A Beginner's Guide to SolarCity Corp

Lyndon Rive, Peter Rive, and Chairman Elon Musk are the leaders of one of the most exciting companies today. SolarCity (NASDAQ: SCTY  ) allows you to harness the power of the sun. It will save you money, its solutions help our planet, and if you invest in it, you have the potential to generate an exceptional return in the process. 

So let's start with the basics. Before you commit cash, it's important to know how a business works, why it provides value to its customers, a little bit about its competition, and the size of its market. Let's also take a look at one of SolarCity's biggest competitors, both in residential and commercial solar: SunPower (NASDAQ: SPWR  ) .

What you can expect as a customer
Once you set up a consultation, a rep will come to your home, design a system that works best for you, and takes care of all the red tape. You don't have to worry about permits, inspections, and getting all the rebates and incentives you're due.

Once the installers set you up, the panels start working their magic. The system turns direct current power from the panels into alternating current power (the type of power used by your home) using an inverter. That AC power is then sent to your breaker box and is used by everything running in your home.

Now that the sun is powering your pad, you will have a surplus of energy. Your electric meter keeps track of everything your system produces. You will earn credits from your electric company, which will offset most (if not all) of your electric bill. SolarCity also has some pretty cool tech that keeps an eye on your system to ensure it's working properly and that you're using your energy efficiently.

Source: company website

How it provides value
SolarCity works because it provides clear value for its customers. If you choose to lease a system (you can also buy it outright) you have no initial costs for installation. Zero, zilch, nada, none. It's also a snap to transfer to whomever buys your home. SolarCity estimates that if you're paying $0.18 per kWh, your new bill will be about 20% less, or $0.15 per kWh. Over time, do the math on how much you can save.

It's tough to find a fault with residential solar. It's clean, it's renewable, and it can be deployed on a case-by-case basis, so it doesn't take massive amounts of infrastructure to get it rolling. In an imperfect world, it's about as perfect a solution as we're going to get.

A formidable foe
SunPower has a residential solar business that is growing in leaps and bounds. It also builds industrial solar farms and other power generation facilities on a larger scale than SolarCity. But the main difference between SunPower and SolarCity has to do with their respective business models.

SolarCity doesn't make panels -- it gets them from sources like Yingli Green Energy. SunPower is more vertically integrated, in that it makes its own panels, then has a network of local contractors install its residential systems. In essence, SolarCity acts as a middleman, while SunPower is more of a one-stop shop. 

Though they're more expensive, SunPower claims to make the highest efficiency panels available. And believe me, these panels are durable. From 2006 to 2012 only 27 panels, of 1 million produced, have needed to be covered by warranty. 

The panels SolarCity uses are effective but not as efficient. Depending on your needs, that might not matter. If you only need a 4kW system and have plenty of space on your roof, why would you need an ultra-efficient, top-of-the-line panel?

Source: SunPower

The market is robust
SolarCity's addressable market is huge. There is about 377,000 gigawatt hours, or GWh, of electricity sold in the United States each year. Its current blended electricity price is around $0.14 -- once you crunch the numbers that works out to be around $63 billion.

SolarCity is targeting 1 million customers by 2018, which is a 70% compounded annual growth rate from where it is today. Sound impossible to achieve? SolarCity has achieved a compounded growth rate of 99% since 2009, so this target isn't too much of a stretch. 

Foolish final words
Right now, SolarCity is a story stock, run by some truly exceptional entrepreneurs. Admittedly, you have to have some vision to see its potential and some courage to invest. But as it continues to do business and build out its scale, it could generate some serious cash flow.

It claims there are more than 42 million buildings in the 17 markets it operates in. A 1 million customer penetration will only cover about 2.4% of those markets. The point is SolarCity is just starting to scratch the surface -- its future and its potential are tremendous. If you're looking for an environmentally conscious company with loads of potential, SolarCity might be right for you.

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Read/Post Comments (12) | Recommend This Article (11)

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 April 12, 2014, at 11:35 AM, ronwiserinvestor wrote:

    SolarCity owes much, if not most of their success to the fact that they were first to market with a $0 down financing (lease) product during a time when virtually no solar financing model of any kind was available.

    That all recently changed when $0 down FHA and $0 down PACE financing, both with tax deductible interest payments hit the scene. (solar leases and PPAs do not offer tax deductible interest).

    Now that both of these no money out of pocket solar financing options as well as others such as $0 down LightStream and $0 down Comerica Bank financing are available for residential solar projects, smaller players as well as even Mom & Pop dealers across the country are not only able to complete, but even offer much lower pricing on high quality products than the pricing that is offered by SolarCity as well as other major players.

    The growth in market share for solar leases and PPAs has fallen flat. More and more consumers are opting to keep the 30% federal tax credit and applicable cash rebates for themselves while taking advantage of tax deductible interest payments and owning their much lower priced, virtually maintenance free solar system for a much greater return on investment than any lease or PPA.

    The reign of the solar lease and PPA is about to end and $0 down solar loans with their tax deductible interest payments coupled with sub $3.00 per watt before incentives pricing will dominate the PV market moving forward.

  • Report this Comment On April 12, 2014, at 4:46 PM, oTeslaManiax wrote:

    A milestone for solarcity.

    http://blog.solarcity.com/2014/04/

  • Report this Comment On April 12, 2014, at 10:03 PM, fool1953 wrote:

    Why would I want people putting this stuff on my roof and inverters on my property. I use the typical 800 kw-hrs per month of electricity on average for a single family home. I only pay an average of about $90/ month of electricity. (our electric cost is 8.8 cents/kw-hr) plus you need special equipment to run in parallel with the utility, more junk I don't need on my property. Might work better for homes in Arizona, California and Florida where there is more sunshine. Especially California because their electric rates are so high. I don't know it might work but once again I am scared this is another scheme to cause massive increases in something that the average working guy has to buy. I am impressed that first solar is such a profitable company but I didn't see a mention of them. Elon Musk is quite a man if anyone could make this technology work profitably it would be him. Good luck to all.

  • Report this Comment On April 13, 2014, at 9:50 AM, oTeslaManiax wrote:

    China is the clear leader in solar deployment and progressing rapidly towards renewables.

    http://cleantechnica.com/2012/12/13/chinas-new-solar-target-...

    The oil rich exporter Arab countries have even bigger solar deployment plans.

    http://www.arabnews.com/news/463333

    Electricity consumption by countries:

    http://en.wikipedia.org/wiki/List_of_countries_by_electricit...

  • Report this Comment On April 13, 2014, at 11:34 AM, oTeslaManiax wrote:

    SolarCity reaffirms adding 1/2 a Gigawatt in the US in 2014.

    http://www.greentechmedia.com/articles/read/SolarCity-On-Tra...

  • Report this Comment On April 13, 2014, at 4:08 PM, WaMike wrote:

    Hi Ron,

    Thank you so much for your thoughts, you clearly have spent some time thinking about SolarCity and its PPA model. The cool thing about SolarCity is the variety of PPA plans it offers to its customers. You can pay as you go, you can have a custom plan and only pay for what you produce, you can pay up front for all the power your system will produce over a 20 year period, or you can buy your system outright. I recently received a quote from SunPower and it does not yet offer that kind of flexibility. I'll be writing about my experiences with both SolarCity and SunPower in my next article.

    Thanks again for sharing your thoughts,

    Wade

  • Report this Comment On April 13, 2014, at 4:15 PM, WaMike wrote:

    Hi there Fool1953,

    Thanks for your comments!

    If you're only paying $0.088 per kWh, then you are definitely not a candidate for solar. I live in CT and I'm currently paying $0.188 per kWh. If I chose to go with Full Pre Pay Plan (PPA), I would be able to get that cost down to about $0.066 per kWh. As you can imagine, that savings would make a difference for me and my family.

    So while it may not make sense for everyone, it definitely makes sense for some.

    Fool on!

    Wade

  • Report this Comment On April 13, 2014, at 4:25 PM, WaMike wrote:

    TeslaMania,

    Thank you for the awesome additions to the discussion, they're greatly appreciated!

    Call me Captain Obvious, but judging by your name you must be a fan of Tesla. Did you know this was coming out?

    http://www.solarcity.com/residential/energy-storage.aspx

    Very exciting times indeed!

    Wade

  • Report this Comment On April 13, 2014, at 7:00 PM, oTeslaManiax wrote:

    Wade,

    Thank you for your article. It sure is an exciting time for change. I think that big changes are coming to our energy and transportation industry. My alias proudly shows I am bias and support Tesla :)

    I think we all know how difficult it is to make changes and to shift paradigms. It takes tremendous social, political, and financial support. Change is not what happens to us. Change comes from within us... one self is all it takes.

    I look forward to your next article.

  • Report this Comment On April 14, 2014, at 11:24 AM, kernel101 wrote:

    Hi Wade,

    Thanks for the article. I would like to understand better the economics for SolarCity. From my calculations, I don't get nearly $1.50/watt or so, they are booking as "retained profit"..

    Here are my assumptions: (I will discuss them below)

    1. Total residential cost per watt: $3.50

    2. PPA is fixed @ $0.15 kwh (utility pays fixed rate for 20 years)

    3. One watt generates 2000 kwh per year.

    4. Discount rate is 5%.

    With these assumptions, the NPV of the 20 year cash flow is $3.74. Therefore, you get profit of $0.24 per watt (in NPV terms, 5% discount).

    One watt generates about $0.30 of electricity per year, so your unlevered return is about 8.5%. To pay off a 20 year loan with 5% rate, you would need to make 8% annual payment. So you have about 0.5% annually of "retained value" or about 1.75c per watt per year ($3.5*0.005%).

    I've posted more on the SCTY message board:

    (is there a way to link to a MF board post?)

    http://boards.fool.com/economics-of-solar-where-is-150w-prof...

  • Report this Comment On April 14, 2014, at 9:16 PM, oTeslaManiax wrote:

    I think that most people on this forum are not accountants or energy industry professionals. It is probably best to look at the company prospectus or contact the company's investor relations department to get a detailed answer of retained value calculations. There are many factors to be considered in the levelized cost of energy and future value of a power source. There are costs in operation and maintenance, carbon capture costs, cooling costs, ongoing rising fuel costs, repair costs and replacement costs, carbon tax, various federal/state level tax incentives for various types of power generation plants. In general photovoltaic is possible now due to the drop in capital cost and forecasted declining capital cost, lower installation cost, lower financing cost, reduced operational cost which should all improve retained value in the future. The primary reason to increase renewable energy generation is climate change. The cost of climate change on the economy is a very difficult subject already not including climate change as an environmental issue. Perhaps we should look to Germany and China to understand how they are able to control costs.

  • Report this Comment On April 15, 2014, at 12:16 PM, TMFFlushDraw wrote:

    @kernel101

    The rate of $0.15 isn't constant over 20 years. It typically rises about 3%, which SCTY says is what the average rise in electricity rates is (historically true, today questionable).

    That should change your numbers drastically.

    Travis Hoium

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