Negative Solar Industry Trends Could Wind up Helping SolarCity Corp

Last year Arizona decided to make installing solar power more expensive; so how is that good news for SolarCity?

May 25, 2014 at 4:15PM

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.

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Reuben Brewer has no position in any stocks mentioned. 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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