How NREL Uses Minimum Sustainable Price to Understand the Solar Industry Video (Text Version)
This is the text version for the "How NREL Uses Minimum Sustainable Price to Understand the Solar Industry" video.
Let's say you are working on the next, big thing in solar energy.
Maybe you're a researcher, wanting to know how your technology fits into the current market.
Or maybe you're a manufacturer, trying to identify how to lower costs.
For scenarios like these, minimum sustainable price, or MSP, is a useful metric to consider.
Minimum sustainable price is exactly what it sounds like: it's a price that provides the minimum rate of return necessary in a given industry to support a sustainable, business over a long term.
Specifically, MSP is influenced by: manufacturing costs; overhead costs; and other financial considerations, such as financing, discount rates, and tax incentives.
Let's take a closer look at manufacturing costs, also known as the cost of goods sold.
Understanding manufacturing costs can help identify the major cost drivers for a particular technology.
Manufacturing costs include: materials; labor; electricity; equipment costs; maintenance; and facilities.
The next set of costs that influence MSP are overhead costs.
These include research and development costs, as well as sales, general and administrative costs.
Overhead costs can vary significantly between companies, as well as over time within a given company.
After summing up manufacturing and overhead costs, we then obtain the minimum sustainable price by assuming an operating margin typically desired when pricing products within a given industry.
An operating margin accounts for interest payments, profit, and the corporate tax rate.
A sustainable operating margin can be estimated by interviewing industry members, or by calculating the price needed for a business to break even over an assumed business lifespan while adjusting for inflation and the cost of capital.
Let's look at a few different ways that MSP can be used.
First, minimum sustainable price allows us to directly compare costs of different technologies.
Market prices aren't ideal for such a comparison because manufacturers might be selling well above or below their actual costs.
MSP focuses on the actual costs of two technologies, removing market factors like supply and demand fluctuations from the comparison.
While you could compare technologies solely based on manufacturing costs, the MSP also takes into account financial factors such as different financing fees that can create cost differences between technologies.
Furthermore, considering MSP can provide a way to estimate what prices and margins might be for manufacturers when no public information is available.
Another important aspect of MSP is that it will adjust over time as costs change.
MSP is not the absolute minimum sustainable price that could be achieved by a given technology; just the minimum at that time and location.
Here, you can see how for one technology NREL's estimated costs, MSP, and market prices have changed over time.
Our costs and MSPs are benchmarks, suggesting a typical case within the industry.
Sometimes the market price is below the MSP, which can reflect low margins in the industry. A company may also price below our benchmark MSP if they have achieved lower overall costs than the industry as a whole.
MSP is a good metric for setting policy and cost targets for a technology.
Ideally, these targets should reflect actual technology costs, not prices that have been inflated or depressed by market factors.
In a nutshell, minimum sustainable price can be a useful metric when comparing existing energy technologies or introducing new ones.
To learn more about MSP, see NREL's solar cost analysis publications.