Effect of price reduction on renewable energy technology supply chain performance and contract design

Abstract

Over the past ten years, fossil fuel sources, particularly coal, dominate global electricity generation. With increasing concerns of large pollution emissions from coal-fired power plants and world-wide commitment to environmental change, clean and renewable energy has begun to surge. However, while the installation of renewable energy technology such as solar photovoltaic (PV) panels has risen globally, there has been a sharp reduction in the price of solar PV panels, which has created a challenge for manufacturers and retailers due to a rapidly changing market. This unique characteristic of renewable energy technology supply chains creates inefficiencies by incentivizing manufacturers and retailers to maintain stock levels that are too low prior to a price reduction. To address this challenge, this research models a renewable energy technology supply chain with one manufacturer and one retailer (who acts as an installer) that faces stochastic consumer demand. Applying inventory models with stochastic demand, this research aims to (1) demonstrate the negative impact of a price reduction on the supply chain by comparing to a model without a price reduction; (2) characterize the renewable energy technology manufacturer’s and retailer’s optimal stock and production policies with and without a compensation fee contract when a price reduction is present; (3) conduct sensitivity analysis by simulating supply chain performance with different parameter settings; and, (4) provide guidance on supply chain contract design to enhance the efficiency of a renewable energy technology supply chain.