Is Third-Party Financing a Game Changer for Alternative Energy?

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Back in May of this year, SolarCity (NASDAQ: SCTY  ) and Goldman Sachs (NYSE: GS  ) inked a deal where Goldman Sachs would provide up to $500 million in financing for SolarCity's customers. SolarCity has a business model where it provides the rooftop solar panels for free then sells the electricity generated back to the customer at rates up to 20% cheaper than they would pay for electricity from their utility company. Goldman Sachs must be happy as well as its financing is secured by cash-generated assets that acts as mini permanent power stations on each roof they sit. 

A no-brainer for the customer, right? From the customer's perspective, it's similar to changing long-distance telephone carriers for a big discount and noticing no change in service. This is far different than most other solar panel companies that make the customer bear the large upfront cost. The problem for SolarCity was now it had to bear that large upfront cost even though it would make more in the long run by owning the solar panels, in the short run, just like many solar panel customers themselves, it simply couldn't afford it. Having Goldman Sachs finance it changes that. SolarCity can now pass the large upfront investment to Goldman and just realize the cash flow.

FuelCell Energy (NASDAQ: FCEL  ) just this past Wednesday, September 7, announced its partnership with NRG Energy (NYSE: NRG  ) will market FueCell's clean power plants to its own customer base. NRG Energy will provide a financing option where NRG Energy would actually own the power plant and sell the power back to the customer in a similar fashion to SolarCity's business model. NRG Energy would then realize the long term cash flows in exchange for the large upfront costs while FuelCell Energy won't have to lay out much capital. A win-win-win for both partners and the customer.

The financing for these alternative energy companies solves three critical issues facing alternative energy companies. One, supply constraints due to capital costs become a thing of the past. Two, customer affordability becomes instantaneous as the customer as instead ownership transfers to a third party. Third, these companies now have large financial partners who have their own financial incentive to now help expand the customer base through their own networks.

Investors should look to the earnings reports and backlogs to see if these finance arrangements are bearing fruit. I believe the trend toward third-party financing is there because it works, to the great benefit of alternative energy companies, their customers, and as a low-risk investment opportunity for their finance partners.

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