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Beware of the Rooftop Solar Market

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Editor's Note: In a previous version of this article, the author incorrectly stated PG&E was a part owner of the San Onofre Nuclear Generating Station. However Southern California Edison and San Diego Gas & Electric own the two operating units. The Fool regrets the error. 

America's utilities are starting to be supplemented by rooftop solar systems. Instead of facing competition from a select number of other large utilities, now utilities are facing millions of potential competitors. Some utilities are working proactively to deal with these challenges, but others should be avoided.

The utilities
Edison International (NYSE: EIX  ) is a traditional utility that actively competes with solar through its Southern California Edison subsidiary. California's relatively high electricity costs and healthy amount of sunshine make rooftop solar systems quite attractive. In addition to fighting rooftop solar, Edison is dealing with the estimated $4.1 billion bill to dismantle the San Onofre nuclear power plant, and it is still not clear how much of the bill Edison International will be stuck paying. 

Edison bought the rooftop solar developer SoCore Energy. It is important to note that Edison did not simply buy a collection of solar panels out in the desert; it bought a piece of the distributed generation market. With Edison's experience and its BBB debt rating, it will be able to funnel relatively cheap capital to boost SoCore's operations. Rooftop solar systems mean the destruction of the status quo where demand for Edison's electricity grew in a steady and dependable fashion, but Edison can use SoCore to recoup some of its lost profits. 

Challenges with the San Onofre nuclear plant will put a dent in Edison's earnings. The company is big, but a $4.1 billion price tag is still a hard pill to swallow. Also, the growth of distributed generation is forcing the company to lay down $17.8 billion to $20.3 billion in capital expenditures from 2013 to 2017, mainly in distribution and transmission upgrades. Do not expect a large amount of earnings growth in the coming years. Thanks to these costs it is expected to earn around $3.38 per share in 2013, $0.46 less than what it earned in 2010.

PG&E (NYSE: PCG  ) is the other big Californian utility with a situation very similar to Edison. With more than 4 million natural gas accounts it has some income to help decrease the impact from distributed generation, but PG&E is still in a challenging situation. It is stuck with big grid upgrades, making its $1.85 billion investment in its electric distribution upgrades the largest item in its 2013 capital expenditures budget.

Don't expect PG&E's earnings growth to be very strong. Thanks to network upgrades and rising energy prices, its expected 2013 EPS of $2.63 is a full $0.24 less than what it earned in 2010.

NRG Energy  (NYSE: NRG  ) is a large utility with over 46 gigawatts of generational capacity, and it has a strong interest in the renewable rooftop market. Through its NRG solar subsidiary it has helped more than 141,000 homes install rooftop solar systems. NRG's willingness to embrace rooftop solar along with traditional utility scale solar installations is encouraging, because it shows that the company is willing to work with the market. It is important to remember that a full 46.8% of NRG's generational capacity is on the East Coast, where relativity low solar radiation makes distributed solar less threatening. 

NRG Energy does own 44% of the South Texas Project nuclear plant, but the facility is operating and does not carry the headaches of the Edison's San Onofre plant. Thanks to its forward looking policies, NRG Energy has been able to grow its customer base for 10 consecutive quarters. Mild weather has put a dent in its earnings this year, but by 2014 it is expected to boost its EPS to $1.42 thanks to solar growth and stronger overall energy demand.

Stuck between a rock and a hard place
SolarCity (NASDAQ: SCTY  ) is a dedicated solar installer under attack. Now that utilities are starting run subsidiaries that purchase, install, and operate rooftop solar systems, SolarCity is facing a huge increased competition from very well financed firms.

SCTY Revenue Quarterly Chart

SCTY Revenue Quarterly data by YCharts

SolarCity is growing with 53 megawatts deployed in the second quarter of 2013. The company expects to be cash flow positive by the last quarter of 2013. Even as the number of Megawatts deployed grows, its recent quarterly revenue only grew to $37.95 million. SolarCity is facing more competition from billion dollar utilities with better access to the capital markets and falling solar costs, thus putting pressure on prices.

Going forward SolarCity should become more profitable as existing customers become a larger portion of its revenue, but that does not erase the difficulties the company is facing from a maturing market. To try to gain more market share SolarCity recently acquired Paramount Solar, but it is still far from certain how things will play out. 

Utilities are realizing that there may be no way they can stop rooftop solar, as they start to join the market. Now SolarCity's prospects have also taken a turn south due to increased competition from well financed utilities. NGR Energy is the one utility that is really worth taking a second look at, as it has embraced solar and is not stuck with an expensive nuclear decommissioning project. 

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Read/Post Comments (9) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 16, 2013, at 2:22 PM, chrischamb1 wrote:

    My suggestion is that if the author doesn't even know the name of the "San Onofre Nuclear Generating Station" then perhaps he should not be writing articles about the industry. Solar City's revenues won't grow as much as other solar companies due to the amount of leasing it does (with its $500M credit line from a small investment bank named Goldman-Sachs) and due to leasing accounting rules, the revenues are looked at differently for GAAP reasons. However, the long term revenue picture is quite promising as is the fact that they are not panel manufacturers subject to widely fluctuating prices, Chinese imports and tariff games. While San Onofre is a fiasco that will be initially paid for by SDG&E, So. CA Edison and The city of Riverside electric customers (the 3 utilities that own the generating station) hopefully, the lawsuits against and the insurance carried by the company that did the upgrade that eventually led to the closing of the plant will ultimately return some of the money to the customers, but I wouldn't hold my breath. In the meantime, the associated KWh price increase will do nothing but make solar (especially zero down leasing) even more attractive!! With Elon Musk running the company and the synergies that occur with Tesla, I wouldn't bet against this company.

  • Report this Comment On September 16, 2013, at 2:34 PM, ronwiserinvestor wrote:

    Solar leasing is quickly losing its attractiveness because of the growing competition from $0 down solar loan offerings that allow the homeowner to keep the 30% federal tax credit and other applicable incentives. FHA backed $0 down solar loans require no equity and offer tax deductible interest. Leasing and PPA paments are not tax deductible. Pricing for purchased solar systems have dropped to less than $3.00 per watt before incentives, while SolarCity is still quoting prices in the $5.00 a watt range. At $5.00 a watt, when compared to purchasing at less than $3.00 per watt, it is actually the consumer who is paying for their own maintenance, repairs and insurance not the leasing company. In addition, more and more homeowners and real estate professionals are now reporting problems selling homes with solar leases attached to them. In my opinion which is backed by over 15 years in the solar PV sales industry. The reign of the solar lease and PPA will soon be over with.

  • Report this Comment On September 16, 2013, at 6:59 PM, chrischamb1 wrote:

    There you go....As a seller of solar PV systems, how can you be objective?? Why not tell people that most of the incentives are going away very soon and that owning a system (whether zero down or not) leaves ALL maintenance or repairs on the homeowner. How is a leased system any harder to sell with a house than a purchased system?? Both have to be calculated into the price. But the leased system has no maintenance or repairs to worry about. Also, my 2500KWh system leases for $401/ month (NO MONEY DOWN) with no yearly increases. That works out to $.16/KWh net net, which is much less than SDG&E!!

  • Report this Comment On September 16, 2013, at 7:15 PM, sunlineenergy wrote:

    Chrischamb1: It looks like you sell leased systems. Being that panels are warrantied by the panel manufacturer, a lease is just a third party company that takes the incentives and charges a hefty sum for the money they lend.

    You could buy panels with 0 down for cheaper then the cost of a 25 year lease. The other issue is with maintenance: PANELS REQUIRE RAIN TO CLEAN THEM, THIS IS WHY LEASING COMPANIES DON'T SETUP MAINTENANCE SCHEDULES: THERE ARE NONE.

    People are smart enough to realize that leases are expensive and cumbersome.

  • Report this Comment On September 16, 2013, at 9:38 PM, chrischamb1 wrote:

    I have no connection to the solar industry of any type other than being a customer of Solar City. and being a person that gets my power for 20% less than buying it from SDG&E. My savings will soon increase to 25-30% due to the upcoming (this month) rate increases with more to come. I have fixed my costs for the next 20 years at a rate much less than SDG&E. Just by your name it appears that YOU are in the solar sales business. Of course the solar leasing companies keep ALL the incentives for themselves.....why else would the do it?? I ONLY care how much my monthly bill is and what my net cost per KWh is... I put NOTHING down so where is my downside?? I live in San Diego county in CA so we don't get much rain...I guess I'll have to get my hose out every few months. And finally, inverters will not last more than 10-12 years and with a purchase, ALL the costs of replacement are the responsibility of the system owner. With my lease, those will be replaced by the Lessor, in this case, Solar's in my contract. Nice try, but leasing is the ONLY way to go....if it wasn't, companies would only sell systems. I doubt that Goldman-Sachs didn't do A LOT of due-diligence before extending a $500M credit line to Solar City to do residential solar leasing.

  • Report this Comment On September 17, 2013, at 12:24 AM, ronwiserinvestor wrote:

    Chrischamb1 Here's the downside that you asked for, If you owed federal income tax when you signed your lease then you most certainly put a lot down in the form of your 30% federal tax credit that you forfeited to the leasing company

    Unfortunately, by allowing the leasing company to apply the tax credit to their over inflated pricing, you will end up paying far more in lease payments than you would have paid if you purchased a system instead.

    And you're dreaming if you think that you're getting free maintenance and repairs. Tell me the size of their system and I'll prove to you, that you'll overpay for the rental of that system by at least double and possibly triple what you would have paid if you purchased a system. All that extra money that you'll pay will pay for maintenance any repairs many times over.

    $401 a month for 20 years is $96,240. That's an insane amount of money for the rental of a system that only produces 2,500 kWh per month.

    2,500 kWh per month is about a 19 kW system. You could have purchased a 19kW system for $2.70 per watt, installed, before any incentives, that's $51,300 or $35,910 if you apply the full 30% federal tax credit.

    So you'll end up paying $96,240 on your lease, but you could have purchased the same size system for $35,910 after the tax credit. That's a $60,330 difference. So who's paying for maintenance and repairs again?

    Yes, you might be saving some money on your electric bill but you would have saved a tremendous amount more if you had purchased your system instead. The numbers don't lie, we advertise the pricing that I used in my calculation on all of our websites.

    That $60,330 difference is an example of why a potential homebuyer will probably choose to buy another home and purchase a brand new system for far less, rather than assume someone elses lease payments on a used system.

  • Report this Comment On September 17, 2013, at 3:07 AM, chrischamb1 wrote:

    Keep telling yourself that and you may actually start to believe it. Financing $35-40K for 15 years (which is the ONLY way to keep the payments low. (Assuming zero down like I did) at 4-5% interest will have a somewhat lower payment. (Assuming you qualify for the loan) BUT, how many people can actually use the tax credit?? It can ONLY be used to offset capital gains.... It's NOT a direct rebate! That's why solar leasing companies CAN actually use the credit. How many people actually get the full benefit of the "tax credit" ?? It is merely a come-on to make solar more attractive. And you know works on the unsophisticated buyer! Finally, what about the person who buys a home with a purchased system?? The seller has to add his or her cost to the home or lose their entire investment. How is this different than a lease?? I think any solar system in today's rate environment is a plus for selling a home since it "fixes" electric costs for years to come. Your final point of the total cost is utterly pointless as my fixed cost for 20 years is $.16/KWh net, up to 2500 KWh's per month. (Guaranteed in writing by Solar City) AND, any unused power HAS to be purchased by SDG&E and paid out to me once a year per the "Net Metering" law in CA! Even if for any reason, they fail to perform...I simply stop making payments. I'm still connected to the grid. Remember, I put NO MONEY DOWN! NO RISK!!

  • Report this Comment On September 17, 2013, at 6:15 PM, ronwiserinvestor wrote:

    $35,900 at 4.99% for 15 years on a $0 down solar loan is a payment of $283.71 versus your $401.00 per month lease payment for 20 years "somewhat lower" ? No, considerably lower.

    And as for your question "how many people can actually use the tax credit?" That number is in the tens of millions. If you owe federal taxes, then you can take advantage of the 30% federal tax credit. That's a fact.

    Yes, people who are at the poverty level, or retirees who do not owe federal income taxes cannot take advantage of the tax credit, but the solar leasing and PPA companies try to whitewash the federal tax credit to make it appear that practically nobody will be able to take advantage of it, which is nothing more than propaganda that works on the unsophisticated buyer.

    And your statement, "what about the person who buys a home with a purchased system?? The seller has to add his or her cost to the home or lose their entire investment. How is this different than a lease????" The difference is that when you or your homebuyer pays off a loan, the system then becomes the property of the homebuyer. (otherwise known as an asset). When you pay off your lease or the homebuyer is foolish enough to assume your lease payments, the system is still the property of the leasing company.

    This is one of the primary reason why people are having trouble selling their homes with a solar lease attached to it. Don't take my word for it, search for the keywords "solar lease home sale" and you'll find many posts from both home sellers and real estate professionals who are now complaining about the "underwater solar lease" issue.

    No matter how you slice it:

    1. You will overpay for your leased system when compared to what you would have paid had you purchased instead.

    2. The payments on a shorter term, $0 down solar loan are considerably less than the payments on a solar lease.

    3. You're paying for your own maintenance and repairs because of the higher price of your leased system versus a purchased system.

    4. You're stuck with that same aging system on your roof for the next twenty years. You can't sell the system and apply the proceeds toward a new system even after paying your lease off like you can with a system that's owned

    5. There are tens of millions of consumers who can benefit from the 30% federal tax credit and ALL consumers can benefit from any available cash rebate.

    6. The interest on many $0 down solar loans are typically tax deductible. The payments on your solar lease are not.

    7. And finally, your statement "as my fixed cost for 20 years is $.16/KWh net, up to 2500 KWh's per month" is utterly pointless because you would be paying far less than $.16/kWh for your power with a purchased system because your net cost for a purchased system would be far less, with or even without the tax credit or any rebate.

    And by the way, your statement: "how many people can actually use the tax credit?? It can ONLY be used to offset capital gains...." is entirely false. The tax credit is not applied to capital gains, that would be a tax deduction. The 30% federal tax credit is a dollar for dollar credit that is applied to the amount of federal income tax owed.

    The bottom line is, even without considering the 30% tax credit and even considering maintenance and repair costs, you still threw away tens of thousands of dollars that you could have saved by purchasing a solar system with a $0 down solar loan instead of renting one with a lease. Keep drinking the solar leasing Koolaid if you want, but please don't try to convince others to make the same mistake. Maybe, wasting tens of thousands of dollars means nothing to you, but for the average consumer, that's a lot of money to throw away.

  • Report this Comment On September 17, 2013, at 6:41 PM, sunlineenergy wrote:

    Chrischamb1: You should look into the federal tax credit: it is 30% of the installed cost but you can use it to offset your FEDERAL INCOME TAX. This is not just capital gains, but pretty much the majority of people that buy or lease systems still have some federal tax liability.

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