads of public regulatory commissions and authorities).
The stakeholders of this political decision are the utility itself which will make more profit if the purchasing
price is lower. The second stakeholder are the solar selling companies which will make a higher profit if
the selling price is higher. The third stake holder is the consumer, which will benefit more if the purchasing
price set by the utility is set at a higher rate. The fourth stake holder are the regulatory commissions of
federal government who need to oversee that their environmental compliance and other energy related goals
are being met or not. The price may determine the level of penetration that the renewable energy source is
able to make into the grid.
If the conditions in the political market are favorable, the consumer will benefit and if the conditions tip in
favor of the utility, through lobbyists the consumer will not benefit from it. So it either has to be in the
benefit of the utility or the company and consumer and it is the job of the government regulator to maintain
that balance.