Earlier this week, I covered a majority of my recent conversation with SunPower (SPWR +0.00%) CEO Tom Werner, which can be found here. Today, I want to go over the company's growing leasing business and the difference between SunPower and its leasing rival SolarCity (SCTY +0.00%). Both companies are among the hottest in solar but SolarCity is now worth $1.27 billion more than SunPower despite not making a profit and investors should consider who can generate more value in leasing.
To give a little background, below are the statistics behind the leasing business at SunPower and SolarCity. SunPower only reports residential for some stats and you can add a little more than 50% to these numbers to approximate the commercial lease business based on a recent presentation. All numbers below are for the end of Q1 2013.
|
SunPower (residential only) |
SolarCity | |
|---|---|---|
|
MW Installed |
100 MW |
333 MW |
|
Customer Base |
16,206 |
57,416 |
|
Contracted Payments |
$541 million |
$1.22 billion |
|
Residual Value/Watt |
$1.75 |
$1.25 |
Source: SunPower and SolarCity earnings releases.
SolarCity clearly has a head start on SunPower in leasing but the number to watch is the residual value at the bottom of the table. This is the total value that should be generated by each company for each watt installed and SunPower thinks it has an advantage here, which was the basis for my questions to Werner.
Why should an investor choose SunPower over SolarCity?
SolarCity has definitely become a larger player in leasing but it gets supply from low-cost suppliers like Trina Solar (NYSE: TSL) and Yingli Green Energy, which we know it has contracted with in the past. Werner thinks this presents a risk for SolarCity long term (which I'll cover more in a moment) and allows SunPower to differentiate itself to both installers and customers.
Independent testing has shown that SunPower's high-efficiency panels degrade more slowly than Chinese commodity panels and will therefore generate more revenue at the end of a lease and also hold more residual value at the end of the lease. In the short term, SunPower and SolarCity will see similar benefits of their leasing businesses but SunPower's argument is that it will generate more value over the life of the lease.
This is important because tax equity investors, who finance the initial lease installation, are normally paid back very quickly leaving product risk on SunPower and SolarCity. When Goldman Sachs (GS +1.24%) signed a deal to invest $500 million into SolarCity projects, it's doing so with financing that will be paid off quickly, taking very little product risk. On the back end is where SunPower thinks it can generate $0.50 per watt in additional value at a lower risk than the Yingli and Trina panels that SolarCity uses.
The analogy Werner used to describe how investors will view this quality and efficiency difference was that of a used car. Over time, the retained value of a car became a big selling point for manufacturers like Honda and Toyota. These two companies rose to power in the auto industry in the '80s and '90s because quality and reliability have begun to matter for buyers, not just 10 years after the car was made but at the moment it was purchased. Most people don't look at solar power in the same way today, but Werner thinks this will evolve and SunPower's quality and reliability will eventually be a big selling point like it was for Honda and Toyota in the auto industry.
When will investors start seeing this higher residual value hit the income statement? It may take 20 years, which is a standard lease term. So, if you're in solar for a quick fix, SunPower might not be your cup of tea but if you have an eye on the long-term winners, that's where SunPower is making its case.
Cost of capital is key
The other differentiator Werner thinks SunPower has over SolarCity is in cost of capital. Total (TOT +0.00%) owns 66% of SunPower and the oil giant allows SunPower to borrow at lower costs than SolarCity, or at least that's the theory.
Despite billions of dollars in lease financing already by the two companies, we're still early in developing the lease business model and capital costs are only going down. The general thought is that SolarCity will do the first solar securitization deal later this year and SunPower will follow some time after that. Like in mortgages, securitization allows for lower capital costs than one-off financing for each project and this will be key for both companies.
If we bring capital costs back to the value of a lease, SunPower anticipates that 1% lower cost of capital will generate $0.40 more residual value per watt. So, cost of capital is key and SunPower thinks Total gives it an advantage over the competition.
Lease will be the dominant form of solar
At some point, it would make sense that the return on buying solar panels becomes so high that homeowners will just forgo the lease and finance solar on their own, right? Werner thinks that view isn't where the long-term market is headed and that lease will be the dominant form of financing in residential and commercial power because companies like SunPower and SolarCity can generate efficiencies that individual buyers can't. Here's another reason why cost of capital is so important because a good lease program will only be as valuable as its cost of capital.
Foolish bottom line
Leads in efficiency, quality, and cost of capital are why Werner thinks his company is best positioned to generate value in solar leasing. Another wildcard to throw into the mix is SunPower's massive dealer network, which could allow the company to expand into Europe as quickly as it grew in the U.S.
The next year will tell a lot about whether Werner's thesis is correct about the attractiveness of SunPower's business model, but the real answer to whether SunPower or SolarCity has leasing right may take 20 years to unfold. Long-term investors, can you wait that long to find out?
