Industry analysis

Answer

Solar Electric Power Generation Industry

Industry Size and Growth Rate

            The use of solar energy for electricity in the US is currently booming. Over the past several decades, there has been a sustained use of the resource both domestically and commercially even as concerns for the adoption of environmentally friendly practices continue to surge. It is important to note in this regard that strong federal policies have been passed over the past several decades (a significant one being the solar Investment Tax Credit) and they have seen players in the private sector and public sector making a move towards the use of clean energy (Timilsina, Kurdgelashvili, & Narbel, 2012). In this regard, the size of the industry has tremendously increased. Currently, based on the North American Industry Classification System (NAICS), the Solar electric power generation industry is one of the biggest industries in the US as it comprises of establishments that basically provide solar electric power services (naics.com). The industry size can also be examined by reference to the number of jobs it provides to the American population. Based on information provided by The Solar Foundation National Solar Jobs Census 2019, it apparent that as at 2015, the number of jobs that were provided in the manufacturing sector of the industry stood at approximately 175,000 (wellsolar.com, 2019). The figure rose to 210,000 in 2016, then 205,000 in 2017, 190,000 in 2018, and slightly below 200,000 in 2019 (Herche, 2017). Over the  past five years, the industry has also provided thousands of jobs in the installation sector, and the trade and distribution sector among other sector. The figure below has been adapted from "The Solar Foundation National Solar Jobs Census 2019" and it provides a summary of the above information.

Figure 1

The growth rate of the Solar electric power generation industry has remained relatively stable over the past few years. Within the past decade only, the use of solar power has increased by 48% (Herche, 2017). As at 2020, approximately 78 gigawatts of solar energy has been installed across the nation and this is said to be enough to power approximately 14.5 million homes. This rise in installation has similarly been reflected in revenue production. In 2019, the amount of revenue generated from the solar industry stood at $18.7 billion and over 10,000 companies are now involved in solar-related enterprises.

Industry Level of Concentration

As noted above, the solar electric power generation industry is one of the most profitable industries in the US and as a result, thousands of companies are involved in the industry. The consequence of this is that the level of concentration in the industry is medium (NAICS Industry Report). Currently, the major industry participants hold a total market share of 65% and due to the atmosphere of exponential growth that persists in the industry, companies have been registering a higher level of willingness to increase their operations so that they can eventually increase their market share (NAICS Industry Report). Many companies have particularly sort to engage in projects that would serve to heighten their solar generation capacity. It is, however, important to note that whereas the existent solar power facilities have indeed been increasing in size, industry concentration has been on the decline over the past five years since there has been minimized movement towards taking ownership of more facilities due to the lack of economies of scale (NAICS Industry Report). As a result of the factors mentioned above, the industry can be regarded as being in the process of consolidation. This is because the major industry participants hold a total market share of 65% even as companies particularly choose to have their focus on the expansion of their core businesses so that they can continually grow and increase their competitiveness.

Changes taking Place in the Macro Environment; PEST Analysis

Figure 2

There are several changes which are taking place in the macro environment and these changes will inevitably have an impact on Innovation Facilities Group. As alluded to above, one of the most significant changes that is occurring relates to the passage of various government regulations regarding the use of renewable energy sources and the reduction of carbon footprint. At both the federal and state level, the US legislators have been keen to pass laws and regulations that regulate the use of the environment and that encourage the use of renewable energies. The government has continually passed favorable incentives such as tax credits and renewable portfolio standard (RPS) targets and this form of laws are now being implemented in 29 states (NAICS Industry Report). In line with the standards set by these laws and regulations, local utilities have been required to generate a prescribed percentage of their holistic energy portfolios from renewable energy sources (NAICS Industry Report). This change in the macro environment has remained sustained over the past several decades even as the federal government and the state governments seek to play a key role in addressing the climate change issue. This change has indeed had a direct impact on the Solar electric power generation industry since the industry concerns itself with the use of a renewable energy resource (the sun) to generate electric power that can sustainably be used for both domestic and commercial purposes.

Apart from the government regulations and policies that have emerged with respect to the use of sustainable energy, there has also been an increase in public support for green energy (Rabe, 2018). Individual households have recorded an increased concern in living sustainably and the result is that more people have been willing to invest in the use of renewable energy (with or without the accompanying government incentives). Of significance to note in this regard is that when it comes to market segmentation, the residential sector records the highest level of solar electric power usage. The general increase in public support for green energy has impacted the solar electric power generation industry in a positive way and is arguable that it has led to the steady rise in installations. Essentially, the effect of the increase in public support for green energy is that more installations are likely to be recorded and Innovations Facilities Group is likely to enjoy a market presence for a relatively lengthy period of time.

When it comes to the technological aspect of the macro environment, it is important to note that the increased technological advancement has meant that the cost of equipment production has lowered since more economically sound methods have been adopted. Increased technological advancement has meant that equipment costs have continually fallen. This means that the use of solar energy has become cheaper for the consumer. The result of this change in the macro environment of the industry is that Innovations Facilities Group is able to record higher levels of installations and sales since individuals and companies have come to an appreciation of the fact that solar energy is in fact a financially-friendly option.

Various economic factors in the macro environment of the solar electric power generation industry have also affected the firm's performance. As noted above, technological advancement has led to the reduction of the cost of equipment production and this has in-turn affected the cost of the use of solar energy for electricity for the individual user. The use of solar energy has come to be seen as a more economically viable option due to the reduced cost of installation. Additionally, the government has offered tax credits for the use of renewable energy and due to this economic factor individuals and companies have been keener to cultivate the use of solar power energy so as to benefit from the tax credits. 

The Five Forces Model and the Nature of Competition in the Industry

Figure 3

The power of suppliers within the industry can be described as being relatively low.  This is because there is a high number of competitors and the number of possible suppliers within the industry is also significantly high. With respect to the Innovations Facilities Group, for instance, the company describes itself as having the benefit of receiving various services from a singular point of contact thus making the process of service delivery highly efficient (facilityinnovationsgroup.com, 2019). There is a big pool of suppliers that are able to provide the needed products within the industry and as a consequence, it is not easy for suppliers to drive up prices.

The products and services that are offered by competing companies within the industry are not highly differentiated. There are no significant differences, for instance, between the solar panels that are offered by the Innovations Facilities Group and those offered by other competing companies. Additionally, there is a negligible level of brand loyalty since once the clients have received the needed products and services; there is no heightened rate of continuous interaction between the customers and the companies. As a result of the above factors, buyer power within the industry can be stated to be medium.

The threat of substitutes remains relatively high within the industry. When it comes to the use of renewable energy, solar energy is not the only source. Fossil fuels and wind power also provide energy and the cost of production with respect to the latter sources is lower than the cost of solar power energy. Substitutes also exist with respect to the conventional energy sources and this competition is likely to continue to exist so long as the prices of crude remain stable. When such factors are considered, the threat of substitutes is seen as being relatively high. It is, however, important to note that solar power meets the need for long-term income and the solar energy and as a result, it offers a relatively low cost of maintenance for households. As a result of this particular factor, it becomes apparent that there are no substitutes that can meet the need for low-cost fuel within the household. The threat of substitutes can in this regard be described as being relatively low.

The issue of rivalry with respect to the existing competitors can also be described as relatively high. The technological era has brought with it high pressure for innovation in respect of the different divisions within the industry. This has brought rivalry and it has consequently adversely affected competitiveness. The existence of antitrust laws has also limited the ability of large firms within the industry to place entry barriers. The Solar Energy Industries Association (SEIA) has in this regard noted that it is committed to ensuring strict compliance with the federal and state antitrust laws so as to foster a competitive market economy (seia.org, 2019). Firms within the solar power generation industry cannot, therefore, legally be involved in the process of monopolization. As a result of the high level of competition within the industry coupled with the fact that there are no barriers to entry, competition within the industry is seen as being relatively high.

Based on the above illustration, the solar industry is a highly profitable industry. As illustrated above, the suppliers within the industry do not have much power to drive up prices and this is particularly because of the low cost of production of the needed equipment. Similarly, even as more and more households and companies are looking to embrace the use of solar energy, the level of customer brand loyalty is significantly low since there is a negligible level of product differentiation. This means that once a firm such as the Innovations Facilities Group has established its presence in the market, their profitability remains stable for as long as the general profitability within the industry is stable. When reference in this regard is made to the general profitability of the industry, it is apparent, as noted above, that the growth rate has remained stable over the past five years, with the number of installations remaining stable and the rate of profitability generally increasing. The solar energy production industry is, therefore, a profitable industry.

The Value Added Chain in the Industry

In the process of conducting a value chain analysis for the industry, the first action that is taken appertains to the delineation of the primary and support activities in the industry. Firms that provide products and services within the solar electricity production industry engage in the provision of renewable lighting and energy-efficient electricity solutions (Hoffmann, 2006). They are involved in the installation of solar panels and the delivery of other products and services that relate the use of solar energy. The primary activities of the business therefore relate to the provision of solar energy products and services.

When reference is made to the cost of activities, it is important to note that the cost of acquisition of the needed products is relatively low due to the high rates of technological innovation and the economies of scale. Since presently many US households are opting to use renewable energy sources and the suppliers within the industry have a limited ability to control the prices of the products they sell to consumers, firms are able to apply economies of scale and in this respect, the general cost of production remains controlled. The raw materials that are used to prepare the solar panels are readily available and firms are able to remit their products and services to their clients at an affordable cost. Business Process Outsourcing (BPOs) are also present within the value added chain since firms within the industry often hire other firms to perform certain tasks that are needed for the successful operation of a business. One of the services that are outsourced relates to the servicing of solar panels. There are numerous instances when firms choose to outsource secondary activities so that they can focus on the core objectives of the business (Cheng and Zang, 2010). Despite the fact that support activities are often outsourced, disintermediation is more rampant in the industry since firms deal directly with the consumers and products and services are provided directly as opposed to the involvement of middlemen. As a result of this factor, the profit margin is increased.

Conclusion

Over the past several years, the use of solar energy for electricity has steadily been increasing. The last five years have seen tremendous growth in the general size of the industry even as individual firms continue to record increased sales. The tremendous growth that has taken place in the industry is largely due to the macro environmental factors that have impacted on growth within the industry. Political, environmental, social, and economic factors have all played a key role in fostering the growth of the industry. Due to its high profitability, the nature of competition within the industry is significantly high. Some of the factors that have contributed to the heightened competition include; increased number of possible suppliers, diminished level of differentiation with respect to the products and services that are offered, and existence of antitrust laws. The value added chain of the industry shows that the level of output is significantly higher than the level of input and this is due to the factors that have been illustrated above. The solar electricity generation industry is, therefore, a highly profitable industry.