SolarCity (SCTY)

[TheTalkingMule]

Let me see if I understand this. Wholesale prices are so low that power producers cannot cover their fixed cost. Meanwhile retail power is still quite high as grid operators seek to cover their fixed costs. The retail price is still high enough that consumers are induced to defect load. The spread between feed in tariffs and retail tariffs is so high that those with solar are flocking to buy batteries so that the can virtually grid defect.

Precisely. They're trying to push renewables aggressively to get out in front of the industry as it expands worldwide and to save money since they have no substantial domestic source of energy, but the impact to legacy power producers is far worse than expected so they're stepping down the FIT rates as fast as possible. They've gone so far that there's no incentive to go solar in Germany(you could argue disincentive) and installs slowed to something like 1.5GW in 2015. Now the FIT rate has been frozen and they're making plans for the next phase. While they do that, it's very likely that consumers will take things into their own hands and go off grid.

EON, who was the largest energy producer a few years back, has tried to focus on just managing the grid and shifting renewables around, but the gov't won't let them divest from the production side of things. It's gonna take a while to sort this out, but the moral of the story is that solar destroys the profitability any and all forms of electricity production once it hits 5% of total demand or about 40% of peak midday demand. The reasons why should be clear and the idea that we should have a nationwide gameplan should be even more clear. Solar cannot be stopped now, so politicians are going to need to wake up and do their jobs.

- - - Updated - - -

EIA - Electricity Data

Looks like the utility rates actually have gone down y/y. Don't tell potential SCTY customers.

I guess you didn't bother taking a close look at your link. Every state with a significant solar foot print is up. New Jersey went from $16.00 to $16.65 and they're probably the state where SCTY had the largest ramp up from 2014 to 2015.

This is not opinion to be debated, it's obvious fact. Solar cuts total demand drastically at midday AND removes midday residential customers simultaneously, utilities make all their money at midday. Where's the confusion?

 

[Perfectlogic]

guess you didn't bother taking a close look at your link. Every state with a significant solar foot print is up. New Jersey went from $16.00 to $16.65 and they're probably the state where SCTY had the largest ramp up from 2014 to 2015.

This is not opinion to be debated, it's obvious fact. Solar cuts total demand drastically at midday AND removes midday residential customers simultaneously, utilities make all their money at midday. Where's the confusion?

And why do you think the prices went up in those states? Because of cheaper wholesale electricity, or because of footing the bill from residential solar customers, aka grid freeloaders? Obviously only of the two is able to raise the prices, that is the facts. When net metering gets scaled back then utilities will get a, in some states, significant load off their back, and SCTY will have a very hard time.

 

[anon]

I thought the wash sale rule only means you can't realize a loss if you buy back shares sold at a loss, or something substantially identical, within 30 days. Am I missing something?

Tax Loss Harvesting - Fidelity

That link is not a comprehensive discussion of the wash sale rule - it is just recommending a strategy of waiting for 30 days before buying back, which is fine. They don't discuss your approach of buying calls before selling shares.

You can find many detailed descriptions of the wash sale rule around the net, but of course the definitive reference for any tax issues should always be the IRS itself. As you can see here, it applies when you buy a replacement security within 30 days either before or after the sale:
https://www.irs.gov/publications/p550/ch04.html#en_US_2014_publink100010601

 

[Foghat]

I can't believe we have to plow this ground again, but I guess when the stock is down, the spin creeps back into this thread...

solarcity does not mandate an escalator. Customers can choose from 0% - 2.9% and everything in between. It all depends on the price point people want to pay. The current average escalator is about 1.7%, so clearly people are choosing a middle number. For those saying he escalator is an issue need to be informed with how the escalator really works.

secondly, Solarcity is pricing well. They are very competitive so to say people are dumb for choosing them is not true at all. Take a look at this authors current article in Computerworld: My big fat rooftop solar installation | Computerworld He evaluated four different offers and chose Solarcity. Hard to argue this individual as not informed or naive. So that spin some keep bringing back here over and over again over the past two years is getting really really old.

lastly, energy storage combo Solarcity offers currently falls under PURPA for aggregation services. In California, that rate is actually more valuable then net metering. To not recognize the tremendous competitive advantage Solarcity has in aggregation services is to ignore the entire future of rooftop solar industry. Currently, Solarcity is the only rooftop solar company to be conducting a deep aggregation pilot program. The only one. They are very far ahead of any competition. This will really be a boon come 2017 and beyond. It would be advisable not to dismiss this advantage in raising post ITC capital as well as continuing to have compounded growth even in there worst case scenario of complete abandonment of net metering. In addition, most big competitors will not be able to sustain current install rates give ITC drop next year. Solarcity will reduce acquisition costs by hiring those companies employees which will have the fundamental training already. At the lowest cost per installed watt in the industry, Their are a lot of advantages Solarcity will have come 2017.

The bottom line with the market is that they can't model a future price no matter how aggressive Solarcity is growing. The ITC drop down and current net metering changes provide too much uncertainty. Think about it... A broker has to give a recommendation to its clients based on models, so it you don't know what's going to happen next year, let alone 2-5 years, it's not easy to recommend to retail let alone bringing in new institutional money in large numbers. In such a speculative environment, traders and short sellers rule.

However, I sense a lot of money on the sideline waiting... Waiting for ITC decisions... Waiting to see how net metering plays out in the big solar markets.

Others are making the bet now Solarcity and the industry will come out well after all this transition, taking advantage of these prices.

 

[T1perry]

Interesting?

Very interesting thread. I live in Sacramento Area with the utility SMUD reducing my base price of electricity to eight cents as I gave them my vin number for my new X. After working with solar city for over a month the best they can come up with was $.12. Then of course, there was the factor that the price went up 2.9% per year, each year.

They also were unable to quote or provide any information on using a battery for time shift of electricity. That does not bode well for the stock, in my opinion.

 

[electracity]

I......

secondly, Solarcity is pricing well. They are very competitive so to say people are dumb for choosing them is not true at all. Take a look at this authors current article in Computerworld: My big fat rooftop solar installation | Computerworld He evaluated four different offers and chose Solarcity. Hard to argue this individual as not informed or naive. So that spin some keep bringing back here over and over again over the past two years is getting really really old.

.....

"Buying a rooftop solar system for my home would have cost upwards of $35,000 for a system similar to the one I chose."

LOL. This is for a 6.2 kwh system.

 

[blakegallagher]

I was going to link that article Foghat. It does a good job going through what is involved in the solar installation process. I wish he would of showed the aluminum
sheet they used to repair the holes in the roof their safety harness makes.

I can see why many people would pay a large premium to have all of this work under warranty by the residential leader vs a local installer.

 

[gene]

I was going to link that article Foghat. It does a good job going through what is involved in the solar installation process. I wish he would of showed the aluminum
sheet they used to repair the holes in the roof their safety harness makes.

I can see why many people would pay a large premium to have all of this work under warranty by the residential leader vs a local installer.

I had Solar City install a system about two years ago. I noticed that every last person on the roof had to be harnessed. When the city inspector came around when all was done, I asked him if they did a good job and his reply was "Solar City always does a perfect job, I never have to call them out to re-do anything. Most of the other have to come back again".

Now as I write, my neighbor across the street has the local Ventura Solar installing a system on his roof. There are 7 guys up there hopping around. No safety harness on any of them. Hard to watch without cringing.

 

[jhm]

EIA - Electricity Data

Looks like the utility rates actually have gone down y/y. Don't tell potential SCTY customers.

Super! The average US resident gets to save 0.09c/kWh, a reduction of 0.69%. They're still paying 12.93 c/kWh.

Meanwhile the price of a thousand cubic feet of natural gas dropped from $4.24 to $3.22, a decline of 24.06%.

What do you suppose the residential rate would be if natural gas was absolutely free to utilities? Do you think we could see residential rates as low as 12.66? Wow! That would be dreamy!

Don't tell the coal industry!

U.S. Natural Gas Electric Power Price (Dollars per Thousand Cubic Feet)

 

[Perfectlogic]

Super! The average US resident gets to save 0.09c/kWh, a reduction of 0.69%. They're still paying 12.93 c/kWh.

Meanwhile the price of a thousand cubic feet of natural gas dropped from $4.24 to $3.22, a decline of 24.06%.

What do you suppose the residential rate would be if natural gas was absolutely free to utilities? Do you think we could see residential rates as low as 12.66? Wow! That would be dreamy!

Don't tell the coal industry!

U.S. Natural Gas Electric Power Price (Dollars per Thousand Cubic Feet)

I just wanted to prove the point that the rates actually go down when the utilities lower their costs, I remember someone who didn't believe that was true. I agree that it is a small reduction but utilities have also had to deal with the growing liability of residential solar customers which has negated some of the cost savings.

 

[Lessmog]

I just wanted to prove the point that the rates actually go down when the utilities lower their costs, I remember someone who didn't believe that was true. I agree that it is a small reduction but utilities have also had to deal with the growing liability of residential solar customers which has negated some of the cost savings.

It seems to me you guys are somewhat in agreement on the principles, just not on details such as scale. :wink:
Which may be the all-important one.

 

[Perfectlogic]

It seems to me you guys are somewhat in agreement on the principles, just not on details such as scale. :wink:
Which may be the all-important one.

I do agree that if net metering isn't scaled back then utilities will have a hard time. But I don't expect that to be the case, net metering is already starten to be tightened which also makes sense, there is no reason to play favorites when utilities are also quickly moving to renewables. More than 50% of new capacity added was renewables last year in the US and it won't be long before that moves to 100%. In other words residential solar shouldn't recieve a bigger subsidy than other solar projects just because it's on someones roof.

 

[TheTalkingMule]

I just wanted to prove the point that the rates actually go down when the utilities lower their costs, I remember someone who didn't believe that was true. I agree that it is a small reduction but utilities have also had to deal with the growing liability of residential solar customers which has negated some of the cost savings.

Where? Grid retail prices have gone up in every state with any significant solar footprint, take a look at your linked data.

 

[TheTalkingMule]

And why do you think the prices went up in those states? Because of cheaper wholesale electricity, or because of footing the bill from residential solar customers, aka grid freeloaders? Obviously only of the two is able to raise the prices, that is the facts. When net metering gets scaled back then utilities will get a, in some states, significant load off their back, and SCTY will have a very hard time.

Prices go up in states where there's significant solar because it displaces a ton of demand at peak where legacy power producers make all their money. I feel like we're rehashing a lot of 2009 topics that aren't really in question anymore.

 

[Johan]

Prices go up in states where there's significant solar because it displaces a ton of demand at peak where legacy power producers make all their money. I feel like we're rehashing a lot of 2009 topics that aren't really in question anymore.

Don't sweat it. The upside for us longs is not only some on this forum have these thoughts, but a very large part of the energy industry and its investors/financiers STILL think like this... Just wait until the banks who have financed those NG peaker plants built in the last 5 years understand the very thing you suggest smart people had already caught on to in 2009.... Ooops... Or as Jim suggested up thread: it wouldn't really help much if the price of NG dropped to $0.

 

[jhm]

"Buying a rooftop solar system for my home would have cost upwards of $35,000 for a system similar to the one I chose."

LOL. This is for a 6.2 kwh system.

Doing the math on this PPA, the buyout price would be $20,288 for this system. On a pre-ITC basis this would be $28,982 purchase price, substantially lower than the $35,000 top end price noted above. I do wish the author had given details about each of the 4 offers.

 

[jhm]

I just wanted to prove the point that the rates actually go down when the utilities lower their costs, I remember someone who didn't believe that was true. I agree that it is a small reduction but utilities have also had to deal with the growing liability of residential solar customers which has negated some of the cost savings.

Alot of utilities have fuel price pass through mechanism. That is they simply pass fuels costs onto ratepayers. So natural gas, coal and oil have all substantially fallen in the past year. Hawaii in particular runs on oil which is why rates came down significantly. Once you account for fuel prices, there does not seem to be any indication that utilities are trying to price competitively to fend off distributed solar. And basically they can't. Their profit margins tend to around 10% as limited by the government. So a utility charging 16c/kWh in the face of SolarCity offering 13c/kWh would be hard pressed to drop their rates to just 14c/kWh as this would make them unprofitable and unable to pay a dividend to shareholders. The loss of market share to rooftop solar is small. So they have insufficient motive to make themselves unprofitable to avoid less than a 1% reduction in revenue in a year. Instead, they will attempt to recapture revenue by raising the non-fuel portion of their rates. It is too costly to pivot to a long-term strategy of scaling back fixed cost structures. They will seek to perpetuate business as usual for as many years as possible. But until crisis forces abandonment of BAU, they will continue to raise base rates year after year.

Ironically, it may be beneficial for SolarCity not to grow so fast as to put utilities into crisis. If they moderate growth, the utilities will cling to BAU, and solar installers can get away with raising their rates as well. The utilities would be content to drag this out for decades.

 

[electracity]

Doing the math on this PPA, the buyout price would be $20,288 for this system. On a pre-ITC basis this would be $28,982 purchase price, substantially lower than the $35,000 top end price noted above. I do wish the author had given details about each of the 4 offers.

That's a better price, but a good price some people are getting is a in the $ $3.10-$3.50 range. So it is still a $5K - $10K premium for Solarcity.

$5K-$10K covers the total purchase price for most residential installs in Australia. Or put another way, Solarcity's profit/retained earnings per job in the U.S. meets or exceeds the total purchase price per job in Australia. That is not sustainable pricing for Solarcity.

 

[jhm]

Solar energy costs continue to plunge across the world : Renew Economy

Given our discussion of natural gas prices in the utility space, this article is very interesting. Note the chart in particular. Recent utility sclae solar PPAs look to price power below the fuel cost of NG generation. This is serious trouble for natural gas, coal and even oil. When the cost of new solar is below the cost of fossil fuels, even depreciated fossil plants become writedowns, and the price of fuel is forever capped by the price of solar.

Look carefully at that chart. It show a refernce case scenario for natural gas and a wider prediction band. It also overlays the PPA prices for solar contracs originated in 2014 and 2015. First off the 2015 curve is much lower than 2014. Likely future PPAs will cut an even lower curve. So far so good. What concerns me as an econometrician who works on scenario generation is that the reference scenario is not at all consistent with these solar PPA curves. Any realistic scenario for natural gas needs to be at or below the PPA curve at least in the long run. Basically gas producers will have to lower their prices to keep pace with solar or gas will lose substantial demand. Moreover, every MW of solar that is added to production implies a permanent loss of demand for fossil fuels. I cannot underscore what a serious error this AEO reference case is. Austrailian utilities, governments and the gas industry are misallocating resources based on unrealistically high expectations. They are making bad investments under bad assumptions. This is the sort of forecast error that leads to economic disasters. It is a bubble in the making.

For example, in the US, Southern Company has recently acquired AGL Energy for their natural gas production and distribution assets. They believe this will give them an avantage in generating power. But what happens when large scale solar installations are cheaper than the gas used in power generation? They will have to writedown gas network assets even as they write down fossil generation assets. They are making a huge mistake to become so capital intensive around a commodity that will become worthless for power generation. I think a much smarter strategy would have been just the opposite, leave other investors to hold the risk of the collapse of gas prices. Southern Company and other utilities are making themselves long on gas when they should be short.

I would note that natural gas is cheaper in the US than in Australia, so we may not be as close to solar eclisping the fuel cost of gas in power production. This just means it will take a little longer. But the main point still holds, natural gas prices are bound above by solar. Current gas prices are around $2.4/MMBtu, I doubt the can ever return to prices above $5, even if the US stopped drilling for gas altogether.

Note that NG combustion turbines (peakers) use 11.371 MMBtu/MWh. So Solar at $40/MWh is cheaper than gas at $3.52/MMBtu, and this is ignoring all other costs associated with financing and operation a gas generator which can be in excess of $150/MWh for a plant with 10% utilization. But the average utilization is less than 5% which leads to $300/MWh plus around $30/MWh for fuel. What is abundantly clear hear is that a utility really does not want to be using gas peakers while the sun shines, the wind blows or a battery holds a charge.

 

[jhm]

That's a better price, but a good price some people are getting is a in the $ $3.10-$3.50 range. So it is still a $5K - $10K premium for Solarcity.

$5K-$10K covers the total purchase price for most residential installs in Australia. Or put another way, Solarcity's profit/retained earnings per job in the U.S. meets or exceeds the total purchase price per job in Australia. That is not sustainable pricing for Solarcity.

Fair enough. Are there any notable names offering residential installation in that range? Or is it just really small outfits? It would be nice to beable to look at their business models and see how they do it, how profitable they are and how well they grow/scale.

SolarCity now has a $1.92/W installed cost. If they were content with a 40% gross margin, they could offer systems at $3.20/W cash, or 45% GM at $3.49. I wonder if it would be worthwhile to do so. Essentially they could offer systems with financing based on a pre-ITC price of $4.50/W and direct sales at $3.50/W. The logic here is twofold. There is an shareholder cost and overhead cost to offering financing. So the financed price really ought to be a little higher. Second, for those willing to lay cash, they really do have other installer they can go to for better direct sale prices. So when SolarCity fails to convert a sale to someone looking to buy outright, they incur marketing and sales cost, but lose the sale. Combining the two point SolarCity could reduce SG&A per Watt this was, while improving cashflow. The 45% they net from a cash sale would get immediately used to finance the next sale. So SolarCity could decrease the use lf leverage.

One curious point, using the PPA assumptions in the current EVC and adjusting to remove ITC, I get $4.54/W as the lresent value under 6% discount rate. If I change the discount to 10%, I get a present value of $3.10/W. SolarCity's cost of debt is around 4%, but most of the capital is coming from equity which is likely expecting more like a 20% return. Thus, a discount of 10% would come closer to the WACC and be a more suitable discount rate upon which to track performance. Cash up front would be much mkre highly valued in pricing under a higher discount.