Is SolarCity A Win in the Battle for the Rooftop?

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SolarCity (NASDAQ: SCTY  ) and Direct Energy recently announced that they would be teaming up to provide solar-generated electricity for BJ's Wholesale Club at its North Brunswick, New Jersey location. Under the terms of the 20-year power purchase agreement (PPA), BJ's will pay for the electricity at a discount to current rates-- so much so that they expect to save hundreds of thousands of dollars over the life of the PPA.

Allies on the battlefield
Serving more than six million residential and commercial customers in 46 states and 10 Canadian provinces, Direct Energy, a subsidiary of Centrica plc (LSE: CNA  ) , is one of the largest energy and energy-service providers in North America. Earlier in September, Direct Energy and SolarCity, arguably America's largest full-service solar power provider, announced the creation of an investment fund to finance $124 million in solar projects for Direct Energy's commercial and industrial customers.The deal with BJ's Wholesale Club represents the first project, which is to be financed through the investment fund.

In a time when most utilities are resisting the growing trend of residential and commercial customers embracing solar power, Direct Energy has demonstrated remarkable interest in embracing change. In regards to the deal with BJ's, Paul Dobson, acting president of Direct Energy Business said, "Solar is a viable opportunity that positions Direct Energy Business as a total energy management service provider for commercial and industrial customers." 

This deal is yet another reminder of SolarCity's commitment to achieve its goal of 1 million solar rooftop customers in the next five years. It may also prove to be the first step toward a growing relationship-- perhaps even as large as SolarCity's relationship with Wal-Mart, in which there are over 160 projects completed or under construction.

The battlefield is more than just residential rooftops
One of SolarCity's most formidable competitors is SunPower Corporation (NASDAQ: SPWR  ) . Unlike SolarCity, though, SunPower is vertically integrated-- designing, manufacturing, and delivering solar electric systems to residential, commercial, and utility scale customers throughout the world. SunPower, unlike SolarCity, is not as interested in working with utilities (like Direct Energy) to provide power to residential customers. Instead, SunPower, which manufactures its own panels, is interested in building utility-scale facilities. For example, SunPower's 250-megawatt California Valley Solar Ranch, when complete, will power over 100,000 homes.

Currently, SunPower is much more profitable than SolarCity. At the end of Q2, SunPower had an EPS (GAAP) of $0.15, whereas, SolarCity had an EPS (GAAP) of ($0.31). SolarCity advises investors, though, that they expect to net cash flow positive by the end of Q4 2013. In terms of performance, both stocks have done well over the past six months, and I foresee both companies being possible winners in the long run as customers continually recognize the value of converting to solar powered electric systems, although I'm interested to see in Q3 results if companies are continuing to secure customers.

Another positive indicator for SolarCity is that the retained value forecast increased to $662 million (forecast at June 30, 2013)-- up from $569 million (forecast at March 31, 2013). It is difficult to compare SunPower by the same metric because it is not as dependent on the solar leasing model as SolarCity. Nonetheless, SunPower secured 2,200 new leases in Q2, bringing the total to more than 18,000 leases with net aggregated payments totaling $528 million. We can compare the two companies based on per watt residual value, though. Here SunPower has an impressive $1.75 per watt residual value; whereas, SolarCity has only $1.25 per watt residual value.

SPWR Chart

SPWR data by YCharts

The Foolish takeaway
Investors in SolarCity and SunPower may very well outperform in the future. For those who are more interested in exposure to the residential and commercial market, SolarCity may be more compelling; whereas, for those investors interested in the commercial and utility-scale solar power market, SunPower may be the better choice. Regardless of which company, investors choose, they must recognize the long-term horizon that both stories will need to fully play out.

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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 October 05, 2013, at 1:09 PM, ronwiserinvestor wrote:

    Consumers are finally waking up to the reality that solar leases and PPA are an expensive way to go solar when compared to $0 down loans that allow the homeowner to keep the 30% federal tax credit and cash rebates, instead of forfeiting them to the leasing company. Not to mention the difficulties that homeowners are experiencing when attempting to sell their homes with solar leases attached to them.

    In the end, it will be the companies that offer this preferred mode of financing (0 down loans)coupled with lower priced systems that will win the battle for rooftop solar, not the leasing and PPA companies.

  • Report this Comment On October 07, 2013, at 1:45 AM, kbaran wrote:

    When you compare SolarCity and SunPower's, 1.25 and 1.7 residual value, what is the discount rate you are using? I am not sure but it is possible that your comparison is not apples to apples. I think the SolarCity number might be drived from a higher discount rate, which would make your point moot.

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