SIMULATION OF THE SOLAR POWER

The solar power case studyfocuses on the future of solar power. The CEO of solar power, TomWerner did not have an easy time as he had to explain to the board ofdirectors where sun power lies with regards to being the world’smost efficient photovoltaic (PV). Their main questions were how fastthe solar power industry was likely to grow and how long were itscompetitive advantage likely to last (Henderson,Conkling, &amp Roberts, 2007). Thisanalysis discusses the simulation of solar power over a period ofeighteen years in order to make informative pricing strategies andinvestment decisions.

Analysis

Key Metrics

In this analysis, the relevantmetrics at the end of each decision point are the total market share,the consumer net price, the module price, the unit direct cost, theannual revenue of the firm, and the annual net income (Sterman,2014). Othermetrics include the annual shipments, the installed base, the shareof the installed base, the cumulative profit and the percent ofrevenue to process improvement.

At decision point one, the SolarPower Company had a market share of 3.78%, which was low as comparedto other solar companies. The corporation had a consumer net price of$ 0.17 per unit, a module price of $ 0.15 per unit, and the percentof revenue process improvement was 0.05% (Forio.com,2016). &nbspTheirunit direct cost was $ 0.10 annual revenue was $ 564.68M, an annualnet income of $ 84.59M, and a cumulative profit of $ 263.85M. Allthese key metrics were higher than other solar firms implying thatthe company was doing well. They, however, had a low annual number ofshipments of 147.24, a lower installed base of 620.23, and a lowershare of installed base of 3.2%. This simulation was conducted for aperiod of 5 years that is from 2008-2012.

&nbsp

Sun Power (You)

Other Solar

Market Share (%)

3.78%

96.22%

Consumer Net Price ($/kWh)

$0.17

$0.17

Module Price ($/kWh)

$0.15

$0.15

Unit Direct Cost ($/kWh)

$0.10

$0.08

Annual Revenue ($/Year)

$564.68M

$14.40B

Annual Net Income ($/Year)

$84.59M

$3.55B

Annual Shipments (MW/Yr)

147.24

3.82K

Installed Base (MW)

620.23

18.77K

Share of Installed Base (%)

3.20%

96.80%

Cumulative Profit ($)

$263.85M

$11.70B

Percent of Rev to Process Improve (%)

0.05

0.05

Grid Power Price ($/kWh)

$0.13

Industry Net Income ($/Yr)

$3.63B

Industry Subsidy ($/kWh)

$0.12

New Entrants

0

As an MBA, the comparative tableabove tells me that the solar power company has a lower market share.Its unit cost is higher than that of other companies, and it realizeshigher annual revenue and a higher annual net income than those solarcorporations (Forio.com,2016). &nbspBasedon this table, it is evident 5% of the revenue goes to processimprovement which amounts to $ 28.23M. This tells me that the companyis incurring more costs, which it needs to account for and reduce theirrelevant expenditures.

At decision point two, all thekey metrics were unfavorable. The solar power company had a marketshare of 5.3%, which was an increment from the previous decision butstill lower than the market share of the other solar companies(Forio.com,2016). &nbspItsnet price, module price, unit direct cost, annual revenue, annual netincome and cumulative profit were $ 0.15, $ 0.13, $ 0.08, $ 1.18B, $179.15M and $ 745.75M respectively which were below those of othersolar corporations. Lastly, the company’s annual shipments andinstalled base were 355.93 and 1.70K respectively, which realized ashare on installed base of 4.11%. This simulation analysis wasconducted for a period of five years to advancement that is from 2013to 2017.

&nbsp

Sun Power (You)

Other Solar

Market Share (%)

5.30%

94.70%

Consumer Net Price ($/kWh)

$0.15

$0.16

Module Price ($/kWh)

$0.13

$0.14

Unit Direct Cost ($/kWh)

$0.08

$0.07

Annual Revenue ($/Year)

$1.18B

$23.89B

Annual Net Income ($/Year)

$179.15M

$7.67B

Annual Shipments (MW/Yr)

355.93

6.54K

Installed Base (MW)

1.70K

39.65K

Share of Installed Base (%)

4.11%

95.89%

Cumulative Profit ($)

$745.75M

$41.64B

Percent of Rev to Process Improvement (%)

0.05

0.05

Grid Power Price ($/kWh)

$0.13

Industry Net Income ($/Yr)

$7.85B

Industry Subsidy ($/kWh)

$0.12

New Entrants

0

From the comparative tableabove, the percentage of revenue that goes to process improvement is5%. This amounts to $ 0.059B of the total revenue (Forio.com,2016). &nbspThistells me that the costs of process improvement have reduced. Its unitcost is $ 0.08, which has reduced from the previous $ 0.10.

At decision point three, thesolar power firm had a market share of 9.70%, which was an incrementfrom the previous decision point. Its net price and module price were$ 0.13 and $ 0.11 respectively (Forio.com,2016). Theenterprise had a unit direct cost of $ 0.07, annual revenue of $5.04B, an annual net income of $ 1.01B, and a cumulative profit of $2.76B. Lastly, the business made annual shipments worth 1.79K, whichresulted in an installed base of 5.91K and a share of installed baseof 6.37%. The simulation analysis was conducted for 5 years that isfrom 2018-2022.

&nbsp

Sun Power (You)

Other Solar

Market Share (%)

9.70%

90.30%

Consumer Net Price ($/kWh)

$0.13

$0.14

Module Price ($/kWh)

$0.11

$0.12

Unit Direct Cost ($/kWh)

$0.07

$0.06

Annual Revenue ($/Year)

$5.04B

$55.53B

Annual Net Income ($/Year)

$1.01B

$18.95B

Annual Shipments (MW/Yr)

1.79K

17.79K

Installed Base (MW)

5.91K

86.91K

Share of Installed Base (%)

6.37%

93.63%

Cumulative Profit ($)

$2.76B

$105.72B

Percent of Rev to Process Improvement (%)

0.05

0.05

Grid Power Price ($/kWh)

$0.13

Industry Net Income ($/Yr)

$19.96B

Industry Subsidy ($/kWh)

$0.12

New Entrants

0

From the table above, thepercentage that goes to process improvement is 5%, which amounts to $0.25B. Here, it is evident that the costs have gone up. The unit costincurred by the firm has however reduced from $ 0.08 to $ 0.07.

The final decision point isdecision point four. In this simulation analysis, the simulation wasconducted for three years that is from 2023-2025. The solar powercompany had a market share of 19.28%, which was higher than that ofthe previous decision point. Its net and module prices were $ 0.11and $ 0.09 respectively as seen in Appendix 1 (“Financial StatementAnalysis,” 2015). The company incurred a unit direct cost of $ 0.05as seen in Appendix 2, realized annual revenue of $ 22.53B as seen inAppendix 3, an annual net income of $ 5.33B as seen in Appendix 4 anda cumulative profit of $ 10.75B. Due to the favorable conditions, thesolar power company managed to increase its annual shipments to 9.79Kand installed base to 22.62K from the previous decision point. Itsshare of installed base at this decision point was 11.43%, whichportrayed an increment. In the simulation analysis that is fromdecision point, one to decision point four, horizontal analysis ortrend analysis was used. This is where a firm would determine whethera particular metrics has increased or decreased from the previousfinancial period.

&nbsp

Sun Power (You)

Other Solar

Market Share (%)

19.28%

80.72%

Consumer Net Price ($/kWh)

$0.11

$0.13

Module Price ($/kWh)

$0.09

$0.10

Unit Direct Cost ($/kWh)

$0.05

$0.05

Annual Revenue ($/Year)

$22.53B

$122.61B

Annual Net Income ($/Year)

$5.33B

$41.34B

Annual Shipments (MW/Yr)

9.79K

45.95K

Installed Base (MW)

22.62K

175.24K

Share of Installed Base (%)

11.43%

88.57%

Cumulative Profit ($)

$10.75B

$202.26B

Percent of Rev to Process Improvement (%)

0.05

0.05

Grid Power Price ($/kWh)

$0.13

Industry Net Income ($/Yr)

$46.67B

Industry Subsidy ($/kWh)

$0.12

New Entrants

0

From the table above, 5% goes toprocess improvement. This amounts to $ 1.13B, which is an incrementfrom the previous process improvement cost. The organization’s unitcost has however decreased from $ 0.07 to $ 0.05, which is favorablefor the solar power company.

Cause and Effect

From this analysis, a decrease inthe module price, as well as the consumer net price, resulted to adecrease in the unit direct cost. As the cost reduced, the firm wasbound to make more annual revenue and therefore an increase in theannual net income and cumulative profit was realized.

Recommendations and Conclusion

To increase the market share, thesolar power company would have produced high-quality products at anaffordable price. They would have tried to cut out all unnecessaryexpenditures and only perform process improvements only whennecessary. While looking at this simulation analysis, if the solarpower lowered its prices to favor consumers, they would prefer buyingfrom the company than from other solar companies thus making it gaina higher competitive advantage and a higher market share. Lastly, itis evident that in future, the solar power firm will realize economicgrowth and development as seen in the appendixes.

Appendixes

Appendix 1: Module Price ofSolar Power and Other Solar

Appendix 2: Unit Direct Costof Solar Power and Other Solar

Appendix 3: Net Income ofSolar Power and Other Solar

Appendix 4: Revenue of SolarPower and Other Solar

References

Sterman,J. (2014). Eclipsingthe Competition: The Solar PV industry simulation.Forio. Retrieved on 28thJuly from&nbsphttp://forio.com/simulation/solar-test/index.htm#page=market_research/

Henderson,R., Conkling, J., &amp Roberts, S. (2007). TheSun Power Case Study.Retrieved on 28h July 2016 fromhttp://forio.com/simulation/solar-test/downloads/SunPower-Henderson.pdf/

Forio.com(2016). SimulationAnalysis.Retrieved on 28thJuly 2016 fromhttp://forio.com/simulation/solar-test/index.htm#page=market_research/

Financial Statement Analysis(2015). Analysis ofFinancial Statements.Retrieved on 28h July 2016 fromhttp://www.vrpacioli.edu/ac102/chapter17/chapter17.ppt/