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Solar Energy in Entrepreneurship

Technical Report · January 2018

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Solar Energy in Entrepreneurship

Alisa Hayati and Husen M. Umer

Introduction

The energy sector has for long been run by large enterprises and governmental

agencies. However, due to efficiency and environmental factors switching to

renewable energy solutions has to be undertaken. Due to the high costs of such

switching governments are not able to provide the required investments alone

(Wüstenhagen & Menichetti, 2012). Similarly to implementing any innovative

technology, in order to ensure implementation of the renewable energy many

stakeholders have to work together (Linton, 2002). Entrepreneurs can be a great fit

towards such implementation. The recent advancements in renewable energy

technologies have enabled entrepreneurs to discover opportunities in novel ways. In

this review report, the aim is to review the current status of entrepreneurship in the

solar energy market. We provide an overview of the current solutions that are carried

out by entrepreneurs. The focus of the review is on the role of ecosystems on

developing energy solutions by entrepreneurs, the role of different business models

and their components towards developing a successful firm, and finally we provide an

overview of the financial and economic aspects. We show, while different business

models exist, entrepreneurs have various changes to establish new company for

providing basic needs as well as integrated solutions. Due to high demands in the

energy sector, entrepreneurs are able to seize high potentials in the market by

focusing on producing solutions that leads to cost reduction in the upfront. Directions

for future research are also discussed to provide insights for improving sustainability

of solar energy companies (Gabriel & Kirkwood, 2016).

Keywords: solar energy, entrepreneurship

Emerging ecosystem in solar energy market

In this context of complexity, active elements, basic traits, and opportunity creation in

solar market would be demonstrate from innovative perspectives. On the same line,

this literature review indicates the nexus of opportunities in which how exchanges

between entrepreneurs is taken place (Overholm, 2014).

Ecosystem Theoretical Framework

A business ecosystem is a close structure of network within alliance portfolios (

(Ozcan & Eisenhardt, 2009)). In order to enlighten the structure of interdependence

among certain businesses, it has to be referred to seminal article by (Moore, 2006) to

describe the ecosystem’s elements including firms which are direct value creators and

stakeholder consist of government and regulators. Form this perspective, the

conceptual framework will serve guidelines for recognizing and generating

opportunities (Overholm, 2014). Emerging markets like solar energy may create

opportunities in two distinctive ways:

1. Cognitive opportunity, which helps entrepreneurs to embark upon the process

of value creation.

2. Practical opportunity, which helps new entrants to access a network that has

been established and formed by pioneers.

Factors in the solar energy ecosystem

Before we start to describe the well-suited business model for solar energy services

firm, it has to be mentioned that the notion that differentiates this business model

from others is the highly effective actors on the model. Basically, clean technology

companies’ business model are in common on traits such as a wide range of

investment profiles (Wüstenhagen & Wuebker, 2011).

For solar energy market, key investment profile is initial capital with low operation

cost; therefore, it has to be invested on wide range of technological equipment,

installation, and potentially learning cost (Overholm, 2014). Thus, the investment

scale in solar energy would be huge burden on the cost and price balance in the

market; however, according to (Overholm, 2014), the service business model has

solved this problem by:

• Removing customers’ upfront investment cost.

• Taking on the initial efforts of selecting, installing , and securing permits for

the technology.

• Taking full responsibility for long-term operation and maintenance

This way, end-customers have fewer drawbacks due to reliability.

On other block of business model, financial model has been formed in two different

ways (Figure 1). The firms use hiring purchase (leasing) whereby end-customers have

monthly fixed fee to use solar panels, or a Power Purchase Agreement or PPA

(Overholm, 2014). PPA was invented during the US utility deregulation in 1978 for

the independence of electric generation firms (Kollins, 2010).

Intermediary business firm also have similar arrangement of production, but the

creation of offerings needs high degree of entrepreneurial skill owing to taxation

process (Krulewitz, 2012).

 Figure 1: Financial transactions for solar firms (Overholm, 2014)

Business models in the solar energy market

Business models are in general terms categorized under three main categories:

economic, operational, and strategic (Morris, Schindehutte, & Allenc, 2005). The goal

of business model is to conceptualize the value propositions, customer interface,

infrastructure, and revenue model to establish a sustainable business (Osterwalder &

Pigneur, 2010; Richter, 2012)

Initially the solar market has gone through three main evolutionary stages (L.

Frantzis, Graham, Katofsky, & Sawyer, 2008). Firstly, businesses were focusing on

manufacturing and supply of solar systems. Next, third parties got involved to install

solar systems and provide electricity. Finally, integration businesses started to emerge

by integrate the two parts; manufacturing and electricity supply. Moreover,

entrepreneurs in developing countries tend to apply the advances in solar technology

to solve more basic daily needs. In developing countries four distinct business models

have been identified in the renewable energy startups: Consultants, distributors,

integrators, and technology inventors (Gabriel & Kirkwood, 2016).

The design of the business model has great effects on attracting investors due to its

importance on value creation (Chesbrough & Rosenbloom, 2002). Furthermore, the

business model has also effects on the financials of the companies (Loock, 2010).

Loock has performed a conjoint experiment to identify the significance of different

business model components by investors in the sector.

Potentially, solar energy provides promising solutions to households and companies.

Due to the high costs associated with installation of solar solutions, social

entrepreneurs have designed various business models on small to large scales. Due to

the requirements for high initial capital investments, the service-driven business

model is preferred by investors (Loock M. , 2012). He further found that cost

reduction of energy solution is the most important element of the business model

based by surveying renewable energy investors (Figure 2).

Figure 2: importance of business model components by investors. Source: (Loock M. , 2012)

Further, it was also found that businesses that lag behind in marketing and sales are

more rejected by investors than those that just lag behind in innovativeness. This

indicates that innovativeness is important only if it also provides sales in line with or

above the industry standards.

Interestingly, the requirement for cost reduction has been the key success for business

in developing countries. For instance, in Africa M-Kopa has successfully expanded its
sales by providing affordable products for people with very low income (Faris, 2015).

Similarly, in India social entrepreneurs in rural areas have provided solar solutions. In

conclusion, although innovativeness in the solar entrepreneurship has great values but

reducing costs and providing affordable business models have high potentials for

success.

Financial feasibility of solar energy start-ups

To assess a firm in the solar energy market regardless of type and size there are few

technical aspects that have to be considered. First of all, the rule of thumb for

feasibility analysis in energy sector is based on hardware assessment and cost of

production, which relies on mathematical methods. Another is the level of

optimization on the system which are strongly dependent on the algorithms they are

programed on. In other words, to reach reliable assessment in the energy sector we

need to consider the size of energy storage, cost of production, load profile, and

finally solar radiation profile (Zhang, Li, Ge, & Li, 2016).

Mathematical assessment

To exchange well the mathematical approach in an easy reading manner, this section

indicates key elements of appraisal for solar energy firms. This starts with

consideration of distributed energy resources or DER, in other words, it is a

characteristic for coverage of the power in the given time range (Zhang, Li, Ge, & Li,

2016).

In terms of mathematical approach toward fiscal analysis, it is necessary to have a

table of guide for formulation and calculation (Zhang, Li, Ge, & Li, 2016).
In access to DER, it possible to calculate the Cost Of Energy production or COE

which can be interpreted as value creation in solar companies:

For calculation of the cost for square meters in case of limited accessibility of

information or assessment of size of certain company’s capacity, it is possible to

compute the metric of solar plan to reach the cost of energy production:
Economical analysis

For evaluation of economical criteria of the projects, the key aspects are time, cost ,

and profit. They all appear in form of (Dağtekin, Kaya, Öztürk, & Kiliç, 2014):

A. Net present value (NPV)

B. Internal rate of return (IRR)

C. Benefit/cost ration

D. Payback period

In case of evaluating the profitability of a company in terms of these economical

aspects, the consideration of other financial aspects are necessary to reach the future

value. Under this consideration, the elements in the table below are functional:

PV Present Value

Cn Cash Flow in N period

r The Discount (interest) rate

n Number of period

NPV Net Present Value

Co The Initial Cash Flow

FV The Future Value

To demonstrate the possible future value, all these elements are utilized in the

following equations to calculate the present, the net present and the future values,

respectively (Dağtekin, Kaya, Öztürk, & Kiliç, 2014):

In case of a positive result of the assessment (NPV > 0) then the company has a

potential future value.

Conclusion and future research

With respect to comprehensive entrepreneurial perspective on the solar energy

market, by authors, on the articles, it is not possible to summarize the solar

entrepreneurship without covering distinctive research areas under the subject which

merit readers think out about necessity of few substantial factors to grasp the

dynamics on the market and role of entrepreneurship in it. Therefore, this literature

review firstly demonstrates the key elements in the market with identifying a

classification and specification of entrepreneurial companies in the market and the

nature of the interaction between them in order to reach a clear view of their roles.

In the same pattern, the profit of those companies and their monetary policy to

overcome financial barriers vis-a-via other energy supplier in the market has been

considered by introducing innovative approach based on regulatory changes in 1970s

in the United States energy policy. And indeed, to support the idea of existing

companies, the environmental force in scope of ecosystem has been elaborated by

articles to figure out the rule of thumb in this business in terms of recognition and

generating opportunities. Finally, toward accumulating practicality of information in

the market, two approaches for assessment have been described in a way that lead

readers have tenable view on the market size in economic and technical point of view.

While several research studies have analyzed entrepreneurship in the solar energy

sector, no research has been conducted on analyzing the impacts and potentials of

microbusinesses. Performing such studies particularly in the developing countries

may discover entrepreneurial opportunities and ability to expand. Also, mutual

funding based on already established corporations to drive the potential of mirco

economic scales in the market.

References

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capturing value from innovation: evidence from xerox corporation’s technology spin-

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Dağtekin, M., Kaya, D., Öztürk, H. H., & Kiliç, F. Ç. (2014). A Study of Techno-

Economic Feasibility Analysis of Solar Photovoltaic (PV) Power Generation in the

Province of Adana in Turkey. Energy Exploration & Exploitation , 32.

Faris, S. (2015). Bloomberg. Retrieved from

https://www.bloomberg.com/features/2015-mkopa-solar-in-africa/

Gabriel, C.-A., & Kirkwood, J. (2016). Business models for model businesses:

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Kollins, K. (2010). Solar PV Project Financing: Regulatory and Legislative

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