With SolarCity IPO, Elon Musk May Get Clean Tech Right

[constructive]

http://www.businessweek.com/articles/2013-05-13/adding-an-electric-car-cut-the-payback-point-of-our-solar-panel-investment-in-half#r=nav-f-story

 

 

Adding an Electric Car Cut the Payback Point of Our Solar Panel Investment in Half

 

$2500 annual savings x 125% oversized x 30 years / $29200 installed cost = 4% IRR

 

Cost of capital is at least 4%, so their solar panels are a bad investment.

[ERICOPOLY]

http://www.businessweek.com/articles/2013-05-13/adding-an-electric-car-cut-the-payback-point-of-our-solar-panel-investment-in-half#r=nav-f-story

 

 

Adding an Electric Car Cut the Payback Point of Our Solar Panel Investment in Half

 

$2500 annual savings x 125% oversized x 30 years / $29200 installed cost = 4% IRR

 

Cost of capital is at least 4%, so their solar panels are a bad investment.

 

The 4% is extremely low risk, and it's after-tax. 

 

At a 35% tax rate you need something like 6.15% pre-tax yield from a Treasury to get close to the same risk-adjusted return.

 

There might also be a lot of inflation in electricity rates which would boost returns.

[constructive]

I'm talking about cost of capital, not discount rate. Judging by the large car loans and home loan do you think this family will have an average cost of capital less than 4% over the next 30 years?

 

It's nowhere close to being as safe as Treasuries. What if you need to make unexpected repairs? What if you sell the house and don't recoup the cost of your solar addition?

 

True, energy inflation works for you, but regular inflation works against you in this calculation.

[constructive]

BTW, don't get me wrong, I'd love to be a SCTY customer. It's on the solar panel ownership side that I think the value breaks down.

[ERICOPOLY]

I'm talking about cost of capital, not discount rate.

 

I saw the mention of 4% IRR in your post and that's what I was responding to.

[constructive]

What I mean by that is that their alternative to buying solar panels & electric cars isn't buying Treasuries - it's taking on less debt.

 

The market is signaling a negative real risk-free rate, but that doesn't mean we should use it.

[ERICOPOLY]

Constructive,

How did you arrive at 4% IRR?

 

They paid $29,205 for their system in October 2011.

 

They reap $4,900 per year from the system (excluding financing costs).

 

The free cash yield (tax free) is 16.77% for 30 years (assumption is that it lasts 30 years, and assuming no financing expenses).

 

They can use this positive cash flow to pay down their highest interest debts, so that free cash flow is reinvested at a risk-free high rate (paying down debts you've already incurred is risk-free).

 

 

EDIT:  It does seem like the article embellishes their savings by ignoring that the electricity to charge the Volt (were they to purchase the electricity) would be cheaper than the gas to fuel their prior car.  So that delta is the embellishment.

 

[SI]

Eric,

A few more irons for the fire:

-I leave in San Onofore country down south and got a notice that the price / unit will increase 20% to pay for shutting it.

 

-Historically power units consumed rise 1.5% / yr.

 

-If we are seeing a slowdown in the silicon portion of silicon valley, there is plenty of semi cap equipment vendors who can drive those solar revenues.

 

-Story today on it: http://www.businessweek.com/articles/2013-08-22/homegrown-green-energy-is-making-power-utilities-irrelevant

 

-When Musk & David Crane reach critical mass, these payback period will accelerate lower which I calculate as falling one year every year. I also calculate a payback period today of 9.2 years.

 

Sincerely,

schmuckinsurance

[ERICOPOLY]

These are the prices Solar City quoted me today.

 

Notice how their prices scale linearly with the size of the system? 

 

It's somewhat unbelievable.  None of the efficiencies of scale flow to their customers.

 

 

****** 5,000 kwh *******

System Cost  $25,211  (before rebates and credits)

 

****** 7,000 kwh *******

System Cost  $34,815 (before rebates and credits)

 

****** 10,000 kwh *******

SYSTEM COST

System Cost  $50,421 (before rebates and credits)

[ERICOPOLY]

The issue is with the soft costs:

 

http://www.technologyreview.com/news/509196/why-solar-installations-cost-more-in-the-us-than-in-germany/

 

 

I'm disappointed that Solar City is not using the efficiencies of it's scale to drive down soft costs.  If you swallow the argument that the US market for installed residental solar is high fragmented and that Mom-and-Pop installers are inefficient and those high soft costs are holding back more widespread solar adoption...

 

then....

 

why isn't Solar City using it's economies of scale to bring down the soft costs?

[Liberty]

why isn't Solar City using it's economies of scale to bring down the soft costs?

 

I'm sure they wil pass more of the savings to customers as soon as they'll have more competition forcing them to. Have you looked at what other companies are offering?

[Vish_ram]

interesting read

 

http://grist.org/climate-energy/solar-panels-could-destroy-u-s-utilities-according-to-u-s-utilities/

 

The utility companies spend considerable resources to maintain the grid. who will subsidize it if everyone goes to solar?

 

Buffett's Mid american energy may suffer too.

[fareastwarriors]

interesting read

 

http://grist.org/climate-energy/solar-panels-could-destroy-u-s-utilities-according-to-u-s-utilities/

 

The utility companies spend considerable resources to maintain the grid. who will subsidize it if everyone goes to solar?

 

Buffett's Mid american energy may suffer too.

 

a recent business week article highlights a bit about that issue too.

 

http://www.businessweek.com/articles/2013-08-22/homegrown-green-energy-is-making-power-utilities-irrelevant

[jeffmori7]

interesting read

 

http://grist.org/climate-energy/solar-panels-could-destroy-u-s-utilities-according-to-u-s-utilities/

 

The utility companies spend considerable resources to maintain the grid. who will subsidize it if everyone goes to solar?

 

Buffett's Mid american energy may suffer too.

 

Thanks for the link. There was also a second part to this article, pointing at the benefit :

 

http://grist.org/climate-energy/how-can-we-boost-distributed-solar-and-save-utilities-at-the-same-time/

[SI]

The quote I got today from solar city was 14k(pre federal tax credit and the state credit has been exhausted at SDGE) for 2.93 KW DC system. 8 year payback is slightly better than my expectations and I came across much more warm to the idea though I will sit it out until the payback period narrows with the falling price of installation

[ERICOPOLY]

The quote I got today from solar city was 14k(pre federal tax credit and the state credit has been exhausted at SDGE) for 2.93 KW DC system.

 

Right, see this is where they're gouging me on that quoted $50,421 for the 10,000 watt system.

 

Your $14,000 price includes design of the system, permitting, marketing, overhead.... etc.... etc...  And presumably they are making a profit on your system, or they would be asking for a higher price.  On your system, they install one inverter... same as mine (not the same inverter, just the same total install time).

 

So the extra $36,000 they're charging me is for what exactly?  Once you are already up on the roof each additional panel you install is not that much additional work.  That's where the scalability comes in and it all flows to their pocket -- none to the customer.

 

 

[JBird]

Flip to 38:30, and then notice his emotion over the next minute. This is why you want your CEO as a shareholder.

 

[ERICOPOLY]

The quote I got today from solar city was 14k(pre federal tax credit and the state credit has been exhausted at SDGE) for 2.93 KW DC system. 8 year payback is slightly better than my expectations and I came across much more warm to the idea though I will sit it out until the payback period narrows with the falling price of installation

 

 

I reason that they install your 2.93 KW system at a profit for $14,000.  Thus, the additional cost of a larger system should merely be additional parts plus per-module-installation-labor.  There are roughly 12 solar modules in your system.

 

Based on the below computations, it looks like the hardware for your 3 KW system is about $4,650 total cost for a "do-it-yourself" project.  Therefore the "soft costs" on your project are at least $9,500 -- or about $800 per module for installation.

 

So here is how I arrive at that:

 

1)  Solar City quoted me $50,000 for a 10 KW system.

 

2)  The solar modules for a 10KW system cost $7,448 (using Canadian Solar 245W panels -- priced by www.renvu.com)

Inverters would cost another $4,200.

 

3)  So you are looking at $11,648 dollars for the panels and the inverters.  Then add lets say $3,500 for racking hardware.  Total cost is about $15,000 for all the hardware to install a 10,000 watt system.  Add $500 for freight delivery to the site.

 

So there are $34,500 of "soft costs" in the 10 KW system.  Divide that by the number of modules (40) and you get roughly $800 per panel.

 

So think about that.  $800 per panel for installation!  And they just multiply that number by the number of panels you want installed.  No cost efficiency flow to the customer.

[ERICOPOLY]

So $800 per panel for installation.

 

But look at how much a professional installer is actually paid in California:

 

http://wiki.answers.com/Q/How_much_does_a_solar_installer_make#page3

 

15 to 20 per hour depending on were you work in California theres a high demand so they pay more sorry for spelling Solar Panel installer jobs are demanding and highly dangerous, because of dealings with electricity and mainly working on roof tops even at high temperatures. Considering this aspects of the job including knowledge and education required to be able to work as an installer, and in relation to other similar jobs like air conditioning, electricians etc... and also researching the cost,(about 35k for regular American home) and government involvement and backing in this industry... A regular installer after 3 months, (of course in normal economic conditions in the country) should not make less then $21.00-$29.00/hour,

 

 

But you figure a professional installer can install at least 3 per hour.  So at that rate you are actually paying at least $2,400 per hour to Solar City just for labor!

 

I think what I will do is:

 

1)  buy the equipment

2)  draw and submit the plans myself to get the permit

3)  offer $50 per hour to a handyman to install the modules  (this will cost $1,000 total if he installs two per hour)

4)  hire an electrician to run conduit up to the roof and install the junction box (probably another $1,000 at most)

 

My total cost, fully installed, should be under $20,000 including sales tax.

 

Now, why does Solar City charge 150% more than that???

 

[Grenville]

So $800 per panel for installation.

 

But look at how much a professional installer is actually paid in California:

 

http://wiki.answers.com/Q/How_much_does_a_solar_installer_make#page3

 

15 to 20 per hour depending on were you work in California theres a high demand so they pay more sorry for spelling Solar Panel installer jobs are demanding and highly dangerous, because of dealings with electricity and mainly working on roof tops even at high temperatures. Considering this aspects of the job including knowledge and education required to be able to work as an installer, and in relation to other similar jobs like air conditioning, electricians etc... and also researching the cost,(about 35k for regular American home) and government involvement and backing in this industry... A regular installer after 3 months, (of course in normal economic conditions in the country) should not make less then $21.00-$29.00/hour,

 

 

But you figure a professional installer can install at least 3 per hour.  So at that rate you are actually paying at least $2,400 per hour to Solar City just for labor!

 

I think what I will do is:

 

1)  buy the equipment

2)  draw and submit the plans myself to get the permit

3)  offer $50 per hour to a handyman to install the modules  (this will cost $1,000 total if he installs two per hour)

4)  hire an electrician to run conduit up to the roof and install the junction box (probably another $1,000 at most)

 

My total cost, fully installed, should be under $20,000 including sales tax.

 

Now, why does Solar City charge 150% more than that???

 

I'm curious due to my interest in Solar City's business model.

 

Have you factored in insurance cost of something happening while they install the system on your roof or something happening to your roof during the life of the installation? Does Solar City recoup this cost through the installation or through the electricity rate they charge. Also is there a warranty or support cost that you get from their installation that last over the life of the installation?

 

Apologize if I'm asking dumb questions but I'd like to understand the economics. Does Solar City offer multiple ways of financing the solar system? One is the one you're describing where you pay an upfront cost and own the system. The other would be a no upfront cost, but Solar City recoups the cost through the electricity billing from the installed panels.

 

I also started listening to their Q2 CC and they mentioned a couple of things they offer that differentiate themselves from the competition. One was the software that they offer to improve energy efficiency. The other thing would be one customer service point for installation, maintenance, billing and other features tied to the electrical system. Also down the road do you get access to the Tesla battery storage system.

 

 

[Liberty]

IMO they charge the way they do because the average person doesn't think about it the way you do (and not just about this), they think about how much perceived utility they get.

 

So when Apple charges $100 to double the flash storage in a device, if you know component prices that seems like a lot. But if you don't, you might think "hey, twice as much storage is a lot of extra utility, it's worth a hundred bucks".

 

Most Solarcity customers probably think that a solar system twice as powerful costing twice as much makes perfect sense. That's why they can price like that. Same with car manufacturers charging thousands for fancy wheels and sunroofs and spoilers, etc.. People who buy these things see the car being X thousand bucks cooler in their minds, not the hundreds the components cost and the negligible extra labor required.

[sswan11]

Article on SCTY in Barron's today:

http://online.barrons.com/article/SB50001424052748704719204579025283044181654.html?mod=BOL_twm_fs#articleTabs_article%3D1

[ERICOPOLY]

Most Solarcity customers probably think that a solar system twice as powerful costing twice as much makes perfect sense. That's why they can price like that.

 

Yes but Elon claims to have dreamed about changing the world.

 

Well, he is changing the world but he could accelerate solar adoption if he gets these soft costs down.

[Liberty]

Yes but Elon claims to have dreamed about changing the world.

 

Well, he is changing the world but he could accelerate solar adoption if he gets these soft costs down.

 

True, but it can make sense to reinvest the extra margin into growing the business (other countries next?) and having a bigger margin of safety so that if there's a bump in the road they are more financially resilient (both Tesla and SpaceX came a hair from bakruptcy in 2008-2009, I don't think he wants to go through that with Solarcity too) IMO.

 

And maybe if they are more financially successful they'll attract more competitors to their model (like how Tesla is making everybody else invest more into EVs and up their game) and that'll do more for solar than if they are alone eeking out razor thin margins, walking along the edge of the precipice. Musk if very long-term oriented and wants his companies to catalyze whole industries, not do everything by themselves.

[JBird]

Bare in mind Elon does not run SolarCity.