Read More About SolarCity's Plans to Dominate the Solar Industry

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Yesterday I covered an introduction to SolarCity's (NASDAQ: SCTY  ) business and how the company generates value for shareholders. Today, I'd like to cover how the company is growing and what new developments investors should watch for in the future.

An energy delivery company
When I talked to SolarCity executives recently, I found it interesting that the company doesn't consider itself a solar installer, instead thinking of itself as an energy delivery company. Instead of just installing solar panels on a roof, the entire experience of buying solar, maintenance, monitoring, and energy storage is part of what SolarCity is selling.

An image of SolarCity's DemandLogic energy storage unit. Offering products like energy storage is key to SolarCity's long-term strategy. Image courtesy of SolarCity.

This is an important distinction, because new products like energy storage and securitization will play key roles in building a competitive advantage in delivering energy. At the end of the day, if SolarCity can deliver a kW-hr of solar energy or stored energy for less than the grid it should be able to sell that product to customers.

This isn't unlike the way SunPower (NASDAQ: SPWR  ) executives talk about their company, and these two clearly see more value in providing energy as a service than building an installation and moving on. It's an important distinction from manufacturers like Trina Solar, Yingli Green Energy, or JA Solar, who compete to sell panels but don't have the same incentive to offer a suite of services.

Solar power as a service
What differentiates SolarCity from competitors like SunPower, Sunrun, or Clean Power Finance is that they sell and fulfill the full energy services themselves. From the sale to maintenance to renewal of leases or new product offerings, it's the same company offering the energy service.

Conversely, SunPower owns the upstream supply chain, but works with partners to install and service distributed solar installations. Sunrun and Clean Power Finance also don't own the trucks that do the work.

This gives SolarCity's customers one point of contact instead of a more complex network. Other companies will argue that owning the supply chain the way SolarCity does is more efficient, but SolarCity's growth and gains in market share prove that it has an attractive product offering in today's solar market.

The advantages of securitization
The other thing that SolarCity currently does better than anyone else is tap into financing for residential and commercial solar installations. This year it lined up hundreds of millions of dollars in tax equity financing for new solar projects, including a $500 million deal with Goldman Sachs. Tax equity financing is used for the first few years of a solar project's life to capture tax advantages, but then ownership transfers back to SolarCity, which is why securitization is such a big deal.  

Earlier this year, SolarCity sold $54.4 million of bonds secured by solar lease payments for a 4.8% interest rate. This was the first securitization of distributed solar payments, and sets the stage for the next generation of financing.

In 2017, the investment tax credit will fall from 30% to 10%, and suddenly the tax equity financing portion won't be so important. Instead, being able to quickly and efficiently finance solar installations will become more important -- and that's why offering securitization now and building a record with investors is so important. I also think this could be a pathway to offering securitized solar loans in the future, which would be another financing innovation.

The goal for SolarCity is to have the lowest cost of capital in the industry, which would allow the lowest cost of each kW-hr of energy produced. If leasing solar equipment continues to be the dominant product for the residential industry, this low cost of capital will be key to success. 

Building a path to solar domination
What SolarCity has done is build the largest and most efficient sales, installation, and financing network in the industry. It has a first mover advantage by building a strong brand name and customer loyalty. With installations expected to grow up to 90% next year, the company is set up to gain share again and solidify its dominance in distributed solar. 

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Read/Post Comments (5) | 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 December 28, 2013, at 1:13 PM, TMFCheesehead wrote:

    Awesome set of article, Travis.


  • Report this Comment On December 28, 2013, at 1:41 PM, TMFTypeoh wrote:

    <This gives SolarCity's customers one point of contact instead of a more complex network. Other companies will argue that owning the supply chain the way SolarCity does is more efficient, but SolarCity's growth and gains in market share prove that it has an attractive product offering in today's solar market.>

    Did you mean less efficient?

  • Report this Comment On December 28, 2013, at 4:59 PM, speculawyer wrote:

    So basically SolarCity wants to charge you a lot of money for stuff you don't need (maintenance, monitoring, and energy storage). Maintenance? There is no maintenance for a solar PV system. Monitoring . . . ooh, they look at a web site. Like you can't do that. Storage? Unnecessary, expensive, and undesirable unless you are in an off-grid remote location or you are a doomsday prepper.

  • Report this Comment On December 28, 2013, at 5:19 PM, Riverdoctor88 wrote:

    Speculawyer is correct. Once installed a PV system is pretty much maintenance free. My supplier offered a maintenance contract - to come twice a year to wash the dust off the panels! It's a flaw in the business model that there is little in residual revenues for them once a purchased & self financed system is up and running. Leasing or providing financing at least provides some residuals, but the margins would be small so they presumably have to make it up on volume.

    Storage is important for the corporations that distribute power, but not to the small producers - at least not until there is a price differential between night and day. The biggest factor in all of this is the rate paid by the utility company and the ROI & payback period - I'm currently getting 54 cents per kWh but my original contract was for 80.3 cents! The subsidized price means a lot to the future margins and return to investors - when they dry up, the only companies remaining will be those that are vertically integrated, selling a complete ecosystem with valuable products- not maintenance, monitoring and storage. Products like setting up a home based (PV based) business, software for same, accessories like optional emergency backup-generator compatible inverters.

    The PV systems are pretty amazing - we just had a major ice storm in the Toronto area, with at least and inch of ice on my panels, and 2 inches more of snow, and I noticed yesterday the panels were generating power. They weren't generating much, but even under 3" of ice and snow there were enough photons to generate a current and a few more bucks in my pocket.

  • Report this Comment On December 28, 2013, at 7:30 PM, LovePeace wrote:

    I wouldn't say they are an energy delivery company when they are using utility company transmission lines to do so. The days of doing that for free (or like now for profit) are numbered.

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