SolarCity (SCTY)

[jhm]

U.S. Solar Installations Decline, but 2015 Should Be a Record Year

Residential solar advancing 76% Q1 y/y, while utility installations are down. Commercial is also declining, but not as much as utility solar. SolarCity is a big contributor to residential solar. SolarCity also competes in commercial solar, like Walmart installations, but residential appears to be more profitable for them. Utility solar will get burnt badly by decline in ITC. It is very price sensitive, and its tendency to favor Q4 installs my reflect heightened sensitivity to tax issues, specifically ITC. Price sensitivity is lower in the residential segment. Commercial will benefit emensely from Powerpacks and other technologies. So in all, this seems to confirm my bias in favor of distributed solar over utility. SolarCity seems to be doing the right thing by staying out of utility solar.

 

[imherkimer]

@electracity: Some of Solarcity's lease customers include the U.S. military, and companies such as Walmart and Walgreens. Are these customers also "monetorizing their ignorance?" In your view, is every kind of lease agreement based on "ignorance?"

 

[jhm]

Electracity, what makes you think that the ITC expiration is not already baked into the market price? This is an extraordinarily foreseeable event. There also seems to be plenty of room for surprise to the upside, like reducing only to 20% not all the way to 10%, or new incentives for batteries or cooperation with grid, or imposition of carbon tax, or anything else politicians might cook up to ease the transition. So if the market has already baked in a reduction to 10%, and the political deal is not that severe, then the price goes up on this news, not down.

 

[hcsharp]

...
It's a clever company strategy. I guess people have bad credit because they make poor financial decisions. Monetize that ignorance while it lasts!

A lease has more value to a lot of people than borrowing to own the system. Many of these people are not ignorant and have good credit.

Walmart sells huge volume on tiny margin.

2014 is the year solar became a lock for becoming a huge business. Yet solarcity stock has declined. I would think that individual investors holding the stock for long term gain would wonder why. Do you understand something about solarcity that industry specialists don't?

The interest I have in solarcity is buying on the bad news of the federal tax credit expiring. And then selling when the stock recovers.

Wait, you think the tax credit expiring is "news"? If you do, I have some real news for you. On the one hand you suggest the bulls in this thread are naive because they think they know something that industry specialists don't, and then you seem to think these specialists haven't already priced in the expiring credits. Maybe you can explain yourself better...

 

[electracity]

Solarcity in Q1 had a $2500 customer acquisition cost, and retains $2/watt.
While in Perth, Australia customers in May paid $4888 USD on average for a 4kw system they own.

 

[jhm]

FACT SHEET: Administration Announces Actions to Bring Jobs and Clean Energy to Rural America | The White House

Obama Administration wants to give agriculture subsidies in the form of clean energy projects. I am ambivalent about this, but it may create some opportunities for solar installers.

 

[jhm]

Solarcity in Q1 had a $2500 customer acquisition cost, and retains $2/watt.
While in Perth, Australia customers in May paid $4888 USD on average for a 4kw system they own.

That's a really nice price in Australia, about $1.24/W. It's hard for me to believe that that is a complete picture hower. Consider that the going price for utility grade solar installations in the US this last quarter was about $1.55/W. How is it posible that residential solar in Australia could be cheaper than utility solar in the US? Clearly there are bigger differences here than what can be explained by business models. We can just bring a bunch of Aussie solar installers to the States and expect them to throw up rooftop solar for less than the cost of utility solar. We also cannot lay the blame at US utilities saying that they are too ignorant or unsophisticated to get solar at lower cost. I fail to see how you can get solar in the US down to $1.24/W simply by letting local contractors install it and banks finance it with conventional home loans. If you knew how to make this business model work, you could make a killing installing solar for utilities at $1.44/W. Just do a GW installation and you could net $200M. Pretty simple, right?


USSMI - GTM Research - GTM Research

 

[hcsharp]

That's a really nice price in Australia, about $1.24/W. It's hard for me to believe that that is a complete picture hower.
...

I believe the price he quoted was after government incentives. It's still a low price and helps make his point that margins are slim in some regions. However, prices in Australia have not been declining like they have everywhere else. Resi solar has a very high adoption rate in Australia - something like 11%. At those prices you can see why!

 

[electracity]

Australia has incentivized solar by subsidizing panels. They also don't have a panel tariff like the U.S., AFAIK. The price is post incentive. I didn't try to make a detailed comparison, but their incentives are roughly similar to the U.S. solar ITC. Germany has no solar incentives, AFAIK, and prices far below the U.S.

The labor component of the price is Bob the Perth electrician making wages. He doesn't have a $2500 customer acquisition fee. I'm sure Bob complains about too many competitors.

Here are the first two recent solarcity quotes I find online:

Hi Guys,
Hoping to get help from the experts. I got a quote from SolarCity that seems high. So wanted to see what you all think & any suggestions you may have. Also can anyone recommend any local installers?

SolarCity - $21K for 3.06 KW system

System Size AC 3.06 kW
System Location MP2
Shading (% Sun) 89%
Direction 154°
Slope 26°
Monthly Electric Usage 524 kWh
Annual Electric Usage 6,291 kWh

here's another:

Note how the quote is structured towards the absurd PPA. How will they avoid mass lawsuits in a few years?

 

[Zzzz...]

here's another:

Another one more believable: 10.29 kW DC for $22,230

But notice, this is SolarCity partner, not SolarCity, which is probably cheaper. And do not forget, if one choose purchase over leasing, one would need to pay retail insurance rate, pay for new inverter in 10-12 years, etc.

 

[jhm]

Electracity, thank you for the examples. The second one is a little easier to follow. I think the purchase price looks pretty good at 7.8 c/kWh. It's less out of pocket when you net out the 30% tax credit, $2.70/W before ITC, $1.65/W after ITC. The PPA price nets out the ITC.

I don't personally feel like this quote is steering the buyer to select the PPA over the purchase price. At least, it does not have that effect on me. It may actually be that SolarCity is leading more for the Purchase option. Why? Because, if they sell the MyPower solar loan, they actually get more retained value than the PPA, about 50% more, $3.66/W vs $1.86/W! MyPower is a 30 year loan at 4.5%, if you opt for auto payments, of 5% if you don't.

So here's the cleaver finance question: how does MyPower generate more retained value than SolarPPA? Bonus points to anyone who can figure this out. Hint: If you can, you should work for a bank!

 

[electracity]

Here's an interesting quote from Y a yieldco's IPO that gives an indication of who they are selling PPA:

The residential solar assets "are leased under long-term fixed-price offtake agreements with high-credit-quality residential customers with FICO scores averaging 765 at the time of initial contract."

These companies, and likely solarcity, are targeting and selling PPA's to unsophisticated homeowners with good credit. Is this the type of business where homeowners with good credit will continue to be stupid? What will be the reaction of these homeowners when they realize that they were sold by a PPA by a company that obviously understood the steep fall in the future price of self-generated solar?
Understanding solarcity has diminished my opinion of Elon Musk's sincerity and character.

http://www.sec.gov/Archives/edgar/data/1635581/000119312515084389/d876955ds1.htm

 

[doggusfluffy]

As SolarCity turns giant, call goes out for supply chain - Business - The Buffalo News

Also the 2 Solyndra stories seemingly pair nicely with meeting 'off the hook' Powerwall demand:
SolarCity leases former Solyndra facility to house Silevo panel division - Silicon Valley Business Journal

Tesla lease in Fremont helps city's economy rebound - San Jose Mercury News

This is from the 2nd factory site Tesla is leasing from the best I can tell:
Solyndra Fab 2 - YouTube

 

[Foghat]

Here's an interesting quote from Y a yieldco's IPO that gives an indication of who they are selling PPA:

The residential solar assets "are leased under long-term fixed-price offtake agreements with high-credit-quality residential customers with FICO scores averaging 765 at the time of initial contract."

These companies, and likely solarcity, are targeting and selling PPA's to unsophisticated homeowners with good credit. Is this the type of business where homeowners with good credit will continue to be stupid? What will be the reaction of these homeowners when they realize that they were sold by a PPA by a company that obviously understood the steep fall in the future price of self-generated solar?
Understanding solarcity has diminished my opinion of Elon Musk's sincerity and character.

http://www.sec.gov/Archives/edgar/data/1635581/000119312515084389/d876955ds1.htm

http://files.shareholder.com/downlo...7DD00B/2015.05_SCTY_Investor_Presentation.pdf

There are 40 million households in Solarcity's 17 markets. The majority of households (53%) have a FICO score above 700. The super majority (2/3) have a score above 650. In successful business, the first priority is targeting the highest probability sales given margin demand. Clearly, if 20 million households have a FICO score above 700, its crystal clear that where any solar business would go. As scale happens, growing the business to meet this tremendous demand, Solarcity reduces internal costs to broaden its compelling product offering to a broader market. Nothing new here or any different for any other solar company or any business in any industry for that matter.

ITC 5-Year Extension Is In | CleanTechnica
The ITC is now most likely to get extended. Since solarcity is planning on being competitive without ITC in 2017, this will only support their current 90%+ growth for many more years to come. Solarcity didn't build the 1GW buffalo factory without an expectation of continued compounding growth after 2017. In fact, they are already publicizing a 5GW factory and currently have a provision in the New York state incentive contract to build it in New York. The Solarcity "my power" solar loan is designed to function as the next vehicle to raise significant levels of capital in the absence of tax equity partnerships. Since the Solarcity solar loan has proven to be a popular option for its customers, they are well positioned to thrive in the worst case scenario of no ITC after 2016. Soon they will do an ABS (be rated) with the new Solar loan, which will complete the post ITC capital raising cycle that will enable them to thrive. In addition if the ITC is not extended, many solar companies will not be able to compete with solarcity and either go out of business or be bought up by the larger companies. Solarcity will in fact gain market share as well as increase it's access to module supply at very advantageous prices(due to lower demand from out of business solar companies). See, the ITC expiration will hurt the solar industry, but be a boon for Solarcity for the pure fact that they are prepared for the incentive drop.

In the end, the biggest obstacle is not in competing with other solar companies, it's not in technology, or anything to do with anything about the solar system sold to customers. The biggest obstacle is political/regulatory. That's it. Situations like Arizona utility rate hikes and permitting/certification delays are the key drag on future compounded growth for the entire solar industry, but most pointedly on solarcity's 90%+ compounded growth. My belief is Solarcity will win it's Arizona lawsuit. Look at multiple monopolistic industries in America's past from the movie business to the telecom business and you will see how our courts have decided. One glance at the Sherman Act and you will see where this is going to end up and it will be truly transformative for the future of distributed generation solar. The Antitrust Laws | Federal Trade Commission

And with powerwall and microgrid services, Solarcity is establishing a strong position to take the entire national grid to a new level. Solarcity is already has a provision in its contracts that will share profits 50/50 with its customers under PURPA type arrangements. And currently hitting 6GWh/day levels (and rising), if you don't think the utilities are extremely concerned about this, then you haven't been keeping up with Warren Buffet and his near instantaneous rebuke and lobbying effort to get the anti competitive wall built higher. Buffett's Berkshire Hathaway Energy pushing for PURPA reform | Utility Dive

In fact, here is a clear statement of where Warren Buffet stands on how his energy companies will obtain their fuel sources for decades(and centuries) to come: http://video.cnbc.com/gallery/?video=3000376493

And not all utilities are fighting against Solarcity, in fact, not many actually are. Currently 44 states and counting with net metering for DG solar customers. Many states are already planning on the solar+storage as an aggregating resource and solarcity is right there in the planning mix(with other solar companies). In New York, Solarcity is one of the newest members of the utility consortium.

To say that interest and momentum in Solarcity is not building is not really knowing the reality of the situation:

-- Lyndon Rive #20 highest rated CEO in the United States.
http://www.bloomberg.com/news/articles/2015-06-10/here-are-the-top-25-highest-rated-ceos-in-america-as-judged-by-their-employees

-- Solarcity's 30 second commercial has 11 million youtube views. It's two 10 second spots have over 11 million views combined. That means Solarcity has received over 22 million views creating significant web presence in approximately 30 days.SolarCity Commercial - At Home with Ra: Fish Tank Diet - YouTube

-- Solarcity Buffalo factory supplier conference(next week) is "sold out" with potential suppliers interested in working with Solarcity. Solarcity is seeing high demand for it partnership. SolarCity supplier event sold out - Business - The Buffalo News

-- 35K+ "solar ambassadors" created by word of mouth promotion sales reflects customer satisfaction is very strong, strong enough to become a solarcity advocate within their communities. #1 marketing tool across all industries is word of mouth, so solarcity has significant momentum in future sales accumulation, especially reflected in the company's all time record breaking Q1 booking number.

 

[atang]

Nicely done @Foghat :wink:

 

[electracity]

I see finance is not strong here.

 

[blakegallagher]

Here's an interesting quote from Y a yieldco's IPO that gives an indication of who they are selling PPA:

The residential solar assets "are leased under long-term fixed-price offtake agreements with high-credit-quality residential customers with FICO scores averaging 765 at the time of initial contract."

These companies, and likely solarcity, are targeting and selling PPA's to unsophisticated homeowners with good credit. Is this the type of business where homeowners with good credit will continue to be stupid? What will be the reaction of these homeowners when they realize that they were sold by a PPA by a company that obviously understood the steep fall in the future price of self-generated solar?
Understanding solarcity has diminished my opinion of Elon Musk's sincerity and character.

http://www.sec.gov/Archives/edgar/data/1635581/000119312515084389/d876955ds1.htm

With all due respect ... please quit calling everyone who went with a ppa stupid. Just because you can not see the value does not mean that no one else can...

This could be said for any technology. What will people think when they realize that the apple 1 was way overpriced and future generations of computers would be much more capable at a much lower price. I wonder how all those "idiots" feel that bought a computer that is completely worthless now.

Historic Apple 1 computer sold at auction - BBC News

Never mind .. looks like whoever got duped by apple ended up ok.

Might also be worth pointing out that one large reason the price of Solar is falling is SCTY and the massive number of PPA's sold by them and their many competitors.

 

[dalalsid]

I see finance is not strong here.

The force is, who needs finance

 

[electracity]

With all due respect ... please quit calling everyone who went with a ppa stupid. Just because you can not see the value does not mean that no one else can...

This could be said for any technology. What will people think when they realize that the apple 1 was way overpriced and future generations of computers would be much more capable at a much lower price. I wonder how all those "idiots" feel that bought a computer that is completely worthless now.

Historic Apple 1 computer sold at auction - BBC News

Never mind .. looks like whoever got duped by apple ended up ok.

Might also be worth pointing out that one large reason the price of Solar is falling is SCTY and the massive number of PPA's sold by them and their many competitors.

You wouldn't own the Apple 1 in your analogy. The equivalent of a PPA would buying 20 years of computing from Apple that would be provided by an Apple 1 owned by Apple.

How would that have worked out?

 

[ItsNotAboutTheMoney]

You wouldn't own the Apple 1 in your analogy. The equivalent of a PPA would buying 20 years of computing from Apple that would be provided by an Apple 1 owned by Apple.

How would that have worked out?

What would happen if you bought the Apple 1? You'd pay for the Apple 1 and then if you want to upgrade you'd buy another computer, which would cost you more. And it's a terrible analogy, because even if solar panels became massively more efficient and cheaper in the next 20 years, if you wanted to upgrade you'd have to buy new panels and inverters and then pay for permitting and installation. At this point the main problem in the USA is in the soft costs, rather than the hardware. Soft costs are much lower in other markets. And if soft costs are lower in other markets, then it suggests that large installers in the USA have room to lower cost of residential installation, which is what matters if you're looking at the company's value. The potential issue for now and for the future is if utilities change the pricing model to have higher monthly fees and lower power prices (but lower power prices are good for electric cars). Anything else (lower hardware costs, lower permitting costs, streamlined permitting) would lower prices and expand the market.

Yes, leasing is almost always a bad deal, and SolarCity is taking advantage of information asymmetry and risk aversion. But unless people are ethical investors, the question for SCTY investors is not whether SolarCity is exploitative, but whether it's profitable now and will be profitable in the future. Is the company taking advantage of current market conditions? Is the company working to adapt to future market conditions? Is the company trying to expand the market? Is it doing it better than competitors?

It seems to me that mainly you're repeating (a) PPAs are a bad deal (b) SolarCity steers people to PPA. If you want to say to people that they shouldn't invest in SolarCity for ethical reasons, well, you've said it, so now either you're done and should stop posting, or you need to focus on market shifts, adaptability and competitivenes.

Giving prices in mature foreign markets without any depth or context is unhelpful. What are competitors asking in SolarCity's markets? How do permitting processes differ in foreign markets? How do labor costs compare in foreign markets? Do installations differ in foreign markets? What are customer acquisition costs, and more importantly why are they different?