SolarCity Is Takin' It to the Street

With its announcement that it will begin allowing individuals and smaller organizations to buy secured debt in its solar projects, SolarCity is taking a play out of the playbook for traditional utilities like Duke Energy and Southern Company, and then turning it upside down. Will this be wildly successful, or a big failure?

Jan 16, 2014 at 2:43PM

SolarCity (NASDAQ:SCTY) co-founder and chairman Elon Musk has described the company as a "massive, unregulated, decentralized utility company" on many occasions. In December, the company started acting like a utility company, issuing $200 million in short-term debt, secured with the company's leased assets with its customers. While $200 million may seem like a lot of money, it's a drop in the bucket for utilities like Duke Energy (NYSE:DUK), with its more than $1.6 billion in both secured and unsecured short-term debt, and nearly $40 billion in long-term debt, used to fund infrastructure upgrades, build new power plants, and acquire smaller utilities to expand. 

SolarCity just announced that it too will begin offering more secured debt to investors. But just as the company has turned much about the utility industry on its head, it's not asking big institutional investors or Wall Street banks to invest -- oh no. SolarCity is bringing its debt to Main Street.

Two big questions investors have to ask: Is this going to really bring in money to expand, or is it about publicity? And more importantly, will this give SolarCity a big boost against smaller competitors, as well as manufacturers like SunPower (NASDAQ:SPWR)? Let's take a closer look.

The details
SolarCity CEO Lyndon Rive, from the press release:

People want to support clean energy development. Customers are seeing the benefits of getting solar for their homes but they would like to participate in other ways as well. Previously, only institutional investors could participate in the financing of most solar assets. With our investment platform, we're hoping to allow far more individuals and smaller organizations to participate in the transformation to a cleaner, more distributed infrastructure.

While the press release is light on details, we can guess that both short- and long-term secured debt will be available to purchase, and that SolarCity will then use this capital to fund further expansion into new markets. And with the company forecasting to install almost twice as much solar capacity in 2014 as 2013, this new capital will be pretty important to the company's growth plans.

Scty Install

SolarCity residential system. Source: SolarCity

Why Main Street?
There are two schools of thought here. First, one can't help but wonder if the company was getting pushback from institutional and banking investors with its efforts to secure more cash for expansion. If that's the case, then proclamations that solar had finally "arrived" as a long-term challenge to traditional utilities like Duke, was premature, as the value of these assets may not -- at least right now -- carry as much value for securing cash for expansion as many thought. 

If that's the case, this plan to secure capital from Main Street may be a move of last resort, or simply a move to avoid a public share offering, diluting current investors (of which Musk is the largest.) 

Spwr Install

SunPower utility install. Source: SunPower

Competitive advantages
While SunPower's primary business is in manufacturing solar panels and system components, it does operate some direct sales, especially with larger customers like Toyota and Berkshire Hathaway subsidiary MidAmerican Energy, with whom it's building one of the largest solar arrays in the world, among others. It also does some leasing business, which is -- at least for SolarCity -- why selling debt can be important for expansion. 

Since the vast majority of SunPower's business is direct sales of systems to manufacturers, and some expansion of its leasing business, this isn't a major competitive advantage for SolarCity -- at least not directly -- especially when one considers that SunPower is controlled by Total SA, which has a 66% stake in the company. This large backing gives SunPower a significant financial backing that would probably make securing debt relatively easy if the company needed it. However, with plans in place to expand manufacturing capacity by more than 20% in 2014, and to use cash to do it, SunPower isn't in need of debt today.

When it comes to positioning itself against the utilities, the biggest benefit that this should give is simply funding continued growth. As things stand, the utilities in many ways need  for SolarCity to be successful. The grid is already stretched thin in many places, with the cost of building new power plants prohibitive. Adding capacity through solar -- which also produces the most when the grids are heavily taxed -- will give the utilities breathing room that they need.

However, at some point, the expansion of solar will become a threat to the utilities.

Final thoughts
Whether this plan will net more cash than publicity remains to be seen. Any way you slice it, the market certainly has a favorable view of SolarCity right now, and striking while the iron is hot makes sense. While not necessarily giving the company any material advantage over manufacturers like SunPower, which it does compete with in some cases, or over utilities like Duke, the additional liquidity -- if it does actually generate any -- will certainly help accelerate growth.

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Jason Hall owns shares of SolarCity. The Motley Fool recommends SolarCity. 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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