Sunny Days Ahead for SolarCity?
The future of SolarCity remains uncertain, yet promising.
SolarCity’s Mission: Protecting Your Wallet and Our Planet
SolarCity offers a simple value proposition of lowering its customers’ energy bills by providing solar energy solutions for little to no initial investment. Sounds like a win-win, right? Any rational consumer loves saving money – particularly in situations where spending less money for a given service (electricity) does not compromise the perception of value delivered to the consumer.
Washington is taking the issue of climate change quite seriously: on October 3, 2015, President Obama and the EPA announced the Clean Power Plan – a historic and critical step in reducing carbon pollution from the power sector. The Plan requires a 32% reduction in the sector’s carbon pollution within fifteen years.[1] As America’s #1 vertically integrated provider of residential and commercial solar energy solutions, SolarCity has been a clear beneficiary of the nation’s newly energized conversation around sustainability. The numbers also seem to support this thesis – given the most recent publicly available data, the company maintained 35% market share of the residential distributed solar installation market.[2]
Is the Business Model as Sustainable as the Energy Source?
In the United States, federal, state and local governments collaborate with public utility providers to determine policies and regulations that directly or indirectly impact the price of electricity. One key driver of SolaryCity’s value-creating abilities concerns a regulatory policy known as “net metering”, which currently exists in 41 states.[3] Net metering is a billing system that credits individual customers for the full retail value of the electricity that their system generates. The idea is that since your solar panels will typically produce more energy than you will consume during a given period, you should only pay the difference – or the net amount – and sell the rest back to the grid.
A second, more explicit subsidy, known as the solar Investment Tax Credit (ITC), is also instrumental to the viability of the SolarCity business model. The ITC currently offers a 30% federal subsidy to tax equity investors in solar projects – Congress recently extended the policy through the end of 2019, after which it will taper off to 10%.[4] This is truly a game changer: By 2020, the U.S. will be installing 20 GW of solar capacity each year (to put this in perspective, at the end of 2014, 20 GW was the total amount of solar that the country had installed in its history)![5] As a result of the multi-year ITC extension, solar prices are forecasted to decline while installation rates and technological efficiencies will rise over time.
Over the last few years, SolarCity has taken strategic moves to vertically-integrate its supply chain through acquisition. These steps have helped optimize the company’s cost structure (lowering cost per watt), but they alone are not sufficient to generate attractive returns on invested capital without some sort of subsidization. Critics assert that in the absence of tax policy loopholes such as the ITC, SolarCity’s model would no longer be sustainable.
Can Elon Save the Day?
On July 31, 2016, SolarCity entered an agreement to merge with Tesla Motors, in a $2.6-billion all-stock deal, subject to shareholder approval.[6] It is important to recognize that brothers Lyndon (CEO) and Peter (COO) Rive co-founded SolarCity in 2006, along with their cousin Elon Musk, who serves as Chairman of SolarCity AND Tesla. In many ways, the future of SolarCity is inextricably linked to that of Tesla – both companies share Musk as a visionary leader and ‘key man’ stakeholder. Tesla’s decision to acquire SolarCity is predicated on the assumption that there is a longer-term, value-creating opportunity to reduce dependence on national grid interconnections by localizing renewable energy through a Tesla / SolarCity partnership. ‘But what do cars have in common with solar cells and backup battery systems?’ you might ask. The next step is to go “off the grid” entirely, by using solar cell systems to generate energy which can do anything from power a home or re-charge an automobile. Storage is essentially the buffer by which consumers can reliably ensure that they have access to energy 24 hours a day, even when the sun isn’t shining. In a surprise move, Institutional Shareholder Services (ISS), an influential shareholder proxy service, said today that it believes the deal makes strategic sense for both parties, and should be approved.[7]
Perhaps sunny days do lie ahead for SolarCity.
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[1] EPA. 2016. https://www.epa.gov/cleanpowerplan/fact-sheet-overview-clean-power-plan . Accessed November 2016
[2] SCTY Investor Presentation. 2016. http://files.shareholder.com/downloads/AMDA-14LQRE/3157059545x0x830612/1A32ABBC-4024-44B9-8F81-1B5BD77DD00B/2016.06_SCTY_Investor_Presentation.pdf . Accessed November 2016
[3] Ibid
[4] SEIA. 2016. http://www.seia.org/research-resources/impacts-solar-investment-tax-credit-extension . Accessed November 2016
[5] Ibid
[6] WSJ. 2016. http://www.wsj.com/articles/tesla-and-solarcity-agree-to-2-6-billion-merger-deal-1470050724 . Accessed November 2016
[7] WSJ. 2016. http://www.wsj.com/articles/proxy-service-iss-endorses-proposed-tesla-solarcity-deal-1478275610 . Accessed November 2016
Very interesting post on SolarCity. I liked how you simply and clearly laid out the business model, including stating the risks the company is facing. While it certainly sounds extremely encouraging and promising from an environmental point of view, I was surprised to see how much the business model relies on the government and the regulatory environment. You stated that SolarCity’s model might not be sustainable if it were not for tax incentives. This is scary. I appreciate President Obama’s push to tackle climate change, and how these policies have significantly benefited the business, however, it is uncertain how future administrations will handle this issue. I would be curious to see what you would recommend to the business to make more sustainable on its own and less dependent on legislation.
Craig mentioned in his post that Wal-Mart installed a number of solar panels on its rooftops in an effort to move towards sourcing sustainable energy. I did a little additional research and it turns out that Wal-Mart is one of SolarCity’s clients [1]. One of the primary reasons Wal-Mart uses SolarCity seems to be the value proposition of having SolarCity put up its own capital in order to provide Wal-Mart with cheaper electricity. As one of Wal-Mart’s executives put it, “Why put up our own capital?” [2]. The question of tax subsidies aside, do you think there’s an opportunity for SolarCity to structure its deals with its clients in a more economically favorable way? Why should SolarCity carry 100% of the capital burden?
[1] Forbes. 2014. How Walmart Became A Green Energy Giant, Using Other People’s Money. [ONLINE] Available at: http://www.forbes.com/sites/christopherhelman/2015/11/04/walmarts-everyday-renewable-energy/#2eff4e674894. [Accessed 6 November 2016].
[2] Ibid.
I’m concerned about the timing for SolarCity merging with Tesla and also scaling heavily into the domestic energy production game. SolarCity has acquired several new silicon wafer solar cell manufacturing companies, as well as solar technology R&D firms. Perhaps their bet is to be the fore-front designer or new panels as well? With such a visionary as Musk at the helm, it’s hard to believe that anything is off SolarCity’s ambition plate, but the question to ask would be where SHOULD they focus their efforts now and WHEN should they push to scale their presence into every home and business nation wide? My guess would be to emphasize SolarCity’s ability to install new solar arrangements to downstream customers and leave the R&D element out of their portfolio. Perhaps then, they can ride the ebbs and flows of new efficiency gains and maintain their role as a market leader and driver of market adoption. In merging with Tesla, I see they creating a serious bet on integration into the transportation space, which I hope will pay off in the years to come.
Very interesting post, discussing a topic that is without a doubt at the forefront of energy innovation today. While SCTY and other solar providers certainly benefit from the ITC extension, it is noteworthy that the stock price for each of the major companies has been in decline over the past few years (SCTY, VSLR, SUNE, RUN, SPWR). Are investors dubious that these companies are sustainable in the long-run (excluding SUNE, which has already gone bankrupt but not necessarily due to industry challenges)? Research analysts seem to have a fairly positive outlook on the industry (similarly to your article), but what risks/concerns are not being considered?
Very interesting post. I totally agree on the subsidization point and wonder whether there is any solar company in the world that is self-sustained right now. Technology is still an issue, i.e. how to increase energy conversion efficiency. Different countries are at different development stages and if I remember correctly, the US is currently leading on this by a significant amount comparing to the rest of the world. But even that, SolarCity still live on subsidy. So there’s definitely still a long way to go before solar can contribute meaningfully to the world power usage. I would also like to know how much energy the panel production and installation process consumes and how feasible it is to transmit electricity produced by each customer to the other end users through grid. My concerns are on the cost efficiency, safety, infrastructure front.
When thinking through the solar industry I am curious as to at what point these companies might become profitable? Are the companies banking on a technical breakthrough that will make solar energy more cost effective. Additionally, how long will investors allow these companies to have operating losses before capital is allocated elsewhere.
I am not as concerned about Solar City’s profitability or business model as others may be. Over the long-term, solar energy is the only energy source that makes sense for the planet, since it is the only energy source external to the planet. All other sources are either fundamentally limited in amount (i.e. coal, gas) or are incapable of the scale necessary to power society (e.g. wind, geothermal). I believe Solar City may simply be riding out the trend lines until 1) the cost-per-watt of solar energy becomes materially less than coal and 2) battery technology advances to the point where weather patterns no longer impact the viability of solar. At that point, the vast majority of electricity production, not just for homes but for the entire grid, will begin to shift to solar, and Solar City will have the infrastructure, sales force, and expertise necessary to lead the drive. Short term profitability is not meaningful compared to that larger goal.
The introduction of solar roof was a great step towards sustainable communities. I believe Elon is building an ecosystem with cars, power savers and roofs not only for cost synergies. Just imagine how easy it becomes to sell these product if you promote the total savings per household from using less gas and electricity. Yet its just the beginning. Shared economy will increase customer savings even further when you will be able to share your electricity with neighbors and rent your self driving car while it is idle.
I think the solar roof tiles that Elon Musk showcased recently got investors excited again about Solar City.
http://www.usatoday.com/story/money/cars/2016/10/28/teslas-elon-musk-promotes-solar-roof-tiles/92920894/
I wonder how much that project increased the value of Solar City to Tesla investors? Or is it more a function of the synergies that both Tesla and ISS claim.
What a great post, Joey!
After just reading about the recent solar roof launch by Tesla, their partnership with Solar City makes a lot more sense. The problems you’ve outlined that maybe faced by Solar City on the tapering off of Solar Power tax incentivisation is something being echoed all over the world. In several countries, especially the developing nations, government tenders are not upholding their own laid out tariff structures and in fact, these inflated values aren’t sustainable for any government in the long run. Unfortunately, the investments done in Solar at the turn of the millennium were based entirely on these lucrative numbers and schemes and will not sustain the shift in policies over the next decade. What Solar City and Tesla are proposing is, in my humble opinion, so simple yet so revolutionary. Advancement in PV cells and storage solutions (in some cases led by Tesla itself) has made their concept of “off-the’grid” a reality and when clubbed with retail sale to private consumers and the established concept of net-metering, their economic structure is sound for a long time to come.