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Selling a Streamlined Residential Solar PPA

Discussion in 'TSLA Investor Discussions' started by TheTalkingMule, Mar 6, 2017.

  1. TheTalkingMule

    TheTalkingMule Active Member

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    Investors(TMC posters and otherwise) universally cheered the SolarCity/Tesla shift away from packaged PPA solar leases to outright sales as a logical move toward building shareholder value. While I appreciate the clear-as-day profitability that simple installations provide, I would argue that Tesla has turned it's back on what should be it's core business and primary differentiator moving forward. Sustainable energy as a service.

    The idea that you could simply sign a contract with Tesla giving you 100% American made solar for zero-down and no need to deal with tax credits, warranties, maintenance, or anything all while actually saving money was astonishing to me. Would I ever consider buying it? No. But that's because I almost always purchase the product itself, most of today's marketplace doesn't act that way. Most people see tremendous value in not having to think about things.

    I do believe that as we move into the mainstream solar years, the simplicity of PPA models will comprise at least 50% of the market demand. There are just far too many consumers, even in this semi-early adoption phase, that don't want to deal with all the extra nonsense that comes with ownership.

    Now to the purpose of this thread.....

    The drawbacks of the traditional SolarCity PPA were rooted in un-scaled soft cost and inefficiency. 20 year PPAs with rate escalators were a necessity to get price points under regional grid prices and supposedly create self-sustaining demand. That clearly did not happen. Sales costs ballooned to $.91/W as SCTY tried to push out into new markets, cost of financing ballooned along-side soft costs, and the whole thing came crashing down under it's own weight. Utilities found the weak point in the model and by pulling the rug out from under SCTY just in Nevada alone, they crumbled the whole operation.

    The new "solar roofs" will provide all the direct sales demand Tesla will need, but I think there is a much larger market for standard panel PPAs over the next 10-12 years. There are some very simple avenues to a sustainable PPA model if you take out most of the $4-7k in customer acquisition costs. I'd like to hear anyone's thoughts on a PPA for today's market where costs have continued to plummet and the Tesla brand can draw 400k paid reservations for it's new products.

    In an optimal world where soft cost are minimized, what does a streamlined "first principles" Tesla PPA look like?

    My initial thoughts.....

    If sales cost can be nearly eliminated(like in Germany), does the PPA need to run 20 years?
    Why does the rate have to be static in each market?
    Why isn't down-payment a more flexible option?

    A little flexibility gains you much broader appeal. Why not allow consumers to move the dials around and create their own contract? Some people want rock-bottom rates on a 25 year deal, some would rather pay a slight premium to the grid for a 10 year deal with $2k down.

    A prosumer could even have things like buyouts and extensions inserted into the contract if it makes them more comfortable. A few bucks up front allows you a sliding-scale buyout clause with clear prices to jump out of the deal at any time. A higher rate gets you a 10 year deal and a few bucks up front gets you a 10 year extension option.

    That all sounds complex, but the customer experience would be as simple as a couple dials on a dashboard with a big BUY NOW button. If the costs could be streamlined, as I fully expect Elon to, the PPA options start looking pretty attractive.

    P.S.

    Consider also the value to TSLA shareholders of active on-going relationships with solar customers vs. one-and-done sales interactions. Solar+Storage will be a far more profitable business than automotive manufacturing in the long term. It will constantly evolve and require fresh ideas and build-out along the way. Staying at the top of the solar-as-a-service market has massive value for growing future energy marketshare.

    Would you rather own Ford or Standard Oil(Exxon)?

    How about both?
     
  2. neroden

    neroden Happy Model S Owner

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    Stop right there. You've failed to understand the problem.

    From the *corporate* side, the drawback of the PPA model, as with any seller-financed lease, is that it puts Tesla / SolarCity into the banking business. Tesla has to spend the money upfront but only gets it back over 20 or 30 years.

    This is what nearly drove SolarCity bankrupt. They had to *finance* all the PPAs, and they were trying to do so with borrowings of less than 20 or 30 years, meaning that they had refinancing risk. Borrow short term, lend long term -- this actually IS the banking business. Apart from the question of whether it's a good idea to be in the banking business, Tesla should absolutely not do it without having a subsidiary with Federal Reserve access in case of liquidity emergencies.

    Now, in addition to switching to cash sales, Tesla/SolarCity has started *pre-financing* their PPAs and leases: in other words, they won't issue them until there's 30-year financing from a *third party* available *in advance*. This does address the problem without really getting into the banking business. However, the issue here is that this means that the number of PPA sales you can make is limited by the financing you can line up in advance. Which is exactly what they're trying to do. They cannot promote PPA growth until they have financing growth going faster.

    And as Musk said in one of the conference calls, it's probably cheaper (lower interest rates) for most of his customers to get loans themselves than for SolarCity/Tesla to get those loans.

    Now, does this picture change when Tesla becomes awash in cash? Sure, then they can finance the loans out of their own profits. But that'll be a while; they have three more Gigafactories to build first among other things.
     
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  3. SageBrush

    SageBrush Active Member

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    Hubris will not get you far.

    Off the top of my head, two big problems stand in the way of SCTY's future residential roof market:
    1. Utilities changing the terms
    2. Low valuation of roof PV in the secondary market
     
  4. TheTalkingMule

    TheTalkingMule Active Member

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    The idea that financing could not be found to fund residential PPAs seems silly to me. Yes, right now with the solar market just breaking out of it's infancy financing is difficult. But do we really think a cost-lean offering won't be able to source financing of what is becoming one of the safest investments around? There won't be third parties lining up to offer 20 year financing on installations of a 25 year warranted product? I'm not asking what what it would look like to inject a PPA offering into the market today from scratch, I'm asking what the next round of offerings will look like having taken in all the lessons of the past.

    Yes, we are living in a world where utilities are dictating to consumers as if it were remotely appropriate, but the foundation of their power is rapidly eroding. Nevada, Arizona, NY, CA, all these states are very quickly rebounding from the local utility lobby's best punches and are on much more stable ground now. Republican governors are rallying behind solar installers and their massive job growth. You think Elon will ever again set up a sales center in a state like Nevada without securing clear net metering legislation in advance? It's not crazy to think within 2 years there will either be some good FERC protections put in place for consumers or the states themselves will have legislated a reasonable battle ground under which solar can just steamroll the legacy fossil interests.

    Local installer's current advantage is their sales cost is less than half that of the majors and other overhead is a bit lower as well. When costs for Tesla are $1.57 rather than $2.57, the world is drastically different. In THAT dynamic where customer acquisition and other avoidable soft costs are whittled down to nothing, what does a PPA offering look like? Hardware costs nothing, when Elon finds a way to limit soft costs as they do in Germany, I have to think "solar as a service" wins out. I'm wondering what the offering(s) will be.
     
  5. neroden

    neroden Happy Model S Owner

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    Oh. Well, wait 5 years. Tesla won't be able to finance large rounds until then, so why worry now?

    Maybe they will look like you suggest in 5 years, but a lot of things can change in 5 years.
     

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