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| Fig. 1: SolarCity Installation (Source: Wikimedia Commons) |
In the last decade, solar energy has been on the rise. One company that has contributed to this rise is SolarCity, the biggest installer of rooftop solar power systems. SolarCity provides clean energy to homeowners, businesses, schools, and government organizations. The company has been a huge success since its founding in 2006, growing 80% to 90% every year. In fact, SolarCity reached 1,000 megawatts of solar panels installed this year and now has a market capitalization of $3.5 billion. [1] More importantly, Solar City has helped reduce the use of fossil fuel energy, which contains a high amount of carbon and is a major contributor to global warming. With solar installations increasing 30% last year due to cheaper photovoltaic panel, it is only a matter of time until all homes are powered by solar. [2]
SolarCity has become so successful because it has figured out how to make mass adoption of solar panels possible. Before SolarCity, solar panels were simply too expensive, requiring home and business owners to pay about $50,000 upfront. SolarCity has made solar panels affordable to the average homeowner by developing a solar lease strategy. This strategy allows homeowners to put solar panels on their roof without having to make a down payment. That way, customers save right away and have incentive to invest in solar panels. However, solar panels are expensive not only to the customers but also the developers. Installing solar panels is a very capital-intensive business and developers like SolarCity have to spend a good amount of cash upfront, while revenues don't come until later. SolarCity solved this problem by collaborating with Wall Street banks. Specifically, SolarCity made a deal with Goldman Sachs to finance the installations by bundling the leases into bonds that can be bought by individual investors. [3]
Despite SolarCity's early success, the company has recently been struggling. The company reported a higher than expected loss of $113.86 million for its third quarter. Since then, shares in SolarCity have fallen by around 30% and the company's value has fallen to $3.5 billion from $5.2 billion at this time last year. The core issue is that a federal tax credit that covers 30 percent of the costs of installing the company"s rooftop systems is set to expire for residential systems and fall to 10% for commercial installations by the end of next year. This tax credit was a huge incentive to invest in solar power and now many are predicting that the loss/reduction of this tax credit will be a disaster for the industry. Particularly, investors are worried about how SolarCity will finance itself after losing this significant tax advantage. [4]
SolarCity has responded to this change in federal tax credit by shifting their business strategy. Previously, SolarCity focused on growing as much as possible and since installing solar panels requires a lot of upfront costs, as mentioned earlier, they were cash-flow negative. They are now focusing on becoming cash flow positive by slowing down their astronomical growth rate of 85% to about 40%. This shift in strategy addresses investors fear about the company not being able to finance themselves. In fact, just last month, SolarCity raised $113 million in a new investment led by the Silver Lake. Silver Lake's investment is huge for SolarCity because it is a sign of confidence in SolarCity's new strategy. Specifically, Silver Lake professionals believe that the company's shift to focus of positive cash flow signifies an effort to prepare for the long term and become a more reliable utility. [3]
Even with SolarCity's new strategy, there is little debate that the reduction of the solar investment tax credit will hurt the entire solar industry. It is very unfortunate that this change in policy is happening, particularly at a time when solar is on the rise. The 30% investment tax credit has been huge not only for the environment but also for the US economy. Solar is growing faster than any other domestic energy source as prices continue to fall, resulting in the reduction of harmful fossil fuel energy. Additionally, the solar industry provides living-wage salaries for more than 200,000 Americans. [2] With pollution being a major issue in the world today, Congress should not reduce the solar tax credit but rather get rid of the billions of dollars of subsidies that the government provides for fossil fuels.
© Anthony Tsodikov. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.
[1] K. Fehrenbacher, "SolarCity Stock Drops 20% on Loss, Slower Growth Plan," Fortune, 29 Oct 15.
[2] A. Ronen, "Will Solar Energy Plummet if the Investment Tax Credit Fades Away?," Wall Street Journal, 15 Nov 15.
[3] C. Martin "Goldman Sachs to Finance $500 Million for SolarCity Roofs," Bloomberg Business, 16 May 13.
[4] M. De La Merced , "Silver Lake Is Said to Invest $100 Million in SolarCity," New York Times, 18 Nov 15.
