SolarCity Corporation (NASDAQ:SCTY) is leaving Nevada, one of the sunniest states in the country, a shocking turn for one of the fastest-growing solar states in the country. A new ruling by the Nevada Public Utilities Commission (PUC) will take away the cost savings that drove rooftop solar growth in the state, and it could have a long-lasting impact for SolarCity.
In a move that mirrors SolarCity's pessimism, Sunrun (NASDAQ:RUN) may be forced to slow, or even shut down operations in Nevada, and Vivint Solar has said the move will keep it from reentering the state. The Nevada PUC's decision is big, and it could create a long-term problem for residential solar companies.
NV Energy turns on solar
Rooftop solar has always been driven by a policy structure known as net metering. In most states, homeowners can send any extra solar electricity they create during the day back to the grid and only pay for the net electricity they consume. In effect, the customer is paid the retail rate for electricity they produce.
But net metering is under attack in states like California, Arizona, and Wisconsin for being too generous to solar installers. For the most part, the solar industry has been able to hold off attacks and keep the policy in place, and that was the hope in Nevada as well. The state's net metering structure had a cap of 235 MW of residential solar, which was hit earlier this year, and the PUC then had to decide if it was going to extend net metering, or put another policy in place.
This summer, NV Energy, Nevada's largest utility and a subsidiary of Berkshire Hathaway (NYSE:BRK-B), had asked for a rate structure that included a monthly service charge, a demand charge (based on a home's peak demand), and an electricity charge. For homes with solar, it proposed paying 5.5 cents per kWh for the electricity they send to the grid, well below the 11.6 cents per kWh that customers are paying for electricity. Make no doubt about it, the proposal NV Energy made was intended to kill rooftop solar in the state.
These kind of proposals aren't uncommon, but the solar industry can usually fight them off and keep net metering intact. But the Nevada PUC quickly passed a rate structure that increases customers' fixed service charge and lowers the compensation for solar to wholesale rates for electricity. The change will be phased in over four years; the exact charges aren't yet defined, but this is going to kill rooftop solar in the state.
Where this gets crazy
The most surprising part of this ruling is that it's retroactive. So, customers who were sold solar systems with a lease or power purchase agreement in the past won't see the savings that companies like SolarCity and Sunrun promised them. The residential solar industry in Nevada is thrown into chaos overnight.
Solar installers will definitely fight this ruling and they could win in court, but if it stands, there are a lot of unknowns. Will they stick customers with the higher cost associated with the new policy? Will they renegotiate power purchase agreements, potentially losing money on these installations? Will customers stop paying solar bills, forcing solar companies to take systems down?
This is a complete unknown space for the solar industry, and how customers and companies react could tell us a lot about how they view their relationship with each other.
The impact on solar is big, but not devastating
Nevada should be a huge residential solar state given its solar resource, but it's not, even under net metering. SolarCity says it's not in the company's top five states, and while Sunrun doesn't break out its exact exposure to Nevada, it does say that a majority of its installations are in California. GTM Research said Nevada is just the 10th largest state for residential solar capacity; so losing this one state won't be devastating.
The bigger problem will be losing a potentially massive growth market. GTM Research estimates that Nevada's residential solar installations quadrupled between the second and third quarters of 2015. Now it might go to almost zero overnight.
Is this a sign of things to come?
What's troubling for SolarCity, Sunrun, and Vivint Solar isn't that Nevada's rooftop solar market may be decimated. It's that utilities may have found a formula to slow the growth of rooftop solar. They've tried to attack rooftop solar with fixed charges and/or changes to net metering in the past, but this is the biggest success they've had (excluding Hawaii, which is a different case entirely).
If states across the country see net metering as too generous to solar companies and change rate structures to include fixed charges and lower tariffs for solar energy sent back to the grid, it could make rooftop solar less economical in many places. That's what solar companies fear, and it's why they're fighting back in Nevada so rigorously. They don't want this to begin a domino effect that undermines solar across the country.
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Travis Hoium owns shares of Berkshire Hathaway. The Motley Fool owns shares of and recommends Berkshire Hathaway and 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.