Solar power is finally having its day in the sun, if you can pardon the pun. Installers like SolarCity (NASDAQ:SCTY) are using new sales models and taking advantage of government support to expand quickly. However, the fact that solar growth has been concentrated in just five states is bringing the impact of solar's growth to the fore more quickly than the nascent industry might like.
The big one
When it comes to renewable power, you have to go where the power is. And for solar that generally means installing in sunny states like California, Arizona, and Hawaii. In fact, California saw solar installations roughly double last year, which means that half of the state's solar power was installed in 2013.
To give some perspective to that, California installed over 2,700 megawatts of solar power last year. That makes Arizona, the number two installer, look like an also ran with just 700 megawatts. However, the trend is clear, solar is gaining traction and that's where companies like SolarCity come in.
This rooftop solar installer is offering homeowners and businesses a deal that's hard to beat. SolarCity pays the upfront costs and leases the system back to the home or business on whose roof it sits. The benefit is a lower electric bill (as much as 15% lower), green bragging rights, and a limited investment.
This helps explain why SolarCity watched its installed base grow from 30 megawatts to nearly 600 megawatts between 2010 and 2013. It's expecting to nearly double that number by the end of this year. The company is clearly working hard to build out its solar footprint. And that's a good thing.
One of the chief benefits of having a solar installation on your roof is using the power. But most rooftop systems make too much power during the day. Government rules allow that power to be sold to the local power company at advantaged rates. This model is called distributed power. How big a deal is it? Edison International (NYSE:EIX), which operates in California, says that it costs about $0.08 to generate a kilowatt of power but it has to pay rooftop solar owners $0.28.
That's a big deal and helps explain why Edison International is working with regulators to stop what it considers generous subsidies. Although net metering only accounted for 1% of the company's power sales last year, that math is obviously a problem if solar keeps getting bigger. What Edison International wants is something akin to Arizona, which has allowed a monthly fee to be charged to customers involved in net metering.
That was a big win for Pinnacle West (NYSE:PNW), which operates in the state. However, Pinnacle West was looking for much more than the roughly $5 a month charge that got approved. Still, the trend is what was important. In fact, a total of four states are considering ways to charge net metering customers for their reverse use of the electric grid.
That's why scale is so important for SolarCity. After the Pinnacle West net metering win in Arizona, solar power installations took a hit. But SolarCity was able to cut prices to keep demand up. How could it do that? Between mid 2012 and the end of 2013, SolarCity was able to cut its cost per watt by nearly 40%. Scale was what allowed that impressive improvement.
The fight rages on
So SolarCity, which is losing money, is under the gun to get big fast. It's doing a great job of it. That said, utilities like Pinnacle West and Edison International, located in two of the top solar states, won't stop fighting until they get a better net metering deal from regulators. On that front, Arizona is more likely a starting point than an end point.
If you are interested in the rooftop solar space, SolarCity is a great way to get involved. And it gets even better with every new installation. However, it's looking more and more like a utility itself, and that hasn't gone unnoticed. Expect more push back from the utility incumbents wherever SolarCity operates.
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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.