SUNSHINE

05.14.13

Elon Musk-Backed SolarCity Thrives in Solar Power Sector

Backed in part by Tesla founder Elon Musk, SolarCity is succeeding where many other solar companies have failed. Josh Dzieza reports on the company’s innovative business model.

Sun Concept, Ampulse, Evergreen, Solyndra: the long list of defunct solar companies is enough to give pause to anyone trying to enter the business. But at least one company, SolarCity, has been succeeding where so many others have failed. Its secret? Staying away from manufacturing and focusing on installation.

SolarCity was founded in 2006 by Lyndon and Peter Rive, on the advice of their cousin, Elon Musk, the Paypal founder who went on to start Tesla Motors and SpaceX, and is enjoying something of a moment. Tesla Motors just posted its first quarterly profit. And SolarCity, which went public last January, has seen its stock more than triple.

Instead of designing solar panels, the Rive brothers decided to find ways to get solar panels onto people’s roofs. They settled on a sort of lease arrangement: SolarCity installs the panels for free on customers’ roofs and then sells them the energy the panels produce for the next 20 years, at a rate lower than charged by the local utility. As the owner of the panels, SolarCity also reaps the valuable tax credits associated with clean-energy production.

This business model, with high upfront costs for gradual returns spread out over decades, doesn’t lend itself to immediate profits. On Monday, the company posted a $31 million loss. So far investors seem patient.  “The stock is outperforming the results,” an analyst for Raymond James & Associates told Bloomberg. Lyndon Rive, in an interview with CNN, pointed out the irony that as soon as SolarCity show a profit, it’ll be a warning sign that recurring revenue has outpaced installations and the company has stopped growing.

Right now SolarCity is focused on growth. SolarCity currently operates in only 14 states, a mix of sunny states (like Arizona) and states with aggressive clean-energy subsidies (like Oregon). The company installed 156 megawatts of solar systems in 2012, 10 percent of all new distributed solar generating capacity deployed that year, up from 6 percent in 2011. Next year, they expect to install 250 megawatts. Should it meet the goal, SolarCity would represent a 27 percent of the national residential market, according to analysis by consulting firm GTM Research.

SolarCity has benefited from the same forces that wiped out so many other solar companies. Because it never got into manufacturing game, the flood of inexpensive solar panels from China that bankrupted so many American and European companies was great news for SolarCity. Even after tariff protections were put in place, panels were still relatively cheap to buy. Second, the company’s no-money-down offer to customers appealed to cash-strapped municipalities and government agencies. The Barstow Unified school district in California had just voted to close two schools to cut costs. But it inked a contract with SolarCity to install solar panels on the grounds of one of its schools. Superintendent Jeff Malan boasted that the deal would save $125,000 in power costs in its first year without any funds committed upfront to the project.

Because it never got into manufacturing game, the flood of inexpensive solar panels from China that bankrupted so many American and European companies was great news for SolarCity.

The Department of Defense, facing the dual objectives of cutting its budget and getting 25 percent of its energy from renewable sources by 2025, has also turned to SolarCity. Last week, the Navy announced that the company would install solar panels on 6,500 homes in the Ohana Military Communities in Hawai’i. Additional SolarCity military projects are planned for Fort Bliss in Texas, Pearl Harbor, Los Angeles Air Force Base, and Peterson and Schriever Air Force Bases in Colorado. The company aims to build more than $1 billion in solar energy projects for U.S. military communities in the next five years.

The company has also been savvy about its partnerships, stationing sales representatives at Home Depot and partnering with Honda, which offers customers a discount on SolarCity systems.

It remains to be seen whether SolarCity can continue its rapid growth if federal clean-energy subsidies are phased out, as they’re currently scheduled to do in 2017. But so far Wall Street has been uniquely optimistic about the company. Despite falling Monday night after the earnings report, SolarCity’s stock has nearly tripled from its December 2012 initial public offering price. The chart below shows the company’s performance compared with the Standard & Poor’s 500 over the last six months. “Solar is still less than 1 percent” of electricity generation,” Lyndon Rive pointed out in a conference call with analysts, “It’s a massive growth opportunity.”