SolarCity (SCTY)

[Robert.Boston]

I'm hoping that GridLogic / SolarCity have hired some very good regulatory lawyers. There are aspects of this business plan that look strikingly similar to an electric distribution company (e.g. Southern California Edison)--they own and maintain a power grid for use by the customers, over which they sell power. It's going to be a state-by-state question about how far GridLogic can go without (a) violating the exclusive franchise of the incumbents and/or (b) becoming a rate-regulated utility. This could shape up to be a battle like that Uber is facing. Utilities are much better lawyered-up than the taxi cab companies, though.

 

[Johan]

I'm hoping that GridLogic / SolarCity have hired some very good regulatory lawyers. There are aspects of this business plan that look strikingly similar to an electric distribution company (e.g. Southern California Edison)--they own and maintain a power grid for use by the customers, over which they sell power. It's going to be a state-by-state question about how far GridLogic can go without (a) violating the exclusive franchise of the incumbents and/or (b) becoming a rate-regulated utility. This could shape up to be a battle like that Uber is facing. Utilities are much better lawyered-up than the taxi cab companies, though.

Interesting indeed. From a bigger perspective it's always interesting to see how disruptive new businesses always seem to touch on and get in trouble with established business model who very often have the benefit of different forms of legal protection. Points in case:
Uber vs. Taxi companies
Solar City vs. Utilities
Tesla vs. Dealers

I guess identifying these kinds of conflicts early could be a good indicator of where to invest if you're looking for disruptive ideas?

 

[Auzie]

That's a very common misconception, popularized by a few strong willed folk, who don't write much here anymore. These folks have been saying that since the beginning (or since the IPO).

SCTY market share increased from 6% in 2009 to 17% in 2012(IPO time) to 39% in 3Q14.

This is "market share" growth.

Per latest available data, their residential installations exceeded the next 70 competitors’ combined!

See the latest presentation at SolarCity - Events Presentations

If solarcity didn't have a competitive advantage why is it's market share growing??

It's very simple, their economies of scale is helping them out at every level from financing to operations.

This will continue to play in their favor for a long time into the future.

I have not followed SCTY for more than a year so I can easily be wrong.

My guess is that their market share growth is due to their ability to eliminate capital investment hurdle for their customers. That is very attractive proposition for many people. When a potential customer weighs their current utility service vs Solar City utility service, the benefits of going green and paying less are on the one side and there is no clear downside in that equation.

Some people prefer to own everything including their solar panels and they are unlikely to become Solar City customers. As panels are becoming cheaper, capital investment hurdle becomes lower and thus Solar City might be loosing this advantage over other solar providers.

The strength of Solar City is in their footprint. They are building a distributed grid network that they own and lease and the size of that network grows with each customer, thus adding incremental value to Solar City business. That business will be enormously reinforced with GridLogic value proposition.

 

[jhm]

I have not followed SCTY for more than a year so I can easily be wrong.

My guess is that their market share growth is due to their ability to eliminate capital investment hurdle for their customers. That is very attractive proposition for many people. When a potential customer weighs their current utility service vs Solar City utility service, the benefits of going green and paying less are on the one side and there is no clear downside in that equation.

Some people prefer to own everything including their solar panels and they are unlikely to become Solar City customers. As panels are becoming cheaper, capital investment hurdle becomes lower and thus Solar City might be loosing this advantage over other solar providers.

The strength of Solar City is in their footprint. They are building a distributed grid network that they own and lease and the size of that network grows with each customer, thus adding incremental value to Solar City business. That business will be enormously reinforced with GridLogic value proposition.

Currently, they can offer power at $0.13/kWh in markets where the utility rates are in excess of $0.16. This is an addressable market of $60B. Their cost of installation is $2.09/W. If they can drive this down to $1.90/W in 2017, then they should be able to offer power at $0.118/kWh. This would have the impact of expanding their addressable market 20% to $72B.

The implication of the declining cost of solar is that they can offer new systems at lower rates and address a larger market. So I'm not particularly worried that solar will become cheap and undercut their business model. Just the opposite, as solar becomes cheaper SolarCity will undercut the utilities and gain market share.

You make a good point about a distributed grid growing in value with each incremental customer. To Robert's point, they'll want to be very careful with crossing legal lines that limit their business model. My view is that GridLogic will make the most sense in regions that are underserved by utilities. That's why I am enthusiastic about India and the Middle East where growth in demand for power is highest in the world. GridLogic will be offered worldwide. It would be a real kick to see it get started in a place like India and just start doubling every 9 months. Then we'd see both SCTY and TSLA take off.

- - - Updated - - -

I wonder if the Gigafactory itself may serve as a test case for GridLogic. They will be integrating PV, wind, geothermal, grid power and batteries. It could be a compelling demonstration site.

 

[Auzie]

You make a good point about a distributed grid growing in value with each incremental customer. To Robert's point, they'll want to be very careful with crossing legal lines that limit their business model. My view is that GridLogic will make the most sense in regions that are underserved by utilities. That's why I am enthusiastic about India and the Middle East where growth in demand for power is highest in the world. GridLogic will be offered worldwide. It would be a real kick to see it get started in a place like India and just start doubling every 9 months. Then we'd see both SCTY and TSLA take off.

I am sceptical about business expansions to low maturity markets, like India and the Middle East. That is an option, but usually quite difficult and may require long time to be successful.

The hurdles to overcome are different remote language and culture, often disagreeable local and wider politics, undeveloped financial markets. These are not empty words, these are real obstacles for business expansion, as business must overcome local nepotism, corruption and other similar phenomena that appear during the developing stages of society.

 

[jhm]

I am sceptical about business expansions to low maturity markets, like India and the Middle East. That is an option, but usually quite difficult and may require long time to be successful.

The hurdles to overcome are different remote language and culture, often disagreeable local and wider politics, undeveloped financial markets. These are not empty words, these are real obstacles for business expansion, as business must overcome local nepotism, corruption and other similar phenomena that appear during the developing stages of society.

You might consider India's ambition to install 100GW of solar by 2022. Rooftop PV and microgrids have a role to play. Already rooftop installations are providing power at 8 Rupees or $0.13 per kWh.
India’s Solar Ambitions Face Challenges | MIT Technology Review

 

[Auzie]

You might consider India's ambition to install 100GW of solar by 2022. Rooftop PV and microgrids have a role to play. Already rooftop installations are providing power at 8 Rupees or $0.13 per kWh.
India’s Solar Ambitions Face Challenges | MIT Technology Review

I do not doubt India's ambition to install large solar capacities.

I doubt young business willingness and capability to bridge a huge maturity gap in establishing themselves in a culturally remote societies. The rules of the game are different in these societies. Foreign business must play by both the local rules and by their corporate rules. These rules might be conflicting or difficult to align. That is costly.

Obviously these hurdles can be overcome. Mature businesses with a lot of cash on their balance sheet have much better odds than young developing businesses.

 

[ggies07]

I do not doubt India's ambition to install large solar capacities.

I doubt young business willingness and capability to bridge a huge maturity gap in establishing themselves in a culturally remote societies. The rules of the game are different in these societies. Foreign business must play by both the local rules and by their corporate rules. These rules might be conflicting or difficult to align. That is costly.

Obviously these hurdles can be overcome. Mature businesses with a lot of cash on their balance sheet have much better odds than young developing businesses.

I feel lots of negativity coming from you man, you need to feel the flow:

 

[Auzie]

I feel lots of negativity coming from you man, you need to feel the flow:

ggies, I appreciate your creative expression of your personal sentiment, but I fail to grasp your arguments in this discussion.:smile:

 

[jhm]

I have worked and been friends with many people from India. I have no doubt that SolarCity would be able to staff their operations in India with very capable, intelligent, well educated and hardworking persons who understand their cultures, languages and politics quite well in addition to all the technical knowledge and skills. Indians themselves will be able to electrify their country, and companies like SolarCity can briing an effective business model, product innovation and financing capability to facilitate this transition.

The hang ups that India has had around expanding their grid is that it has been a highly centralized and burueacratic endeavor that depends very heavily on government intervention. This government centric approach has left over 20% of India without any power and with grids that are very unreliable otherwise. The beauty of GridLogic is that it builds efficient and reliable microgrids from the highly local out to fully interconnected. This is a bottom up approach in contrast to the top down approach that as yet to succeed in India. What you will see are little islands of inexpnsive and reliable power string up a few businesses here and a few homes there. On the success of a nearby microgrid others will want to join in and still others will want to start their own microgrid. So these little islands will pop up and grow, and in time they will become quite interconnected. I think that GridLogic has the potential grow much faster than any state run grid or large utility. There is a reason why SolarCity is the fastest growing electricity provider in the US where the utilities are quite good and quite well connected politically with legal monopolies to protect them from competition. It happens one customer at a time, one rooftop at a time.

 

[Robert.Boston]

India has another problem with solar: dust. A good friend of mine who is both Indian and a chemical engineer has a lot of experience with solar panels in India. The airborne grit is much finer in the Dehli area than in the U.S., and if it's not removed from the panels on a regular (daily, or daily+) basis, the particles begin to weld onto the glass surface. There will need to be advances in the panel surfaces and/or automated cleaning technology, he reports, in order to avoid rapid degradation of panels.

 

[dalalsid]

India has another problem with solar: dust. A good friend of mine who is both Indian and a chemical engineer has a lot of experience with solar panels in India. The airborne grit is much finer in the Dehli area than in the U.S., and if it's not removed from the panels on a regular (daily, or daily+) basis, the particles begin to weld onto the glass surface. There will need to be advances in the panel surfaces and/or automated cleaning technology, he reports, in order to avoid rapid degradation of panels.

A few days ago I saw a picture of people cleaning panels in India and they were surprisingly dirty! So after reading your comment, I googled it and here is what I found:
india solar panels cleaning - Google Search

 

[Auzie]

India has another problem with solar: dust. A good friend of mine who is both Indian and a chemical engineer has a lot of experience with solar panels in India. The airborne grit is much finer in the Dehli area than in the U.S., and if it's not removed from the panels on a regular (daily, or daily+) basis, the particles begin to weld onto the glass surface. There will need to be advances in the panel surfaces and/or automated cleaning technology, he reports, in order to avoid rapid degradation of panels.

The main risk that I see in Solar City spreading to India is the incompatibility of leasing business model with the economic and financial environment.

What happens in a scenario: people sign up for panels with Solar City, as there is no downside for them in doing so, and then along the line stop paying as they can not afford it? That is one of the risks that is likely to be higher in less financially and economically developed markets.

 

[Gerasimental]

An advantage of India though is that the current government is very supportive of infrastructure development, particularly power and particularly in remote communities.
It is common for (local and regional) government to provide substantial capital to businesses that are interested in implementing projects that will help development efforts.
I believe Modi is very serious about turning India into a modern economy and so we may see the regulatory and business environment improve in India, which along with serious willingness to drive sustainability and development and a highly tech-savvy people/economy at least gives hope that India could be a fantastic market for SolarCity.

I actually have an unrelated involvement/interest in off-grid electricity provision in India and can say that the Indians are very well acquainted with the concept and most have very favourable views of generating electricity locally and independently from the national grid.

I'm not saying that India won't be a very tough market to penetrate or denying the difficulties of language/cultural barriers and the incompatibility of SC's business model with the Indian norm, but in terms of the product itself, I think India is a fantastic fit and could be a HUGELY lucrative market if the barriers above are overcome.

 

[jhm]

The main risk that I see in Solar City spreading to India is the incompatibility of leasing business model with the economic and financial environment.

View attachment 75874View attachment 75875

What happens in a scenario: people sign up for panels with Solar City, as there is no downside for them in doing so, and then along the line stop paying as they can not afford it? That is one of the risks that is likely to be higher in less financially and economically developed markets.

Leasing is just one form of financing SolarCity provides. They mostly offer power purchase aggreements (PPA) wherein the customer pays per kWh used. In the US, the delinquency rate that SolarCity experiences is substantially lower than for mortgages, which have the lowest rates among consumer debt. Customers poy their PPA bill to SolarCity because they want to continue using power and utility rates are higher. So while there may be temptation to skip a car payment or even a mortgage payment, the power bill is one of the very last a person might skip. There is a certain amount of credit risk with any service contract. The state grid offering lower to an customer has just as much credit risk as SolarCity. Naturally, SolarCity would want to pull credit scores on any customer, whether in the US or India and screen out poor credit risks. SolarCity city has also develop an innovative new solar loan which as I recall ties interest payments to the consumption of energy, which protects the customer from the risk of underperformance of the system. In return for abslrbing this risk, SolarCity realizes higher retained value per watt on this product. The key point here is that SolarCity is very creative about developing its financial products. They offer outright sales, solar loans, monthly leases, PPAs, and on the deposit side they have solar bonds which pay better than CD rates to retail investors. Which products are most suitable in India remains to be seen, even so each product would have to be constructed to work within India's legal, tax and regulatory framework. This is a given. There may even be subtle issues that motivate innovation of a totally new financial product. Off the top of my head, there may be contexts where prepaid plans make sense. For example, a prepaid phone plan could have an embedded prepaid charging plan. Here SolarCity could contract with the company selling the prepaid phone credits to pag them so that the phone user may charge at SolarCity charging stations. This may seem pretty far fetched in places like the US or Australia, but in super remote and grid isolated places in India there may be lots of cell phones and other portable electic devices, but no place nearby to charge them. I'm not saying this is a plum market, but there may a context for it. Any in case, SolarCity is very innovative financially, so I am confident they can figure out what will work best in any particular context. In the view of Robert Shiller, all finance is technology. So it comes down to figuring out how to make it work.

 

[Auzie]

Leasing is just one form of financing SolarCity provides. They mostly offer power purchase aggreements (PPA) wherein the customer pays per kWh used. In the US, the delinquency rate that SolarCity experiences is substantially lower than for mortgages, which have the lowest rates among consumer debt. Customers poy their PPA bill to SolarCity because they want to continue using power and utility rates are higher. So while there may be temptation to skip a car payment or even a mortgage payment, the power bill is one of the very last a person might skip. There is a certain amount of credit risk with any service contract. The state grid offering lower to an customer has just as much credit risk as SolarCity. Naturally, SolarCity would want to pull credit scores on any customer, whether in the US or India and screen out poor credit risks. SolarCity city has also develop an innovative new solar loan which as I recall ties interest payments to the consumption of energy, which protects the customer from the risk of underperformance of the system. In return for abslrbing this risk, SolarCity realizes higher retained value per watt on this product. The key point here is that SolarCity is very creative about developing its financial products. They offer outright sales, solar loans, monthly leases, PPAs, and on the deposit side they have solar bonds which pay better than CD rates to retail investors. Which products are most suitable in India remains to be seen, even so each product would have to be constructed to work within India's legal, tax and regulatory framework. This is a given. There may even be subtle issues that motivate innovation of a totally new financial product. Off the top of my head, there may be contexts where prepaid plans make sense. For example, a prepaid phone plan could have an embedded prepaid charging plan. Here SolarCity could contract with the company selling the prepaid phone credits to pag them so that the phone user may charge at SolarCity charging stations. This may seem pretty far fetched in places like the US or Australia, but in super remote and grid isolated places in India there may be lots of cell phones and other portable electic devices, but no place nearby to charge them. I'm not saying this is a plum market, but there may a context for it. Any in case, SolarCity is very innovative financially, so I am confident they can figure out what will work best in any particular context. In the view of Robert Shiller, all finance is technology. So it comes down to figuring out how to make it work.

jhm, I agree that every problem has a solution, often quite creative one. Developing markets present a great expansion potential for many businesses and many businesses do expand very successfully.

The timing of such expansion is relevant. Solving all the unusual problems in foreign markets costs a lot of money, takes a lot of time and occupies a lot of business resources. For these reasons, such expansion is well suited to mature cashed up businesses that have resolved most of their domestic issues. Jumping to a foreign different market may seem premature if a business is still establishing itself in a more secure and familiar domestic market.

Perhaps Solar City is ready for foreign challenges and I wish them all the best as only good can come out from what they do, in whichever market they take their business.

 

[jhm]

jhm, I agree that every problem has a solution, often quite creative one. Developing markets present a great expansion potential for many businesses and many businesses do expand very successfully.

The timing of such expansion is relevant. Solving all the unusual problems in foreign markets costs a lot of money, takes a lot of time and occupies a lot of business resources. For these reasons, such expansion is well suited to mature cashed up businesses that have resolved most of their domestic issues. Jumping to a foreign different market may seem premature if a business is still establishing itself in a more secure and familiar domestic market.

Perhaps Solar City is ready for foreign challenges and I wish them all the best as only good can come out from what they do, in whichever market they take their business.

SolarCity has locked up 43% marketshare in US rooftop solar. They double their deployed MW every year, 1GW reached last year. They are truly at the top of their game within their familiar domestic market. However, within the next several years, they seriously need to address new markets if they are to continue their present rate of growth. Certainly they can move into a few more states and sell more storage with each installation, but this is pretty much BAU for them. They've got a nkce 1 mlion customer goal for mid-2018. This takes them to 6 GW deployed and will probably multiply their retained value 6 times as well. This could take thier stock to $250 to $300 in 2018.

This would all be fantastic, but where do they go after 2018? This is why I am so keen on them developing GridLogic and taking it worldwide. It represents an evolutionary step forward from mere rooftop solar, and it addresses an incredibly large market. In the next two years, I'd like to see SolarCity build some really good demonstrations for GridLogic with a binder full of case studies. This is developmental work. Once the Gigafactory can produce stationary storage at scale, SolarCity should be in a good position to move aggressively with GridLogic. They can't really get ahead of the Gigafactory, even if they wanted to. But this gives them a few years to develop and refine their microgrid-as-a-service model.


Tesla investors should also recognize that they have a lot at stake in whether SolarCity can pull this off. If they succeed, then Tesla should move quite dynamically in the stationary storage market. Either utilities will pay top dollar for storage, or a much more nimble SolarCity will usher in disruption. OTOH, if SolarCity does not succeed, then utilities will largely only buy what storage is required of them. Storage has the potential to send much of the fossil fleet to early retirement if the disruption is deep. India is one of the very last countries to be installing new coal plants. China is choking on too many coal plants thrown up in its haste to become an economic superpower. Should we wait for the rest of the developing world to take the same path? The best chance Tesla has is to disrupt with impunity.

- - - Updated - - -

India has another problem with solar: dust. A good friend of mine who is both Indian and a chemical engineer has a lot of experience with solar panels in India. The airborne grit is much finer in the Dehli area than in the U.S., and if it's not removed from the panels on a regular (daily, or daily+) basis, the particles begin to weld onto the glass surface. There will need to be advances in the panel surfaces and/or automated cleaning technology, he reports, in order to avoid rapid degradation of panels.

How much of that is pollution?

 

[Robert.Boston]

Leasing is just one form of financing SolarCity provides. They mostly offer power purchase aggreements (PPA) wherein the customer pays per kWh used.

As applied to India, this is a real howler. Pay for electricity? in India? There's a reason that the electricity infrastructure is in disarray: power plant operators don't get paid because distribution companies don't collect. Heck, a lot of the power isn't even metered. We call the gap "non-technical losses".

This isn't to say that there aren't models that could work, but they'll have to pay up front for the gear. For example, treat the solar panels and micro-grid the same way you would treat the communal water-well, as a government cost, paid by taxes.

 

[ev-enthusiast]

Any coincidence that Elon Musk and Bill Gates will talk together at this years BOAO Forum for 2015 Asia (Sunday, 2015-03-29)?
Some kind of partnership here in the future?

Entrepreneurship and innovation are highlights of this year’s annual conference. In the morning of March 29, Bill Gates, co-chair and trustee of Bill &Melinda Gates Foundation, will have a dialogue themed “technology and innovation for a sustainable future” with Elon Musk, CEO of Telsa Motors. Robin Li, CEO of Baidu, will serve as the moderator of the discussion.

 

[jhm]

Slandering solar is not about protecting taxpayers, but utilitys monopoly status | TheHill

It may time to attack political support for power monopolies.

Utilities have long complained about having to pay feed in tariffs for excess solar power, but give me the right to sell my surplus power to my neighbor and the utilities can offer whatever they like. If I offer power just slightly below what my neighbor is paying the utility, then my neighbor will gladly buy from me.

This is the basic test of a free market: can I sell my surplus to my neighbor? If I can, then networking solar panels and other microgrid resources becomes a powerful economic force.