SolarCity (SCTY)

[Robert.Boston]

Moderator's Note

We're wandering far from SCTY. This would be an interesting discussion over in the Energy & Environment area; if it keeps up, I'll move it there.

 

[ItsNotAboutTheMoney]

Ironically, inclusion of battery storage into the grid will not only help wind and solar, but may also help coal and nuclear. Batteries will smooth out the intermittency of wind and solar, while smoothing out the intermittency of demand making it more conformable to base load generation. Any home with solar that charges the battery during peak sunshine and late at night when grid rates are low is actually helping all both extremes. However, depriving coal and nuclear access to the peak power rates that occur when the sun shines brightest will undermine the profitability of baseload power. So while batteries can help with utilization it will put a cap on peak rates. So either way coal is doomed.

In the USA batteries could kill coal, but not necessarily from solar and wind, but because the cheapest capacity right now is Combined Cycle natural gas. Combined Cycle is the Atkinson Cycle of the electricity world. Take away the RPSes, tax credits and other subsidies for renewables and you would end up with an NGCC heavy grid.

The virtue of batteries is that they enable the cheapest marginal producers of energy to optimize their utilization. Batteries will squeeze out the peakers. So this will reduce the total capacity grids require. This is potentially more threatening to utilities than wind and solar. Because utilities make money on their total capacity and recapture the investment from ratepayers. So as capacity requirements decrease, both the size of their asset portfolio shrinks and many assets lose value. The utility industry could be headed into a massive asset bubble. Will they be able to pass these capital losses onto ratepayers? Maybe not, if enough ratepayers defect by throwing up rooftop solar and rounding it out with batteries. This is what I find so fascinating about home storage, it will empower consumers with choices that transform them from being mere ratepayers to being customers who must be won over with superior service and prices.

I don't see eliminating peakers as a threat. Robert can correct me, but I believe the peakers are usually old, amortized plants. Many of the load-following plants are newer, but cheaper natural gas. And, in the USA at least, there's a lot of old capacity, and newer capacity tends to be NG and renewables. So, I really don't think it's a problem.

To me, the big threat to utilities is the support for renewables. Legislatures are supportive, so that's why ALEC and co are trying their best to kill the solar subsidies by lobbying the PUCs to make pricing changes that weaken solar.

 

[Robert.Boston]

I don't see eliminating peakers as a threat. Robert can correct me, but I believe the peakers are usually old, amortized plants. Many of the load-following plants are newer, but cheaper natural gas.

While many older plants are now, in effect, peakers because they run so infrequently, there are new units being installed as peakers. For example, the proposed repowering of the E.F. Barrett plant on Long Island replaces two ancient steam units and some 1970-vintage combustion turbines and jets with a new 636 MW combined cycle unit and six simple cycle turbines (collectively 260 MW).

A combined cycle unit is, in effect, one to four simple cycle turbines that feed waste heat into a heat-recovery steam generator (HRSG). The combined unit has higher efficiency than the simple cycle turbines: e.g. the CCGT replacing Barrett will have a 6,758 Btu/kWh while the CTs are at 10,122 Btu/kWh. But the extra complexity also increases the start time (notice and warm-up) and reduces the economic range of flexibility: CCGTs typically operate at no less than 40% loading. For this reason, I see the industry evolving to using more CTs (rather than CCGTs) when installed to support renewables. CCGTs are far better at replacing old baseload plants (coal, oil, or gas).

 

[jhm]

Well, to draw this back to SolarCity, it may helpful to frame the discussion from the view of SolarCity's share of the meter. Rooftop solar produces the most power when the sun is brightest, and this corresponds to the time when AC usage is heaviest and when grid power has historically been priced the highest. So solar cut into the most profitable hours of production. It cuts into the hours that make the capacity of the system profitable. But solar only leaves a huge share of the meter for utilities to satisfy. The next step of adding batteries to solar enables SolarCity to go after an even larger share of the meter. Depending on the type of rate plan, TOU or demand, batteries can take advantage of low TOU rates or shave demand charges. Either way share of meter is gained by SolarCity and the leftover share to utilities is limited to their least profitable hour, the times when surplus capacity and minimal demand drive the spot market prices to levels that are not high enough to pay for the CapEx of new fossil fuel capacity of any sort. So per installation, SolarCity will be able to extract virtually all o d the profit with its share of the meter.

The next question beyond that is how quickly can add more customers and how deeply can they penetrate the customer base of a utility. Adding storage to their product offering, SolarCity has the potential to sign up even more customers at lower acquisition cost per sale. They can even sign up storage only customers where rooftop solar is not a desirable option. A storage only installation still capture the most profitable share of the meter, leaving the utility with a less profitable share. So I am optimistic that storage will help SolarCity to continue to double its customer base year after year.

Renewables plus storage has the potential to extract virtually all the profit out of fossil fuel generation.

 

[Zzzz...]

jhm: in CA solar is already cutting into production so 3am total California demand is higher than 1pm minus solar.

It was almost exclusively happening on weekends a year ago, but now it started to happen on weekdays also. Example: http://content.caiso.com/green/renewrpt/20150415_DailyRenewablesWatch.pdf

 

[ItsNotAboutTheMoney]

While many older plants are now, in effect, peakers because they run so infrequently, there are new units being installed as peakers. For example, the proposed repowering of the E.F. Barrett plant on Long Island replaces two ancient steam units and some 1970-vintage combustion turbines and jets with a new 636 MW combined cycle unit and six simple cycle turbines (collectively 260 MW).

A combined cycle unit is, in effect, one to four simple cycle turbines that feed waste heat into a heat-recovery steam generator (HRSG). The combined unit has higher efficiency than the simple cycle turbines: e.g. the CCGT replacing Barrett will have a 6,758 Btu/kWh while the CTs are at 10,122 Btu/kWh. But the extra complexity also increases the start time (notice and warm-up) and reduces the economic range of flexibility: CCGTs typically operate at no less than 40% loading. For this reason, I see the industry evolving to using more CTs (rather than CCGTs) when installed to support renewables. CCGTs are far better at replacing old baseload plants (coal, oil, or gas).

At November 2014's Electricity Natural Gas price of $4.68/(1000ft^3) that's 1.5435c/kWh difference between CCGT and CT.
If you have a battery that costs $100/kWh, usable for 10 years with 75% average usable capacity, and 90% cycle efficiency, then the cost per cycled kWh per day (ignoring cost of money) is 4.056c/kWh/day. If the battery could be cycled 4 times per day, that'd be 1.014c/kWh. (Over 10 years that would be 14610 cycles) CCGT or CT might depend greatly on where battery prices and durability end up.

Relevance to SCTY: cheap batteries could be a great way to help renewables, but cheap batteries would also help the economics of fossil generation. Until solar really beats fossil, success depends on government support.

 

[jhm]

jhm: in CA solar is already cutting into production so 3am total California demand is higher than 1pm minus solar.

It was almost exclusively happening on weekends a year ago, but now it started to happen on weekdays also. Example: http://content.caiso.com/green/renewrpt/20150415_DailyRenewablesWatch.pdf

That's really beautiful. Having two peaks of load minus wind and solar gives home batteries the potential to cycle twice per day. On the right sort of TOU rate plan, this can improve the economics of batteries. It would be nice to see spot prices along with this.

 

[atang]

SolarCity's Gigafactory

Have not heard much about SolarCity's solar panel gigafactory. They broke ground with NY governor and all but not much since. The factory was said to be the Largest Solar Panel manufacture in the western hemisphere and in the world!, (IIRC). That's Pretty Exciting! Other related topics are how Lyndon and Peter are utilizing the absolute rock star team from Silevo, (Dr. Zheng Xu, Dr. Jianming Fu and VP Christopher Beitel).

Here is a information rich (older) interview with CEO Lyndon Rive. It's laughable how many times Lyndon has to correct reporter.

http://www.youtube.com/watch?v=g6SzQeeZOPw

 

[jhm]

SolarCity's Gigafactory

Have not heard much about SolarCity's solar panel gigafactory. They broke ground with NY governor and all but not much since. The factory was said to be the Largest Solar Panel manufacture in the western hemisphere and in the world!, (IIRC). That's Pretty Exciting! Other related topics are how Lyndon and Peter are utilizing the absolute rock star team from Silevo, (Dr. Zheng Xu, Dr. Jianming Fu and VP Christopher Beitel).

Here is a information rich (older) interview with CEO Lyndon Rive. It's laughable how many times Lyndon has to correct reporter.

http://www.youtube.com/watch?v=g6SzQeeZOPw

Nice video. I think the interviewer is like most investors who don't quite get it and are operating on old information. The explanation at the end of crossing one market after another and doing so without subsidy is the key thing to understand. SolarCity has been relentless in cutting the total installed cost. The Giga watt factory is part of this effort. Higher efficiency and local production for the Rast coast reduces total installed cost. I expect the West Coast will still source panels from China, while the NY plant will supply the East Coast.

You can definitely see Elon's strategic philosophy at work here.

 

[atang]

Nice video. I think the interviewer is like most investors who don't quite get it and are operating on old information. The explanation at the end of crossing one market after another and doing so without subsidy is the key thing to understand. SolarCity has been relentless in cutting the total installed cost. The Giga watt factory is part of this effort. Higher efficiency and local production for the Rast coast reduces total installed cost. I expect the West Coast will still source panels from China, while the NY plant will supply the East Coast.

You can definitely see Elon's strategic philosophy at work here.

Thanks JHM!

That is what I visualize as well. I foresee SCTY developing into the largest power provider in the country, TSLA the most profitable auto manufacturer/power battery provider. That's why I invested about equal weight TSLA/SCTY, ok a little more TSLA than SCTY. SCTY like TSLA is growing like Elon described in his Khan Academy interview with Sal Khan. Elon said, You want to cause the customer base to grow like bacteria in a Petri Dish. Oh BTW, SpaceX Launch You UP as well! :biggrin:

 

[gene]

Solar City Q1 IR is on 05/05 after market closes.

 

[blakegallagher]

Thanks JHM!

That is what I visualize as well. I foresee SCTY developing into the largest power provider in the country, TSLA the most profitable auto manufacturer/power battery provider. That's why I invested about equal weight TSLA/SCTY, ok a little more TSLA than SCTY. SCTY like TSLA is growing like Elon described in his Khan Academy interview with Sal Khan. Elon said, You want to cause the customer base to grow like bacteria in a Petri Dish. Oh BTW, SpaceX Launch You UP as well! :biggrin:

Yep, I pretty much feel the same way as you except I have my investment slanted much heavier to scty right now. After the 20-?? percentage gain over the next month I am anticipating I may re-balance closer to 50/50 tsla/scty

 

[atang]

Yep, I pretty much feel the same way as you except I have my investment slanted much heavier to scty right now. After the 20-?? percentage gain over the next month I am anticipating I may re-balance closer to 50/50 tsla/scty

Interesting! I had no idea that was coming. It just might happen. :wink:

 

[jhm]

Yep, I pretty much feel the same way as you except I have my investment slanted much heavier to scty right now. After the 20-?? percentage gain over the next month I am anticipating I may re-balance closer to 50/50 tsla/scty

Why do you think the stock price will go up 20% over the next month? What catalysts do you see? Anything beyond the April 30 announcement?

 

[Foghat]

A few events might contribute to a spike over the next month:

*April 30th announcement and demonstration(as you pointed out). But might here a number for how large the initial home storage roll out might be. Also, Bloomberg just reported large utility energy storage units will be announced as well. Not sure if Solarcity will have anything to do with it, but possible they could.
*Q1 conference call is on May 5th. Rumor is they booked 18k+ customers in the month of March alone. They booked 21k in all of q4, so potentially as massive booking of 40K+ new customers. In addition they hit at record 5GWh of total deployed production at the end of March, which could indicate they may exceed high end revenue forecasts for Q1. Also, we may hear big guidance news for the rest of the year as well as how home storage will fit in that equation. Greentech Media also reported today Solarcity unlocked $1bln in financing for 300MW of commercial installs. That is a significant number and may reflect in bookings and Q1 installs. Commercial installs have been disappointing in the past few quarters so if they show strength here it might reflect well with the market. It will also be of interest to see how levered retained value looks this quarter since it is a new metric never disclosed before. Q1 report has a lot of momentum building it seems.
*My Solar loan ABS offering. This is significant because it includes no tax equity. If Solarcity is able to do $100s of millions in my solar loan abs dollars, they could really thrive post ITC 2017. So important to see how this pipeline works out. Thus far, they have raised about $140-150mln in online solar bonds, so it might be a nice surprise if this works out as well. If the finance works out, it could be possible to see continue 98% compounded growth and a 1.8-2GW year for 2018. I think it's a low probability they will give out 2016 guidance, but that doesn't mean it won't happen. 2016 guidance would squeeze the stock in and of itself. It would be a massive catalyst at this moment in the year.

always a chance of a surprise outside these events, but primarily these outline may push the stock up the mentioned prior 20%+. My only caveat is any sudden rate changes or utility uncertainty news events over the same time period.

 

[blakegallagher]

The biggest catalyst I see is when they announce their install targets for next year. If They predict the 2 Gigs that seem obvious to me that will put them at over 800k customers at the end of next year. They would start 2017 with 800k customers and end it with 1.6 million (If they double production the next two years). Currently analayst are using their target of 1 million customers by the middle of 2018 for their models and It is a much too conservative number.

The April 30th announcement also has the potential to be huge. I think there is a chance Tesla announces some HUGE sales to Utilities around the country and if they do and they are using Solar City's Demand Logic software it could be a huge boos to scty as well.

We also know they have had record breaking bookings this quarter and I believe what they have said regarding the commercial install times being a week for all of their competitors and only a couple of days for them. I think we will see some of the momentum on that front.

Also their retained value per watt on the mypower loan is around twice what it is on the PPA's/Lease's which should be taken very positive.

I am also hoping to hear more about cell research and factory construction and I believe with each earnings call more and more people will realize the benefit of having the state of New York build one of the largest solar plants in the world producing panels at the lowest cost per watt.

Edit: There is also the large short interest but I think a decent amount of it has covered recently. Based on the Interactive Brokers Short Interest that is sent out. Scty has been somewhere in the top 5 of the energy sector shorts since I have used them and they were not on the list this time.

I see a lot of articles about how tough it will be on SCTY to lose the ITC when it will affect the whole industry and SCTY is the only company I know of that should have a brand new 1 Gig plant humming along at full production q1 2017.

That last point is getting more into my long term thesis... The bottom line is I am expecting a 20 percent move when they announce (officially) a 2 gig target for next year.

 

[jhm]

Thanks, Blake. I share your optimism. I'm particularly interested in the 1 million customer goal, and want to see solid progress towards it. I figure if they hit that goal, retained value should be $14B or maybe more depending on how rich the loan mix is. I think market cap should be around 2 time retained value, $28B. So assuming 5% annual increase in the number of shares (employee incentives mostly) we could see $240/share in 2018. So basically I just want to see them build up the retained value.

They should come out with a new unlevered retained value which will net out the value going to debt. Currently levered retained value is a kind of enterprise value, but the unleavened will be strictly the value to equity. So it will be very interesting to see how this breaks out.



Regarding ITC, I think SolarCity is working very hard to cut all costs. So I think they will be in a good place to get through the transition, while less efficient competitors will stumble. So it won't be easy for any, but it is the right challenge to face. I also think it sets them up for more international opportunities. Squeezing every last cent out of intallation costs is the right discipline to have anywhere. They have quietly entered New Zealand this year.

BTW, I believe that DemandLogic programming was done by Tesla, but I suspect their is a lot of IP sharing going on. Microgrid-as-a-service is a big wildcard for both companies. It could be that New Zealand is a good place to develop some microgrids, a few islands perhaps.

Viva Cinco de Mayo!

 

[EV2BFREE]

Will the trade be to buy stock now and take advantage of the run-up into april 30th? OR will it be to buy after the announcement when the stock takes a dive? Not saying it will 100% dive after the announcement but that seems to be the trend. Usually a quick recovery follows though.

 

[atang]

Nice article by Dana Hall. She is relatively new at Bloomberg Business and IMO is doing a meritoriously good job!

http://www.bloomberg.com/news/artic...mart-stores-attest-to-musk-s-energy-ambitions

 

[blakegallagher]

Will the trade be to buy stock now and take advantage of the run-up into april 30th? OR will it be to buy after the announcement when the stock takes a dive? Not saying it will 100% dive after the announcement but that seems to be the trend. Usually a quick recovery follows though.

In my opinion it would be to buy now and hold on or sell after announcement. In the past few quarters you would of done best buying about a week ago and holding until maybe 2 days before earnings. I am thinking this time will be different but time will tell.