Solar Install Long term Lease BM$
Solar Install Long term Lease BM$
Solar City Business Model
What is unique?
What separates Solar City from the others - either in terms of what the company offers, or as a place of employment?
- Look at SEC docs S-1, etc for SCTY - should have ton of insider info on how it works..
Sales Process - Consultant Visit to Home
- Sales Mdel
- SolarCity (NASDAQ:SCTY) Energy Consultant into my home
- showed the SolarCity rep my electric usage for the past 15 months,
consultant came prepared with her laptop and some cool software (licensed from Google) that showed a satellite image of my house. She then began virtually placing panels on the side of my roof that gets most of the sun. No ladders were required!
Power Purchase Agreements, or PPA what amazed me the most were the options. If you're not familiar with its plans, stay tuned
With a click of a button, I knew the size of my proposed system was going to be 6.25 kW DC and it was going to produce 8,025 kilowatt hours, or kWh, annually. For those who aren't familiar with the lingo, kWh measures your energy consumption. SolarCity says, "One kilowatt hour is defined as the amount of energy consumed by a 1,000-watt appliance running continuously for one hour." Your kWh is important because it's how your electric company figures your bill.
When all was said and done, I had enough space on my roof to offset 31% of my electric bill. It will also reduce my carbon footprint by 247,214 pounds of CO2. Does that sound like a lot? Over a 20-year period that's equivalent to driving a car 265,511 miles, or the amount of carbon dioxide that can be absorbed by 134 trees, or 61,237 gallons of water used to produce the same amount of electricity.
Case Study 1 consumer
- What I Learned About SolarCity's Business Model by Becoming a Customer http://www.fool.com/investing/general/2014/04/18/what-i-learned-about-solarcitys-business-model-by.aspx
My house is fully electric, heat, hot water, the works. My bill averages out to be $406 per month and spikes to $900 in January and February.
- Consumer Motivations
- Literally, I'm throwing money out the window
I'm not doing the environment any favors.
SCIty Smooths Process to get Solar on your HOME
Solar City will install a solar electric system at your home (on the roof, or ground if you have room), and will sell you the electricity generated from that system, either at a fixed monthly rate (a lease), or at a fixed $/kWh generated (a Power Purchase Agreement, or PPA). Typically, you pay nothing down, and sign a 20-year contract which specifies the monthly lease payment or $/kWh PPA rate, any annual escalators to those payments, and the guaranteed production level of the system. The electricity you get from SolarCity offsets electricity you would have bought from your utility, via a mechanism that the utilities have in place called "net metering". So, while you have a new bill to SolarCity, your bill to your electric utility will drop. The combined SolarCity + utility bills should be lower than your previous utility-only bill before the solar was installed.
SolarCity owns the system, so they get any federal or state tax incentives. But, they are also responsible for any repairs or maintenance on the system.
When you sell your home, you can either transfer the contract to the new owner (assuming they qualify and want to take it), or you can buy out the system from SolarCity.
Solar City is a finance company
- Specialized in vertically integrated solar equipment leasing and leverages their credit exposure using the tax equity, bond, asset securitization, and public markets. Solar City uses debt and equity financing to purchase finished Solar Modules. They have a starting portion of equity capital directly from investors, originally seeded by Elon Musk. I will explore the different capital markets they tap for funding in later sections.
Solar City specializes in consumer electricity sales, solar project development, solar equipment installation, maintenance, monitoring and customer relations.
The actual product supplied to customers by Solar City is electricity. They enter into long (several options, but 10-20 year duration) agreements in which Solar City provides electricity to the customer at a negotiated price, generally lower than local utility offerings, and the customer allows the installation of solar panels on their roof. No immediate payment is made, the solar assets are not sold, so they remain on Solar Cities balance sheet as a leased asset. And boy, Solar city has a lot of leased solar assets on its balance sheet compared to its physical assets and is adding more at an increasing rate.
Their core assets, value of agreements, customers, scale of investment operation operations Note that they invest x10 more than their entire net property and equipment in Solar Energy systems every quarter. *
- Strong Contract Growth - Most of these investments are entirely financed, either with tax equity (selling ITC credits) or borrowing directly from investors. (The graph is refusing to come out symmetrical). Their rate of contract growth is also increasing rapidly. In Millions, USD.
A sense of important customer metrics and recognized revenue. This graph best explains why the classic Price/Sales metric is absolutely worthless when valuing Solar City in its early (>20) years. This shows that the average total payment volume per customer contract has stayed fairly steady around 25,000. Over 20 years, ignoring the discounted value of future payments, this would be a utility bill of only 9$/month. (this is an extreme lower bond estimate, the average contract life is likely closer to 10yrs, plus some contracts have linked to inflation price increases) Obviously, most Solar City customers do not agree to replace their entire utility consumption, but they may choose to in the future. This became a real option, although it is expensive as it is in the earliest of stages, for anyone, anyone, regardless of net metering policy, as of just today. *
Solar City remains liable for the electricity generation of these assets, which means they must maintain the installed Solar Panels through the life of the contract. No generation, no customer payments. The contract does obligate the customer to buy generation, they cannot just 'back out' when they don't use electricity. No customer payments, solar city can shut the juice off, just like an electric utility. Solar City also retains ownership at the end of the contract or if the owner moves, so any maintenance work done over the life of the contract will benefit the company's future assets as well. However, many contracts have built in extension options in later years to increase the length of the original agreement.
This may seem crazy to some, possibly most. Outwardly, buying and leasing a new technology is a risky move. It definitely would not have worked with plasma TVs or Cellphones in the 1980s. After all, if the Solar Industry is truly successful, won't any panels that Solar City installs today be essentially worthless in 20 years? No, they will still be producing power in a location that uses power, in the required quanities. Maybe they won't be worth much in the resale market, but the saying goes location location location. You can think of this in 2 ways.
First, a Solar City does not just own a panel on a customer's roof, it has a contractual arrangement to sell power to the customer based on the CUSTOMERS demand, not the possible max output. So even if Panel efficiencies went to 30% (near physical max), older solar city systems would still be producing the correct amount of power for its host (place whose roof its on) location. At competitor who approached customers offering to install higher efficiency systems at a lower cost would be turned away simply because they already have systems that suit the houses needs.
Second, since Solar City is not locked into any single panel manufacturer, they could adapt quickly to any improvements in PV technology. The benefits gained on all new installations, maintenance upgrades on old installations, and growth in demand work would far outweigh the impairment to the value of Solar Cities existing asset base, especially considering their asset base is currently leased on a long term basis.
What most people realize, but don't really appreciate, is that the price of finished PV panels has fallen dramatically.
Let's start with a graph of Solar City's reported cost per watt of a full installation. This comes from the California open data installation program. Covers the entire lifetime of Solar City up to November 2013. Although this is only for California installations, It is safe to say that they have similar costs elsewhere.
But this graph cover's the reduced price of INSTALLED finished solar. The price of raw panels has fallen even further, mainly due surplus Chinese production capacity.
Recently, Solar City has been sourcing their Panels mainly from two Asian manufacturers. Here is the last 12 months of Solar City's leased Panel installation assistance, in California, by PV manufacturer, the top 5.
As you can see, at least in California, over 80% of Solar Cities panels were supplied by just two firms in the last 11 out of 12 months. This is the only very significant risk, in my opinion.
Last 12 month market share for leased panels, investment vs installed, % of SCTY installations retained as an investment.
Reported Costs compared to competitors
On a Grand Scale. It's incredible that humanity has achieved this as quickly as we have. Although the graph does not scale logarithmically, like Intel's stats did through the 1970s to present, it is damn impressive. We did this in less than 50 years, much less than a human lifetime.
We may still have a chance at becoming a sustainable civilization, at least on a geological timescale. (Musk's other company, SpaceX, is working on the cosmigical timescale front)
To put the most recent years in kW scale and Entire System Costs (Solar Module)
Sorry this Data only goes to the end of 2011. Prices have fallen significantly more in the last 2 ensuing years. I have found data for polysilicion, the main raw ingredient for commercial solar cells.
If the only cost of generating electricity from the panels was the manufactured cost, Solar would be producing unsubsidized at significantly under .10/kWh, closer to .05. However, the cost of installation, financing, marketing and maintenance now make up a MAJORITY of a fully functional price of a residential PV system.
These business activities are what Solar Cities operations are leveraged to. They have fully integrated the supply chain EXCEPT for panel production. This has given them, by far, the lowest fully installed cost per kW. Solar City still sells electricity at the local utility rate, even though it is now cheaper than the utility rate to produce.
To be clear, they Financials show they have the lowest costs per kW (2.37/kW as new systems in Q3 2013, .87 on OpEX, an unknown amount allocated to system cost, although $1.50/full cost of the system seems very likely. It's nice when #s just come out like that, makes one think that they reached the actual contracted price), their prices remain on par with competitor installers because they charge at just below the local utilities price. Everyone does. Because they can, and will be able to until every fossil fuel station is shut down. Solar City has some time before they face price competition on that front.
As for the rest of the solar industry, the more price competition the better, because it inevitably lowers the cost of panels for Solar City. With long contract lock ins and the media personality of Elon Musk, Solar City will gain from their already large 26% share of US residential PV installations.
The ITC 2 year Goldrush: What most people do not realize is that the ITC, the 30% investment subsidy that all Solar Panel OWNERS receive, is not calculated off of the cost of the solar installation, rather, the fair market price of the solar installation. Until very recently, Solar City calculated the fair market value as the cost (considering the panel and installation labor) of PV systems, now, since their costs have fallen so significantly, fair market value is calculated as the discounted present value of electricity sales made possible from the PV system generation. Essentially, even though Solar City is barely profitable now, every project done before the ITC expires in 2016 will be massively profitable [minimum 30% margin] for the lifetime of the contract (20 years). And as they gain the benefits of scale during the next 2 ITC years, they will likely go from barely competitively profitable with utility rates to extremely profitable.
Everyone is doing this. 2 years of guaranteed profits attract a lot of institutions. US Solar PV Pipeline Grows To 43 GW
The Bond Market: For each solar energy system installed, leased, and monitored, Solar Cities holds a customer contract promising a stream of payments in the future.These contracts are very long term lease of a physical asset producing something needed by EVERYONE CONSTANTLY. Historically, electricity bills are paid before auto, credit, cell phone, and even mortgage loans. This makes the contracted customer payments considered 'safe'.
Recently, Solar City has started to tap the bond market by selling these future payments, with the systems acting as collateral, as asset-backed securities. In their first security issuance, they managed to secure a 4.8% interest rate, half of what they previously were paying in the tax equity market. They plan to issue up to 250 million per quarter using asset backed securities in 2014.
The Tax Equity Mark: Solar City historically tapped the tax equity market to raise additional equity capital. Because Solar City invests their capital in assets which benefited from the accelerated depreciation recognition, it receives tax benefits. While a company that buys its own solar system might be able to use tax incentives efficiently, Solar City has no other business which could directly apply the benefits.
Many businesses that invest in solar systems do not have a significant tax liability. While an individual company that buys its own solar system might be able to use tax incentives efficiently, no business we know of that specializes in installation or financing of solar systems for others has enough tax liability to be able to use all the federal tax benefits themselves.
As a result, these businesses often seek tax-equity investors—investors who can use the tax benefits—as partners. The arrangements used are complex and the number of parties that have been willing to invest in tax equity has been limited, however, so both the administrative costs (in terms of legal and accounting fees) and financing cost (in terms of rate of return required by tax equity investors) are high. As of this writing tax equity investors require 9-9.5% for unleveraged projects. This is the after-tax return to the tax equity investor, net of its tax benefits. The cash return to the tax investor and the cost of capital as seen by the developer are lower.
Solar City has Tax Equity arrangements with Goldman Sachs, Google, and Bank of America, plus many more.
I can't resist adding these last two charts, even though they do not DIRECTLY relate to the question being asked, but are actually either being driven directly by solar city or demonstrate solar cities international potential.
The U.S PV markets: (Solar City: 26% market share in residential and rising, unsure for other segments. But residential driving the overall growth anyway.)
Global PV. Solar City is literally about to start their international expansion. The US is a tiny tiny portion of the market. We are the tiny little purple sliver, slightly more now that it is 2013, but the EU is still dominating in terms of installed capacity. Electricity is quite cheap in the US. The Sun shines everywhere, everyday, in a predictable amount.
I expect big things from Solar City over the next 2 years, surpassing the scale of many utilities and primarily installing completely off the grid systems for ALL new customers.
No one is really talking about this, because no one really believes it is possible. But physically, it is possible, in terms of sunshine, raw materials availability, technology, and current proven scale. Economically, it has just become possible. Barely breakeven, possible losses due to excess maintenance requirements, but still reasonably competitive with fossil fuels.
People do not believe this. MANY compare the price of solar to the price of natural gas burned in the plant, ignoring the inherent expensive of building, maintaining and operating a large central utility grid. A significant amount of the price of RETAIL electricity is due to distribution costs and transmission loses, not just generation fuel input costs. Solar is point of the source energy generator. In principal, no central grid needed. In practice, a much smaller central grid will be needed. I cannot understand why this is almost always overlooked.
Solar City literally just went from a negative retained value without subsidies to positive retained value regardless of subsidies LAST QUARTER.
5g retained value / contract. Growing at 10k+ contracts / quarter.
A fact which, when one does the calculations, is surprisingly systematical. I cannot explain this past confidence, or maybe specifically negotiated prices by Solar City. I've confirmed this is correct.
Because the ITC lasts 2 years, they will make BOATLOADS over the next 8 quarters. My high estimate is 5 Billion Investment, 3,500mW, end 2016 (end of 30% ITC, reverts to 10%). Retained value of 7 Billion, plus the equity value of their unsubsidized business, which will be huge, as long as it is remains at least break even on new installations.
And finally, although not strictly relevant to the question, my technical chart for those who actually want to buy the stock. It just hit the 78.13 target this morning and promptly pulled back. Should retest trend line now.
PPAs for days
The main reason SolarCity owns its market (its share is equal to its next 14 competitors combined) is its various Power Purchase Agreement plans. I asked my consultant: Who came up with this great idea? She says it came from Elon Musk. I'm sure you've heard of him, he has some pretty cool ideas for batteries, electric cars, and space.
1. Pay as You Go
The first option was the "Pay as you go" plan. This plan is popular because it requires no money down and would reduce the price of my energy by about 41.5%. My new estimated average electric bill would be about $50 less per month and I would save nearly $24,000 over 20 years. Obviously, with no upfront costs, I would be cash flow positive from day one.
2. Pay only for what you produce
The second option was the "Pay only for what you produce" plan. This required a $3,125 investment, but cut the price of my energy by 51%. Over 20 years, I would have saved nearly $29,000 and I would have gotten my money back by the fourth year.
3. Full pre-pay plan
But in my opinion, the smartest way to go is the "Full pre-pay plan." In this scenario, you pay for the amount of power your system will produce up front. It would have cost me only $0.066 per kWh, compared to the $0.188 I currently pay my electric company. That's a savings of 66% and I would save about $125 per month. My initial investment of $10,000 would be recovered by year six, and over 20 years, I will have saved more than $36,000.
4. Buy Outright & Own - Not offered - The benefits of PPAs
So why wouldn't I want to buy my system outright? It's not a terrible idea -- after a $9,000 fed tax credit, I would only be on the hook for $15,000. But I won't break even until my ninth year and I'll only save $31,000 over the life of the system.
The reason it doesn't benefit me to own the panels is that I can't depreciate them, but if SolarCity retains ownership, it can. The company then passes on some of the savings to its customers. In this scenario everyone wins, the customer gets the benefit of low upfront costs and SolarCity gets 20 years of steady cash flows.
With PPA's like the "Full pre-pay plan," I think SolarCity has created a revolutionary method to get solar systems to its customers. In my opinion, this is the only way to sidestep sizable upfront costs, which have historically slowed solar adoption. Its competition has yet to catch on and market these types of hybrid payment plans, and in time, I think you'll see others trying to copy that model. But right now, SolarCity has a huge head start and is aggressively building its business.
Foolish final words SolarCity has a stated goal of 1 million customers, or a 70% compounded annual growth rate, by 2018. With the experience I had, I believe this to be a low hurdle to hop. The numbers could get silly if we start mapping out its growth rate over a 10-year period.
The only problem SolarCity may end up having is if it tries to focus too much on profitability, gets away from fanatical customer service, and installs underperforming systems. But from what I've seen, that is highly unlikely. The Rive brothers and Elon Musk don't seem like the type of entrepreneurs to mess up a good thing.
As you can see, I'm a big fan of SolarCity and it's an exciting time to be a customer. If you live in one of the 14 states it services, I would strongly recommend giving the company a try. It might just be the best business decision, you'll ever make.