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With SolarCity IPO, Elon Musk May Get Clean Tech Right


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These shares have done even better than TSLA shares since IPO.

 

I spent some time on their website last night -- interesting way to get solar panels on your roof.

 

You only pay for the electricity it produces, and get the option to buy the installation after 5 years.  Aside from the actual electricity generated, you have no obligation to pay for anything else.  No installation charge, no equipment charge, no maintenance charges.

 

SolarPPA is their product name for that:

http://www.solarcity.com/residential/solar-ppa.aspx

 

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These shares have done even better than TSLA shares since IPO.

 

I spent some time on their website last night -- interesting way to get solar panels on your roof.

 

You only pay for the electricity it produces, and get the option to buy the installation after 5 years.  Aside from the actual electricity generated, you have no obligation to pay for anything else.  No installation charge, no equipment charge, no maintenance charges.

 

SolarPPA is their product name for that:

http://www.solarcity.com/residential/solar-ppa.aspx

 

I don't know where you live Eric, but here in California you can find statistics for all solar installations and Solar City is consistently above $5000/ installed kw.  I haven't done this myself but if you split the project up, you can have a solar engineer design the system for less than $300, hire a top rated company to install and help you register all the permits/rebates for the system for about $1.25/watt and then buy the panels/inverters /racking yourself for under $1.25/watt bringing your all in cost easily under $3000/kw before rebates.

Depending on the amount of Sunlight, your savings yield on the system before rebates can easily be north 20%.

   

 

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These shares have done even better than TSLA shares since IPO.

 

I spent some time on their website last night -- interesting way to get solar panels on your roof.

 

You only pay for the electricity it produces, and get the option to buy the installation after 5 years.  Aside from the actual electricity generated, you have no obligation to pay for anything else.  No installation charge, no equipment charge, no maintenance charges.

 

SolarPPA is their product name for that:

http://www.solarcity.com/residential/solar-ppa.aspx

 

I don't know where you live Eric, but here in California you can find statistics for all solar installations and Solar City is consistently above $5000/ installed kw.  I haven't done this myself but if you split the project up, you can have a solar engineer design the system for less than $300, hire a top rated company to install and help you register all the permits/rebates for the system for about $1.25/watt and then buy the panels/inverters /racking yourself for under $1.25/watt bringing your all in cost easily under $3000/kw before rebates.

Depending on the amount of Sunlight, your savings yield on the system before rebates can easily be north 20%.

 

 

It costs nothing (SolarPPA from SolarCity).

 

The difference is that you are now buying electricity from SolarCity instead of Southern California Edison (I'm in Santa Barbara region).

 

No money down, no installation fee, no obligation to purchase their equipment.

 

But the monthly electricity bill goes down because you are getting charged less by SolarCity compared to your electric utility company.

 

So SolarCity is effectively a distributed electric utility company -- they are using your real estate to hang the equipment, you are their energy customer, and there is no transmission lines loss.

 

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Thanks Eric. I have been invested with NRG who is working on this business plan as well. David Crane is Elon Musk but he has earned a pretty strong reputation competing against the non-economic actors in utilities.

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Well with -50% profit margins so far, SCTY is looking like a non-economic actor too.

 

It sounds like SCTY gets repaid over 5 years if they are selling you electricity.  Then they get paid a second time if you buy the equipment from them at that point, or else they just continue to milk you for cash flow as you continue to buy only the electricity.

 

This sort of model would create a lot of depreciation expenses in the beginning even though they would be hugely cash flow positive (given enough scale and high installed base of customers).

 

Similarly, if you build a hydro dam I doubt you look like an economic actor until it is built and operating.

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Well with -50% profit margins so far, SCTY is looking like a non-economic actor too.

 

It sounds like SCTY gets repaid over 5 years if they are selling you electricity.  Then they get paid a second time if you buy the equipment from them at that point, or else they just continue to milk you for cash flow as you continue to buy only the electricity.

 

This sort of model would create a lot of depreciation expenses in the beginning even though they would be hugely cash flow positive (given enough scale and high installed base of customers).

 

Similarly, if you build a hydro dam I doubt you look like an economic actor until it is built and operating.

 

OK. Throw out depreciation, cut SG&A in half, still negative.

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Well with -50% profit margins so far, SCTY is looking like a non-economic actor too.

 

It sounds like SCTY gets repaid over 5 years if they are selling you electricity.  Then they get paid a second time if you buy the equipment from them at that point, or else they just continue to milk you for cash flow as you continue to buy only the electricity.

 

This sort of model would create a lot of depreciation expenses in the beginning even though they would be hugely cash flow positive (given enough scale and high installed base of customers).

 

Similarly, if you build a hydro dam I doubt you look like an economic actor until it is built and operating.

 

OK. Throw out depreciation, cut SG&A in half, still negative.

 

Sure, because you are still constructing the dam.  There is a point where you have a large enough install base throwing off cash that it overwhelms the expenses associated with having the guys running around town installing new systems.

 

These systems could have a 30 year life.  It really isn't interesting to say that after the first year or two the company is not making a profit.

 

The hydro dam is a project that over several years produces only losses.  Just because SolarCity can begin grabbing cash flow on each cubic yard of concrete added to the dam, it doesn't mean it's not a dam.  In other words, don't hate the playa' hate the game  :D

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So essentially, these guys would benefit from dropping solar panel prices...

And rising electricity rates, note though that there are no barriers of entry to this business and just about anyone can provide "financing" for "Free" solar.  Oh and a lot of current subsides (at least in my area) have been reduced and are going to expire entirely over the next few years.

 

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There is a point where you have a large enough install base throwing off cash that it overwhelms the expenses associated with having the guys running around town installing new systems.

 

Yes, time will overwhelm installation expenses, but if they have the wrong model it will never overwhelm the operating expenses. And in the meantime they are going to need billions more dollars.

 

Also, compare revenues to operating assets. On that basis they're a third as efficient as centralized utilities. That metric isn't going to improve very much unless they increase prices.

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On a high level it seems hard to lose money at this game with current economics (including incentives).

 

Why do the short sellers believe SolarCity can't buy/install systems that pays themselves off and then generate a profit long term?  That's what seems crazy to me. 

 

If the typical homeowner can have a system built that pays for itself, SolarCity somehow can't be at least as capable of doing so?

 

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They are competing with many small companies who can offer the same overpriced installations with zero money out of pocket.  And if you think about what the future will look like, innovation in racking and inverters will bring the costs/ ease of installation down considerably.  Why wouldn't homeowners push the middle men out and just keep all the benefits themselves?  You're right when you say current economics, at $5000+/kw homeowners might need the "free" financing. What happens when solar efficiency goes up and the standard installation costs becomes less than $2500/kw? If you look up the California statistics, you'll see some installations already being done for less.

 

At 2.7 Billion Valuation and 130 in 2012 Revenue, with absolutely no moat, it seems to me like this might be a good company to investigate as a short (probably the first time I've ever suggested something like this and I like Elon!)

http://www.californiasolarstatistics.ca.gov/reports/cost_vs_system_size/

 

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Instead of selling this stuff why don't they just build entire fields of solar panels as power plants like all over Nevada, which seems to be more efficient than "solar panel on my roof"....do they already have that?

 

He is looking to have a distributed generation instead of centralized generation. Each has pros and cons.

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They are competing with many small companies who can offer the same overpriced installations with zero money out of pocket. 

 

How do you mean "overpriced" if we're talking about just buying the electricity only?  It's cheaper than what you currently pay your electric utility company, so many people will find it underpriced relative to what they pay already.

 

I think it makes sense to buy your own system if you have the cash, but if you are hoarding your cash (or paying down debt) and you merely just want to lower your utility bill so that you can have lower monthly expenses, then there is nothing to lose by having SolarCity provide you with discounted electricity for the next five years. 

 

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On a high level it seems hard to lose money at this game with current economics (including incentives).

 

Why do the short sellers believe SolarCity can't buy/install systems that pays themselves off and then generate a profit long term?  That's what seems crazy to me. 

 

If the typical homeowner can have a system built that pays for itself, SolarCity somehow can't be at least as capable of doing so?

 

Good question. As far as I can tell, distributed solar panels have single digit ROIs, whether SolarCity owns and operates them or homeowners. Take away tax breaks and they would go negative. In contrast, solar farms and solar hot water have double digit ROIs.

 

The reason I think SCTY will have worse economics than homeowners is that they will give up margins for growth. But the moat they are trying to build with their growth is illusory.

 

Not short, but I think the business model is weak, and the valuation is terrible.

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They are competing with many small companies who can offer the same overpriced installations with zero money out of pocket. 

 

How do you mean "overpriced" if we're talking about just buying the electricity only?  It's cheaper than what you currently pay your electric utility company, so many people will find it underpriced relative to what they pay already.

 

I think it makes sense to buy your own system if you have the cash, but if you are hoarding your cash (or paying down debt) and you merely just want to lower your utility bill so that you can have lower monthly expenses, then there is nothing to lose by having SolarCity provide you with discounted electricity for the next five years.

 

By buying the electricity you are effectively leasing/financing/renting the system from them, your monthly

lease payment is determined by how much electricity your system generates.  They are absorbing some of the risk of ownership.  And you're right, you will save money vs buying from the grid.  They get to keep most of the rebates/subsidies associated with the installation.

Or you  could use your home equity and have it professionally installed for under $3k/kw, keep the subsidies/tax benefits yourself, reduce your electricity bill in exchange for a even smaller monthly payment on your loan. 

 

I'm not saying they don't have a place in the market today, but the technology will continue to change and there are a lot of companies (see the google adverts on this page) doing the same exact thing. 

 

The large solar projects Berkshire is involved in cost less than $5k/kw and qualified for a lot of tax benefits, but the economics of these projects improves as the cost drops/ efficiency goes up.  The cost of small/individual inverters makes the large projects far more economical. 

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By buying the electricity you are effectively leasing/financing/renting the system from them, your monthly

lease payment is determined by how much electricity your system generates.

 

I'm already doing that now -- I'm leasing/financing/renting the system from Southern California Edison, except that "system" probably consists of a mix of natural gas burn, petroleum burn, coal burn, wind, solar, hydro, other stuff...

 

SolarCity merely has a cheaper system than Southern California Edison.

 

And you are right, if you have liquidity and want to tie it up, then it's cheaper to just buy the system. 

 

Their program seems aimed at people who don't have $10,000 in liquid cash, or don't want to tie up their debt/income ratio, or don't have home equity, etc... etc...    Yet they want lower payments so that they can improve their liquidity situation.

 

Anyhow, the program is not directed at people who want to buy their own systems.

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