Many people think that SCTY's install costs, especially sales costs are it's problem. That's not entirely true. The other big issue is cost of capital... From what I know SCTY gives away 12% return or thereabouts to tax equity "partners", with guarantees behind it. In other words if the PPA /lease goes into default, SCTY holds the bag entirely. Also in case of the ABS deals, the final maturity of the deal gets extended based on defaults. So the ABS owners have large cushions against losses. That's the reason why ABS timelines don't match with the PPA timelines.
They could easily foresee this high cost of capital, it's perfectly rational for a business taking something perceived as cutting edge and making it mainstream. This cost will very naturally plummet once solar is even mildly mainstream. The idea that PPA buyers would default en masse was always absurd, but the investment community is clearly almost there now. I believe SCTY saw this temporary high cost coming as was fine with it.
Many people wonder if SCTY is not giving homeowners a good deal, while at the same time it is not making any profits (including all future cashflows), what gives??
The problem is that there are various "leaks" in the business model:
- Substantial cost of capital
To contrast cost of capital is not even considered when making outright purchases, so effectively 0 in people's minds, wether it's true or not in reality
- Default costs
SCTY holds the bag entirely. Again not even considered when making outright purchases.
- O&M costs
SCTY holds the bag on this. SCTY estimated $0.40/W on this. No body thinks of this for outright purchases.
- Renewal
For modeling investors will never take the renewal portion seriously, especially because it is not contracted out. But an outright purchaser might actually consider the purchase as "investment" for longer than 20 years.
None of those "leaks" are a major concern, they can all be very easily flattened out as the market scales. $.40/W of O&M costs? That is a massive over-estimation since these are professionally installed and almost entirely maintenance free.
Including value of renewals is obviously silly and arbitrary since it's 20 years out, but to think the dollar figure they put on that isn't dwarfed by the value of the established customer relationship is equally silly. Solar isn't going to be a one-and-done transaction. These people will need storage hookups and maybe even something like micro-grid solutions long before that 20 year contract is up. There's no value in being their go-to supplier for energy needs moving forward? That's like having the advantages of being the monopoly utility for an entire nation.
Sales costs at $.91/W is 91% of the problem because it's half the reason the other problems exist. If that number were trimmed in half, what would be the cost of capital then? The company would be massively cash-flow positive and installs would be financed at 130% of cost. That cuts your monetization costs considerably because you can sweeten the deals and retain more risk.
In a nut shell, the SCTY PPA/lease are not comparable to outright purchases at all. They are very different animals. But a reasonable rational homeowner is not going to look at all these subtleties. Will compare sticker prices and say SCTY is giving one shitty deal. On the other hand a reasonable rational investor will look at all the cashflows and say SCTY is getting one shitty deal. Neither is a winner, all the money is lost in "ether".
Nearly all of us would never buy a SolarCity PPA, or likely even a straight SCTY install. I would never buy a SolarCity PPA. That's not to say the product doesn't have massive value. The average consumer is not like us, they don't sit around picking through numbers and staying on the cutting edge of technology news. They have one kid that needs to go to soccer practice and another one barfing on their shoulder. Until you can show me a way for consumers to easily obtain a quality solar install with panels that are guaranteed for 25 years from an installer who is guaranteed to be around for those 25 years, I will continue to see value in this PPA product.
The PPA premium vs a low cost local install is well worth it to 50% of the market, especially when you are offering instant savings vs their current grid costs. Let us also not forget that SCTY/TSLA isn't offering this PPA for any other reason than it's what the market has responded to. When installs were $5.50/W, a PPA was the obvious best choice for nearly everyone. Will that change now that we're at $3/W nearly everywhere? I don't believe so. There are too many inherent value adds when going with the SCTY lease product, the ratio will IMO drop down toward 50% and stay in that region for good.
Even entirely erasing the Sales cost down to zero will not make the business model viable. Will prove this one last statement with proper math when I get around to it.
You've already painted this picture many times and it makes perfect sense, if these people haven't listened to your math yet they likely won't.
I think our last favor to ask would be for you opinion of the costs of the most recent monetization round. I'm seeing zero details anywhere and would love some insight into how much of the value they sold and at what cost. I just usually sit here and wait, but how would I go about finding those details?
