Negative Solar Industry Trends Could Wind up Helping SolarCity Corp

Utilities are fighting hard to change rules that allow customers with rooftop solar installations to sell power back to the grid. Pinnacle West (NYSE: PNW  ) "won" an important case in Arizona that will make future rooftop solar installations in the state more expensive. That should be bad news for companies riding the solar wave, like SolarCity (NASDAQ: SCTY  ) , but is it?

Big in the sun
Electric utility Pinnacle West serves over a million customers in Arizona. It's sunny locale has led to its APS subsidiary's position as the number four utility player in the solar generation space (740 megawatts at year end 2013). Clearly, the company is taking advantage of the renewable power riches it has at its disposal.

But that same sun has allowed SolarCity to turn Pinnacle West customers into competitors. Over the past three years, Arizona has seen over 365 megawatts of rooftop solar power installed. That's the third highest total in the nation. A big part of that is net metering, which are laws that allow customers with rooftop solar to feed energy back into the grid -- and get paid for it.

(Source: BrokenSphere, via Wikimedia Commons)

Only, by utility estimates, that's asking other customers to subsidize those with rooftop solar. Why? Because net metering gives rooftop solar owners a free ride on the grid that everyone else is paying to maintain. That's why Pinnacle West was happy to hear that the Arizona Corporation Commission ruled that the utility could charge such customers, "$0.70 per kilowatt" starting last January.

To put that in perspective, the typical rooftop solar customer will have to pay about $5 a month for the net metering privilege. Pinnacle West was hoping for 10 to 20 times that, so it was the direction of the decision that was most satisfying, not the financial outcome. And the ruling only applied to future installations, which is half a victory anyway.

The desired effect
Still, according to SolarCity CEO Lyndon Rive, "[Arizona] has seen a decline in solar adoption." That's pretty much what Pinnacle West wanted. Even better, the ruling has caused smaller players to drop out of the market. One solar installer that declared bankruptcy told the Arizona Republic that, "Small Businesses can no longer compete." SolarCity, for comparison, "immediately cut prices to compensate."

SolarCity's Rive explains succinctly, "unless you have significant economies of scale, it's really hard to offer a customer a value proposition that makes sense." But he adds, "we do have economies of scale, and our value proposition is still very attractive to customers." He claims that the company's bookings in the state have "never been higher." SolarCity has no plans to stop investing in Arizona.

(Source: Oliver Herold, via Wikimedia Commons)

In other words, this solar industry loss is looking like a win for SolarCity. That's why the company has been spending so heavily to build scale as quickly as it can. So while it's lost more than $9 a share over the last four years, it's also on track to build its rooftop solar portfolio to nearly a gigawatt of power by the end of the year. By utility standards that's small, but for a solar upstart it's huge.

The fight continues
Pinnacle West's Arizona "win" was just the first battle in what will be a long war. Other big players are waging the same fight in their home states. And while any added expense is going to make installing rooftop solar less desirable, it's most likely the smallest players that will feel the biggest pinch. That will leave industry big wigs, like SolarCity, a less congested playing field.

Utility regulation is a slow moving process, and there's no way to tell if Arizona is a watershed moment or just a fluke. However, if you own SolarCity or any utility you need to keep a close eye on the net metering issue. That said, with notable scale already built, SolarCity could actually benefit from more "adverse" rulings like the one in Arizona.

Why does Warren Buffett love this energy stock?
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

Read/Post Comments (7) | Recommend This Article (2)

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 25, 2014, at 6:17 PM, ronwiserinvestor wrote:

    "unless you have significant economies of scale, it's really hard to offer a customer a value proposition that makes sense." That's utterly ridiculous. Arizona Solar .com is a smaller player and we blow SolarCity's leased system cost out of the water.

    For example, a typical 4,75 kW leased system with Chinese made solar panels will cost you about $117 per month in lease payments or $28,080 after 20 years worth of lease payments.

    The same 4.75 kW purchased system with American made solar panels from Arizona Solar will only cost you about $11.176.

    Economies of scale, I don't think so.

  • Report this Comment On May 25, 2014, at 7:05 PM, joes123 wrote:

    What we need is some neutral party engineering figures. Putting energy back into the grid actually saves the utility company's money. The energy would theoretically travel only a short distance to a neighboring home, thereby, eliminating the long distances to the power plant. The utility grid and its costs associated are based on the amount of power (watts) travelled over a distance. The longer the distance the higher the costs of cabling and increased energy losses. Also, solar power generation works at the best time, when the grid is seeing the highest demand, usually on sunny days. Solar power kicks in and helps the grid by lowering the demand and even pumping extra energy back into it.

  • Report this Comment On May 26, 2014, at 12:13 AM, geoffhiker wrote:

    Net metering shouldn't be free and the utilities often ask for too much to do it. It's good to see Arizona found a middle ground. If customers get paid the same rate that it costs utilities to get power then the utility companies won't care who they purchase power from. The infrastructure has to be paid for. I'm long GTAT, SPWR and SCTY.

  • Report this Comment On May 26, 2014, at 11:03 AM, dlwatib wrote:

    It seems premature at this point for utility companies to be demanding an end to net metering. We've got a long way to go before distributed solar power installations become a significant part of the grid. A free ride is appropriate at this point. In the future, solar users can install an energy storage system and disconnect entirely from the grid so they'll no longer be using the grid at all. Meanwhile the utility companies are still making hefty profits.

  • Report this Comment On May 26, 2014, at 11:49 AM, speculawyer wrote:

    I can't believe the utilities thought $100/month was a rational number for the 'privilege' of connecting to the grid. That is more than my normal electricity bill! The utilities need to be slapped down for that kind of greed . . . they wanted solar PV people to pay MORE if they generated electricity than if they used electricity.

  • Report this Comment On May 27, 2014, at 2:07 AM, okiedodge wrote:

    The real issue here is an antiquated billing model designed by investor owned utilities.

    The Utilities would get better results by partnering with us solar bottom feeders instead of fighting us.

    Its called a monopoly.

    This year, cost became of little importance to me. Becoming independent from the electric company did. I don't mind paying a "grid fee" to contribute my fair share of the maintenance of the grid. But subsidizing their profit through legal means is just wrong.

    Solar is the future. Electric companies know this. It IS the reason they are fighting it now.

  • Report this Comment On May 28, 2014, at 11:07 AM, mprsolar wrote:

    Pinnacle West - You have over a million customers. You are going to be fine.

    This story sounds hypocritical from the company who is 4th in solar generation. You can't let any of your customers get on the sun train without paying each time?

    Free ride?? Nothing is free. Last I checked these products are extremely high quality and when you own solar there upfront costs or loans required to get your system purchased and installed properly. It is generally the cost of a car when you own it though it lasts for decades. Why should they pay more for updating and stabilizing your infrastructure? Solarcity touts free solar though your in a 20 year contract for a reduced bill and you don't own anything. They make there business on people who like simplicity. Again nothing free.

    Its bad business and bad karma to push out local guys and I hope they come back and find a way. Local installers tend to give the best deals :)

    At the end of the day your state is a dessert so adapt to solar and lets clean and set things up the right way for the future.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2966051, ~/Articles/ArticleHandler.aspx, 9/3/2015 5:21:23 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Reuben Brewer

Reuben Gregg Brewer believes dividends are a window into a company's soul. He tries to invest in good souls.

Today's Market

updated 8 hours ago Sponsored by:
DOW 16,351.38 293.03 1.82%
S&P 500 1,948.86 35.01 1.83%
NASD 4,749.98 113.87 2.46%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/2/2015 4:04 PM
PNW $58.01 Down +0.00 +0.00%
Pinnacle West Capi… CAPS Rating: *****
SCTY $49.42 Up +3.26 +7.06%
SolarCity CAPS Rating: ****