Introduction
Calculating production costs is necessary for businesses to understand their financial capabilities and opportunities for profit. When conducting such an investigation, one has to identify fixed, variable, and marginal costs and determine the most efficient combination of resources. For the solar industry, such analyses are vital due to the continuously developing equipment and processes. The current regulatory environment surrounding solar energy production is favorable and provides companies with many opportunities to expand and increase their profit.
Fixed, Variable, and Marginal Costs Associated with Production
Fixed
Fixed, variable, and marginal costs create a system for determining the value of output for companies. First, fixed costs refer to expenses that do not change significantly regardless of the other resources the business may use (Bade & Parkin, 2020). For instance, a manufacturing plan always needs a building to produce materials or items, and the rent is usually an unchanging amount for a period of time (Bade & Parkin, 2020). Furthermore, the cost of electricity and similar bills may also be fixed, along with the salaries of executives and managers whose numbers do not change.
Variable
Second, variable costs describe expenses that change based on the number and volume of resources used (Bade & Parkin, 2020). For instance, a higher number of machines in a production facility increases the need for more workers, whose pay also grows. A company may purchase more trucks for its facility to increase the volume of delivered products. As a result, the variable costs may impact total expenses depending on how many professionals a business hires or how many trucks the company needs to purchase and service.
Marginal
Finally, marginal costs determine the difference between different points in total expenses, showing the output margin and the efficiency of used resources (Bade & Parkin, 2020). For instance, a company’s total costs may increase with each worker hired, but its output may also grow, resulting in higher potential revenue. Therefore, the marginal costs per one output item would decrease – hiring more workers and producing more would be more beneficial.
Costs in the Home Solar Industry
In the home solar industry, production costs continue to grow due to the increasing prices of raw materials and salary requirements. Common fixed costs include design and engineering, inspection, civil and legal fees, utility costs, and management salaries (Solar Energy Industries Association [SEIA], 2023b). Variable costs may constitute customer acquisition, taxes, logistics, equipment, raw materials, overhead, and worker pay (O’Shaughnessy et al., 2020).
According to the latest available data, total costs of the residential solar industry segment have increased between 2022 and 2023, growing from $3.17 to $3.25 per Watt direct current (SEIA, 2023b). It is apparent that the costs have mostly increased with the growth of prices for raw materials as well as their volume. Nevertheless, the expansion of the business throughout the country also demonstrates the potential for decreasing marginal costs as companies grow their presence in different states.
The Regulatory Environment
The current regulatory environment is beneficial for firms in the solar industry. For instance, federal regulations provide companies with tax credits, according to the Solar Investment Tax Credit policy (SEIA, 2023a). Long-term incentives and programs incentivize companies to expand their solar production businesses. Improved requirements for clean energy production also support businesses in states such as New Jersey and Maryland (SEIA, 2023a). Overall, the advocacy for growing solar power leads to the focus on clean energy.
Conclusion
In conclusion, the solar power production industry continues to evolve. The different costs related to production include fixed, variable, and marginal, and each describes the various measures required for financial planning. In the home solar industry, fixed costs represent unchangeable values of managerial salaries, plant rent, and more, while variable costs determine staffing, resources, and logistics. Marginal costs depend on the growth of the industry and the current regulatory climate, which provides businesses with tax breaks and incentives.
References
Bade, R., & Parkin, M. (2020). Foundations of microeconomics(9th ed.). Pearson Education.
O’Shaughnessy, E., Cruce, J. R., & Xu, K. (2020). Too much of a good thing? Global trends in the curtailment of solar PV. Solar Energy, 208, 1068-1077. Web.
Solar Energy Industries Association. (2023a). Solar industry research data. Web.
Solar Energy Industries Association. (2023b). Solar market insight report 2023 Q3. Web.