SolarCity Getting Into Crowdfunding -- Shakes Up Solar Again

Does another funding source add value to SolarCity, or is it more of a public relations move?

Jan 15, 2014 at 2:05PM

SolarCity (NASDAQ:SCTY) has been on the cutting edge of residential solar in every way, and now it's making the push to crowdfunding. In an announcement made this morning, the company said that it has acquired Common Assets LLC to help build a web based platform that will allow individuals and institutions to invest in baskets of distributed solar projects. The offerings will consist of debt, although exact details of how the projects will be securitized or what interest rates will be are unknown at this point.  

This is similar to Mosaic, an early adopter of crowdfunding for solar projects that I highlighted last month. Mosaic allows investors to provide debt to individual small- to medium-sized solar projects, while SolarCity is bundling hundreds or thousands of residential projects for its funds.

Why is SolarCity interested in crowdfunding?
The move into crowdfunding is a bit curious for SolarCity, especially since it was only two months ago that the company completed the first distributed solar securitization deal. There are two reasons I can see SolarCity getting into crowdfunding, and they center around continued growth.

Scty Installation Image

Residential solar installations by SolarCity. Image courtesy of SolarCity.

First, SolarCity needs access to capital. It seemingly has plenty of that from banks and the securitization deal, but with aggressive expansion plans, the company may be eying even more ways to access the market. As projects come out of their equity funding phase -- which typically lasts five years -- they'll need to be funded with debt and equity, and with 464 MW deployed already, mostly through leases, and plans to install around 500 MW this year, we're talking about billions in debt needed in the next decade.

Second, SolarCity may see crowdfunding as a way to get cheaper capital. The securitization deal it completed in November was done at a 4.8% interest rate and included customers with the highest credit score the company has. Mosaic is offering rates as low as 4.4%, so it's possible to lower the cost of capital slightly.

Is this the new paradigm in solar?
The entire solar industry is looking for ways to finance growth right now. SunPower (NASDAQ:SPWR) is leaning on its majority owner Total (NYSE:TOT) to not only provide project financing, but also to provide debt for the company's operations. Chinese manufacturers are increasingly partnering with power companies to build utility-scale projects. Normally, these big partners or banks like Wells Fargo or Goldman Sachs have financed projects, and now SolarCity is looking to smaller groups for funding. 

Spwr Residential New Home Community

Residential solar installations by SunPower. Image courtesy of SunPower.

What's interesting is that the democratization of solar financing doesn't require the scale SolarCity has built. Currently, SolarCity can offer banks and institutions access to the solar market in ways no other company can through hundreds of millions in financing. In offering crowdfunding, it's moving to products that align well with Mosaic, Sunrun, and Clean Power Finance's business models. These companies are in the business of financing projects and acting as middlemen in the process. They could easily offer similar crowdfunding to small investors, but going to the point of securitization is harder because they don't have SolarCity's scale. 

For that reason, I wonder if SolarCity has a sustainable advantage in solar crowd funding. If SolarCity offered distributed solar debt for a 4.4% and Sunrun offered a 4.5% interest rate, which one would you take if everything else was equal? 

This may not be a big portion of SolarCity's financing, but it shows how the company is leading the solar financing business and desperate to have more ways to access capital. To build 500 MW of solar projects next year and grow at any significant rate after that, SolarCity will need billions in financing. Maybe debt markets aren't eager to finance those projects, and that's why SolarCity is looking to less tradition funding sources. Time will tell.

Foolish bottom line
At the end of the day, crowd funding is an interesting add for SolarCity, and I'm excited to see how it plays out. Let's just not get carried away on what impact it will have on operations. It's incremental positive if anything, just not something investors should consider a huge value add because it won't lower borrowing costs significantly, if at all. It's also not a business SunPower or any other big company couldn't get into easily. 

The value of SolarCity is still driven by how many MW of solar the company can install and how much margin the company can make from those MWs. Unless this drives either of those figures, investors shouldn't read too much into it.

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Fool contributor Travis Hoium manages an account that owns shares of SunPower and personally owns shares and has the following options: long January 2015 $5 calls on SunPower, long January 2015 $7 calls on SunPower, long January 2015 $15 calls on SunPower, long January 2015 $25 calls on SunPower, and long January 2015 $40 calls on SunPower. The Motley Fool recommends SolarCity and Total SA. (ADR). The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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