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1 Warren Buffet Business Just Revealed How Utilities Can Unlock the Power of SolarCity

Even on a good day when utility executives are in a chipper mood, they will probably still describe SolarCity (NASDAQ: SCTY  ) as a "nuisance". The company is the most visible representation of the distributed solar movement, and for many utilities it is a disruption of the business model they have become accustomed to over many years. Several utilities have taken up opposition to distributed solar, but one of Warren Buffets recent acquisitions, NV Energy, is welcoming SolarCity in to Nevada with open arms -- but not for the reason you may think. Let's take a look at what this Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) subsidiary is doing to go against the grain and explore why this may be happening. 

Netting the needed regulation

One rule that has allowed distributed solar to take off in certain parts of the country have been net metering laws. The most basic description of these laws is that they require electricity meters to run in both directions so that customers can sell any excess power production back to the grid. The details on these rules vary, and currently there are 14 states where rules are most favorable to net metering. 

One of the reasons that it has not taken off in Nevada is because there are certain restrictions on net metering that don't make it as attractive for small-scale installations like those found on residential buildings. 

Source: SolarCity Investor Presentation

Recently, though, SolarCity announced that it has begun to take orders for its residential and commercial solar systems in Nevada. It has done so because it plans to partner with NV Energy in what is known as its SolarGenerations Program. A previous version of this program actually gave upfront incentive payments for solar installations, and NV Energy is expected to reopen this program in August before SolarCity makes its first installations there. 

Wait, I thought utilities hated SolarCity

The benefit to SolarCity is pretty obvious: a new market that doesn't have much competition from other distributed solar companies in one of the most lucrative places to have solar installations. This map from the National Renewable Energy Laboratory charts the average annual solar radiation intensity across the US. It shows the state of Nevada -- especially the most heavily populated areas near Las Vegas -- as having some of the most attractive solar real estate in the country. 

Source: National Renewable Energy Laboratory

What this could mean is that systems in the Nevada region could potentially produce more power than the amount consumed by customers. Under Nevada state regulations, this would mean that these systems would not qualify for net metering rules -- but the partnership with NV Energy would actually allow SolarCity to sell that excess power to the regulated utility. 

At first glance, this doesn't seem to make sense for NV Energy at all. It would basically mean that these customers would be more than self-sufficient and the company would need to actually buy their excess electricity. But in this case, NV Energy probably isn't looking to sell its power to Nevadans anyways. It has its sights on a bigger client: California. 

California is in a bit of a quandary. More than 25% of the state's massive electricity demand comes from outside the state and continues to grow as its major nuclear power facilities shut down, and this imported energy represents more than 50% of the state's carbon emissions from power generation. So the state is making a concerted effort to purchase imported energy that comes from cleaner sources. For the past several years, NV Energy has been positioning itself to be one of the premier energy suppliers to California -- not just because it is a friendly neighbor, but because retail energy prices are 66% higher in California. NV Energy today owns a majority of the interstate transmission lines between California and Nevada, but it doesn't currently have the power generation profile to supply California with alternative energy. 

Source: NV Energy 10-K

This is where SolarCity and distributed solar come into play. Not only does this reduce the demand of NV Energy's own regulated business so it can send what solar power it's generating to California, but each customer could also be a potential supplier of power for the utility -- and, more importantly, power that comes with alternative energy credits. And here is the even better part for NV Energy: the company doesn't have to pay the development costs for this additional generation capacity. 

Putting it together. SolarCity nets an inside track in a new lucrative market, electricity customers get lowered electricity bills from SolarCity's installations, and NV Energy gets to sell electricity with alternative energy credits tied to it at a 66% premium to what it can sell it for in Nevada, and gets transmission fees in top of it. Everybody wins. 

What a Fool believes

The situation in Nevada is pretty unique; not every place in the country happens to have an energy-starved neighbor where selling wholesale power out of state is more lucrative than at regulated prices in state. What this does go to show, though, is that distributed power can be more than just a nuisance to utilities. Perhaps it's just me, but for some reason it doesn't seem coincidental that a Warren Buffett-owned utility company is showing how to make the best use of what many others consider a threat to its existing business model.

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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 May 11, 2014, at 5:56 PM, Solarexpert wrote:

    Unlock the power of SolarCity? Don't you mean unlock the power of Solar? SolarCity is just one of many solar installers serving the Nevada market.

    There are many dealers in Nevada that offer better pricing and higher performance products that are better designed for Nevada's hot climate.

    I do like your reasoning though, It makes perfect sense which is why we too are expanding our operations in Nevada.

  • Report this Comment On May 14, 2014, at 4:16 AM, Rayliu25 wrote:

    Hi Ronwiserinvestor.

    Using Solarexpert username now I see?

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