Thanks for explaining. If I may, I'd like to add some more questions. Sorry if they are very basic, as I said, I ignored SCTY till now
The letter seems to suggest that the best way to reduce costs per W (esp sales) is simply to sell more. Yet they guided down on sales volume? Is my basic understanding on these assumptions right? And if so, how does that square with lowest costs per W ever by Q4?
Asset financing is the amount of financing they get measured by how much they have to pay for the costs of goods installed?
But what then with their own gigafactory on NY? If they don't sell anymore and liquidate all their sales channels, can they liquidate their production just as easily?
What is PowerCo? When you say recurring cash generation, that's the cash SolarCity gets from the electricity sold on the panels they installed? They don't need to share this cash with the homeowner who had them install? Or is the number a net number and that part is already subtracted?
What grid services exactly are we talking about? Installing large solar arrays as a utility subcontractor? What's the supposed margin on such activity? What's SCTY's unique advantage in such a market?
Cost per Watt is a mixture of overhead and variable expenses. Certainly G&A are fixed, but sales and installations are mostly variable, especially if you allow for workforce reductions. (Note that SunPower is laying off 1500 workers this years, but I've not heard any suggestion that SolarCity is contemplating such a reduction). Simply holding production at 200 MW/quarter should reduce cost pressures associated with trying to grow production, more efficient marketing at low volume, less workforce recruitment and training, fewer new field offices. lower G&A complexity, etc. So basically I think letting off the gas pedal will improve $/W.
Asset financing is on a basis of more than just COGS, but all the elements that go into cost/W, inclusive of SG&A. Additionally, the have the potential to finance more than just the cost/W. In theory, they could finance the full value per W, though partner investors would want SolarCity to retain some of this value anyway as good risk management. That is, for example, SolarCity retains the full value of the optional renewal terms, and this is enough to assure partners that SolarCity will do a good job servicing both customers and solar systems so as not to undermine the renewal value. Altogether SolarCity retains an NPV of $2.2B, and this stake in payment stream is important to all partners offering financing to other parts of that stream.
If SolarCity manufactures more than it can consume, it certainly has the option to sell panels wholesale. Especially as TE/SC produces integrated products, this does open up international markets for SolarCity's manufacturing capacity. I think we are looking at a ramp that reaches full capacity around 2019. I'm pretty confident that global market for solar panels is robust enough in that timeframe.
SolarCity conceptually divides its business into a DevCo, which sales and installs solar systems, and PowerCo, which finances and holds the value of those solar systems for life. (They should also speak of a FabCo too, in my opinion.) So the $2.2B NPV is the value of the book of business the PowerCo holds. As this net cash flows comes in, it is called recurring cash generation. This cash is not distributed to customers nor to any financing partners (that is already netted out). Rather this is net cash flowing to common shareholders. So in principle, SolarCity can reinvest it or use it to pay recourse debt. (As an aside, I'd love to see Tesla issue preferred stock having a dividend based on a portion of the recurring cash generation. Thus, Tesla common shares would be a pure growth play, while dividend investors would be attracted to preferred shares and so generate capital for growth.)
We're still waiting on details about grid services. Generally this is about aggregating distributed solar, battery and power management capacities to help utilities manage their power supply and costs better. For example, if a utility substation is stretched to its transformer capacity limits, it may need to spend tens of millions of dollars to upgrade the transformers. Even at below capacity, peak power demands on transformers stress those assets and cause them to age faster. So a combination of distributed energy resources (DERs) placed downstream of transformers can reduce peak demands and help the utility avoid costly replacement and upgrades. There are utilities that are willing to spend $20M or so to reduce peak substation loads by 1 MW in lieu of even more costly upgrades. It's not hard to see how batteries and solar can do this for a lot less than $20M, but you have to place these assets somewhere. So the advantage that SolarCity has in this space is that it is really good at placing and maintaining these DERs. Regulated utilities are generally barred from providing behind-the-meter solutions to their customers. But this is exactly what SolarCity does. Naturally, Tesla Energy wants to get in on this, but without SolarCity, TE does not have sales and installation capabilities to do this behind-the-meter work. It would have to build up this capability or simply act as a supplier to other installers. So the acquisition of SolarCity is one of the most attractive ways for Tesla to enter this market. Consider also that SolarCity's existing customer base is also a useful asset for TE. If a utility wanted a peak power solution for a substation where SolarCity customers already exist, then TE/SC could easily persuade customers to add Powerwalls and other power management devices to their solar systems. So TE/SC would be able to deploy rapid relief to a utility and build up from there over time. So the existing customer base has option value for grid solutions above and beyond the $2.2B NPV.
The downside to all this, however, is that it depends heavily on the willingness of utilities to seek out lower cost solutions, which TE/SC would be delighted to provide. If utilities want to resist these solutions, they need only convince PUCs and other regulatory bodies to allow them to put higher cost solutions on to ratepayers. So the politics around all of this is pretty sensitive. SolarCity will likely need to soften up on net metering to get utilities to play ball on grid services. But this is exactly what must happen to lower the cost of power for all ratepayers and solar owners. Simply put, SolarCity needs to transform utilities from being competitors to being customers. It's very tricky politically. And SolarCity may even need to back off on aggressive solar growth to avoid antagonizing the utilities. Tesla, with its position in EVs, holds some power here because utilities want to be able to grow revenue on EV power consumption. It is practically the only growth opportunity for utilities in developed countries. So TE/SC could find a stronger seat at the table combined than as separate entities.
