According to the U.S. Energy Information Administration, 2013 solar power installations will more than double solar capacity in the United States. That's big news for solar but just a blip in the energy industry since the solar power added represents just 4% of the year's newly built capacity. That's why new business models, like the one being taken by SolarCity (NASDAQ:SCTY.DL), may make more sense over the long term.
The big add
Two "massive" solar projects are set to double U.S. solar capacity. The Solana plant in Arizona produces 250-megawatts, or MW, of energy and the Ivanpah plant in California will produce 391MW. That's a grand total of 641 megawatts of power. For comparison purposes, Southern Company's (NYSE:SO) Kemper plant will produce 582MW once it's complete.
While the solar projects are environmentally friendly, they only work when the sun is out. That's a problem since people consume electricity 24 hours a day, seven days a week. Kemper will be able to run constantly. And, although it's a coal plant, Southern is using a suite of technologies that will make it the cleanest coal plant around -- capturing "at least" 65% of the plant's carbon dioxide emissions.
It may seem odd to compare a pair of solar-power facilities to a similarly sized coal plant, but that's the competition that renewable energy must deal with. Add in natural-gas fired plants and solar's "big" advance looks even less impressive. Southern, for example, has increased its use of natural gas from 16% of its generation capacity to 47%. While renewable sources like solar have a place, the technology isn't advanced enough to fully displace its competitors.
That's where new models come into play. SolarCity installs solar systems on customer roofs. It then can sell or lease them back to the building owner or simply sell the owner the power the solar system generates. Any one solar installation is tiny, but as SolarCity builds out its portfolio it is slowly building itself into an electric utility. The company expects to have around 500 megawatts of capacity by the end of 2015.
The benefit of this model, however, is that it uses existing infrastructure -- e.g., buildings and homes -- in a new way and turns its customers into partners with long-term supply agreements and leases. One big SolarCity customer is Wal-Mart Stores (NYSE:WMT), the largest retailer in the country with thousands of rooftops.
So far Wal-Mart has only installed a couple hundred solar systems, but that puts it well ahead of companies like Costco and Walgreen that are going down the same path. And SolarCity has the pleasure of helping Wal-Mart as it continues to build out this system. SolarCity also has deals with other companies looking to produce their own power and home builders offering rooftop solar systems as a custom add on.
And SolarCity is part of the utility build out, too. For example, while Southern is putting the finishing touches on its Kemper coal plant, SolarCity just inked a deal to build a utility solar system in Hawaii. The 15-megawatt system is small, but shows that SolarCity can count on growth beyond the Wal-Marts and environmentally concerned "mom and pops" of the world.
A stealthy fighter
While Solana and Ivanpah are important projects, they are stuck in the old utility world that's dominated by utilities like Southern Company and its coal and natural- gas plants. That's an uphill battle that will take years to fight and it's too soon to tell if victory is achievable.
SolarCity, which is still losing money as it builds out its model, has a chance to break that mold. It is taking what is still just a niche option and spreading it across the country in a way that reaches down and touches individuals at every level of life. That's a playing field that coal and gas can't touch, and it's one that could lead to years of growth.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale, SolarCity, and Southern Company. The Motley Fool owns shares of Costco Wholesale 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.