Some people think SolarCity is doing terribly because they're losing so much money. Actually them losing money is an incredibly great sign for the long run (assuming they don't run out of money - which Elon won't let happen).
Here's how their business model works:
- They will install solar panels on your house for free (or cheaper than the full cost).
- You pay them a much lower rate than what the public utility company charges for the electricity generated from those solar panels.
- You save tens of thousands of dollars and lower your carbon footprint by hundreds of thousands of pounds of CO2 over 20-30 years.
- They lose a ton of money installing those expensive panels but make a TON of money in the long run selling you that electricity that is generated for next to nothing.
So as you can see, SolarCity losing money is actually a good thing because it means they're making so many damn sales that in 10 years they're going to be reaping the profits from those sales like crazy.
Unfortunately, their business model and pricing is far from competitive in some areas of the United States. I inquired into their services, and when it came to pricing, they were at least 50% over the average of all service providers and plans, and in the bottom 10% as far as price per kw/h.
Also, the home owner has no ownership stakes in any of the hardware. That's great during the service period (10 years if I recall), where they maintain and manage the hardware. However, at the end of the term, you are offered to buy the equipment with a hefty baloon payment. To the point ehere you'd be better off and come out FAR ahead by paying out of pocket from the onset and own the equipment outright.
The lease payments do not make it to SCTY's balance sheet, they're securitized and sold as SolarBonds, a financial beast of their own, with no secondary market, no default protection and no rating from a ratings agency.
I've currently invested in Solar Bonds, and am comfortable with the risks they present. I don't need a secondary market and I'm not worried about vast amounts of people no longer paying their electric bill.
> I'm not worried about vast amounts of people no longer paying their electric bill
No one was worried about vast amounts of people no longer paying their subprime mortgages either. Not saying your investment strategy is wrong, but "predictions are difficult, especially about the future".
If the lease payments backing the bond stop, Solar City will attempt to rectify the situation, but it's not responsible for the remainder of the debt in any fashion. This specific aspect of operation is similar to other online servicers, like LendingClub, which would not compensate you in the event of a peer-to-peer loan default.
• your inability to initiate bankruptcy proceedings against SolarCity;
• the lack of certain “customary” investor protective covenants in the indenture;
• your inability to require us to repurchase the Solar Bonds upon a change of control of SolarCity;
• lack of cross-default provisions in the indenture with respect to our other debt; and
• the lack of an underwriter to conduct third party due diligence and other types of “gatekeeper” actions typically taken by an underwriter in an underwritten public offering.
The buyers likely can't afford to outright buy. Being the cheapest isn't usually the best idea in business either. Apple does pretty well being much more expensive than the average.
I think the key here is batteries. The utilities will fight (lobby) to give themselves the upper hand when it comes to buying solar power from consumers. Tesla plans to make lots of batteries. Batteries also happen to be good solution to these legislative issues.
A match made in... the backroom?
It's not about brand at this point, it's about economies of scale and production?
Its about sidestepping regulatory capture. If you can drive battery costs down far enough, you don't need net metering subsidies than can be taken away on a whim.
Converting to metered grids (on which consumers can sell) costs a small fortune, often for very little benefit. Even environmentalists have been weighing in against it as wasteful.
Tesla's home battery solution offers an obvious response to this situation - you can minimize or avoid grid sell-off by doing in-home storage to smooth demand. That has the potential to make SolarCity an incomparable player in non-metered markets, keeping with Musk's general "no viable competitors" ethos.
Also, Tesla automobiles are giant batteries themselves. If you're looking at demand shifting, it's rarely a bad thing to have two days of storage capacity plugged in all night. I think that is where the true magic happens, converting non net metering markets to profitability.
well then think of it like the perks package. solar city allows people that couldn't afford solar to afford solar (at least up front). electrons are electrons, sure just like a job is a job but some jobs have a beer fridge and some jobs do not
To expand on this, it seems clear to me that Tesla should be in the business of selling home solar installations. The question is whether this the right way to get into the business. This was a cheap way to get 1/3 of the market.
On the 1 hour and 32 minute Tesla conference call this morning Elon mentioned:
-there is redundant/duplicate hardware between solar panel & the Powerwall installations
-substantial drop of cost of sales for SolarCity between 30-50%, also drop on tesla's side
-biggest asset is SolarCity's installers
-also some strengths in the SolarCity's sales side
-a special deal with SolarCity would be a conflict of interest
-a seamlessly integrated product/system is just better, and "you aren't wondering if you should blame the solar company, the battery company or what if you are the end customer"
-installation crew can do everything in one visit instead of two or three
Other interesting note:
-Elon explicitly said Tesla has the potential to be a trillion dollar market cap company
My take on it is if the deal is viewed solely based on past performance and traditional financial analysis it probably has big issues. If viewed from a future standpoint where Tesla pulls off things like the Model 3 successfully, it could be a pretty good deal for Tesla. A bigger question for shareholders is what kind of shareholder dilution could occur between today and say 5 years from now on whatever roadmap Elon is imaging and isn't public.
There is an existing partnership where SolarCity sells and installs Tesla batteries.
I think Tesla's ability to sell another company's installations is limited by the impression they are trading on their brand. ie. a "Trump Steaks" problem.
If the failure mode is "public utilities have achieved regulatory capture", then isn't having something like Tesla come in with billions of dollars of support an effective solution?
You're asking a different question, in a very loaded way.
Bringing your question back to SCTY, one of the critiques of SCTY in NV was that SCTY was expecting/betting to be able to sell back electricity to the grid at retail (not wholesale) rates via net-metering. Inarguably, this was a threat to the utility and its ability to re-coup its large capital investments (sunk costs) in the grid.
There are other solar companies whose business model doesn't rely as directly on "billions of dollars of (taxdollars in) support."
There are two different regulatory things going on here. The first is a tax rebate for installing solar. The second is a policy requiring utilities to purchase excess energy from people with solar installations. My interpretation of the article you linked was that the utilities were attempting to conflate these by arguing that the money to pay consumers for their excess power originated from the public, and that they're attempting to place caps and how much energy can be sold back to the grid and don't care much about the installation subsidies.
From what I can tell, the biggest jumps in Solar City's business were when the caps on excess power were lifted. Which makes sense. Rebates are nice and reduce their risk and increase how deep they can go in, but increasing the net metering cap from 3% to 10% more than triples their revenue and cuts their return period to a third what it was. Those caps are not subsidized, in fact often being implemented as trivial accounting tricks where a user gets credits during the day that they can spend that night or next month.
1) if people get script money, which they spend on energy, they effectively get to use the utility as a battery - at a cost for the utility.
2) The utility can't (and honestly, shouldn't) directly shoulder that cost, so they pass it on to other clients.
3) net-metering cap serves as a limit to prevent the utility from being unsustainable, because the rooftop energy business can't survive without it.
What SolarCity effectively wants is to move the cap so that they get more parts of a pie which they are stucturally forced to share with the utility. Effectively, we're witnessing the woes of a growth-hacking model in an environment where the main source of margin and growth is regulatory decision.
Net metering is effectively a subsidy for solar for customers with solar once you take into account things like the cost of maintaining the grid, and will become more and more of one as tech improvements and economies of scale drive down the cost of utility-scale solar and the actual free-market price of power at peak solar times compared to the rest of the day.
Eventually that's true. However, we have yet to hit that point as solar is still a small fraction of electricity production in the US and the daytime peak is huge.
Not exactly how it works. The projects are leveraged off balance sheet with separate, often tax advantageous entities owning the panels in a complicated lease buyback structure. 'Losing money is a good thing' is not true if you understand time value of money and debt leveraging. I haven't done much research but Solar City is probably hurting now because Nevada renagged on gridnbuyback provisions and lots of other states are eliminating residential incentives and subsidies for solar.
Also although they were the first to do some of the complicated financing stuff, rooftop solar installation has turned into a very low margin business with lots of competition in most markets. It's not really groundbreaking stuff they are doing.
I totally understand the business model, but I'm betting this was a really tough pitch to VCs when SolarCity was just starting up.
"We'll be lucrative by the early 2020s, assuming solar starts seeing widespread adoption" carries a lot more weight now than it would've a few years ago, just because of the explosion of programs and services like Project Sunroof.
I believe that the regulatory environment for solar is becoming rather un-cooperative. I also think that the solution to the uncooperative (Utilities don't want to pay for solar electricity) situation is a Tesla product, batteries! It makes sense to me. It also reeks of backroom planning.
> You save tens of thousands of dollars and lower your carbon footprint by hundreds of thousands of pounds of CO2 over 20-30 years.
Most consumers don't give an eff about carbon footprint unless it saves them money or the pollution does affect them directly. Also I dont think there are too many people in USA spending tens of thousands of dollars in electricity bill.
Solar Panale is a great idea if there is technological breakthrough but else it a tried and failed model.
> Also I dont think there are too many people in USA spending tens of thousands of dollars in electricity bill.
They do spend that much, the average in the US is $115 a month, and the spread is lowish, ranging from $90 to $130 a month between states, and up to $150 in outliers like Alaska. Or in other words, a US average of nearly $1.4k a year.
A 10 year horizon puts total electricity expenses at $14k, a 30y horizon you mentioned puts it past $40k.
However, those are not savings like the guy implied that you replied to. Solar today tends to lower your bill by maybe 5-10% on average over large amounts of customers tops. So savings would be a few thousand bucks, not tens of thousands.
More importantly, that's a rate for today, and it remains to be seen how that will develop into the future.
The big untold truth for customers is that there's a high probability that electricity prices will come down sharply. Renewable energy resource price points are dropping fast, both on the hardware side, the soft-market side, and spurred on by subsidies. We've already seen crazy low record rates, like the latest PPA (power purchase agreement) was as low as 3 cents. PPA's set electricity prices for contracts that last well into the future, so they're essentially the industry's prediction for where the market will go. (i.e. a 20 year contract at 3 cents per kwh might look silly when the price is 5c today, but it implies industry experts expect the price to drop such, perhaps to 2 cents near the end, that the average cost level over 20 years will drop below 3c.)
Those PPAs will spread and start to affect electricity prices, 3 cents already undercuts wholesale prices of most coal, gas and nuclear capacity for example. And those wholesale prices will push down retail prices, too, such that existing solar installations on average over 20 years may actually turn out to be more expensive than the market rate, i.e. no savings at all, because their financing assumes rates to stay stable, or drop less than they likely will as far as I can see.
I'm still a huge fan of solar and urge anyone to consider it, but as an investment as a consumer I think it's financial benefits are oversold.
Don't forget the carbon credits: by owning the panels on your roof, solarcity (and others in the same business like sunrun) own the carbon credits. Which they can then sell in the carbon markets.
When you buy your own panels, there's no way to cash in on the carbon credits. I'm waiting for some startup to provide a way to market them...
Actually if SolarCity used a realistic discount rate to measure the value of their future cash flows which extend 40 years out, the company would be massively insolvent. Ahhh, the beauty of non-GAAP accounting...
The pitch for user adoption seems to be that it will be cheaper and eco-friendly. But I question that, for example if your solar panels break or malfunction. You will always be paying for energy outside of solar as a back up.
Not at all. In a ponzi scheme the later investors pay for the profits of the earlier investors. In this case Tesla is taking a loss on customers but turning a big profit in the long run regardless of whether later customers sign on.
Here's how their business model works:
- They will install solar panels on your house for free (or cheaper than the full cost).
- You pay them a much lower rate than what the public utility company charges for the electricity generated from those solar panels.
- You save tens of thousands of dollars and lower your carbon footprint by hundreds of thousands of pounds of CO2 over 20-30 years.
- They lose a ton of money installing those expensive panels but make a TON of money in the long run selling you that electricity that is generated for next to nothing.
So as you can see, SolarCity losing money is actually a good thing because it means they're making so many damn sales that in 10 years they're going to be reaping the profits from those sales like crazy.