Yesterday I covered an introduction to SolarCity's (NASDAQ:SCTY.DL) business and how the company generates value for shareholders. Today, I'd like to cover how the company is growing and what new developments investors should watch for in the future.
An energy delivery company
When I talked to SolarCity executives recently, I found it interesting that the company doesn't consider itself a solar installer, instead thinking of itself as an energy delivery company. Instead of just installing solar panels on a roof, the entire experience of buying solar, maintenance, monitoring, and energy storage is part of what SolarCity is selling.
This is an important distinction, because new products like energy storage and securitization will play key roles in building a competitive advantage in delivering energy. At the end of the day, if SolarCity can deliver a kW-hr of solar energy or stored energy for less than the grid it should be able to sell that product to customers.
This isn't unlike the way SunPower (NASDAQ:SPWR) executives talk about their company, and these two clearly see more value in providing energy as a service than building an installation and moving on. It's an important distinction from manufacturers like Trina Solar, Yingli Green Energy, or JA Solar, who compete to sell panels but don't have the same incentive to offer a suite of services.
Solar power as a service
What differentiates SolarCity from competitors like SunPower, Sunrun, or Clean Power Finance is that they sell and fulfill the full energy services themselves. From the sale to maintenance to renewal of leases or new product offerings, it's the same company offering the energy service.
Conversely, SunPower owns the upstream supply chain, but works with partners to install and service distributed solar installations. Sunrun and Clean Power Finance also don't own the trucks that do the work.
This gives SolarCity's customers one point of contact instead of a more complex network. Other companies will argue that owning the supply chain the way SolarCity does is more efficient, but SolarCity's growth and gains in market share prove that it has an attractive product offering in today's solar market.
The advantages of securitization
The other thing that SolarCity currently does better than anyone else is tap into financing for residential and commercial solar installations. This year it lined up hundreds of millions of dollars in tax equity financing for new solar projects, including a $500 million deal with Goldman Sachs. Tax equity financing is used for the first few years of a solar project's life to capture tax advantages, but then ownership transfers back to SolarCity, which is why securitization is such a big deal.
Earlier this year, SolarCity sold $54.4 million of bonds secured by solar lease payments for a 4.8% interest rate. This was the first securitization of distributed solar payments, and sets the stage for the next generation of financing.
In 2017, the investment tax credit will fall from 30% to 10%, and suddenly the tax equity financing portion won't be so important. Instead, being able to quickly and efficiently finance solar installations will become more important -- and that's why offering securitization now and building a record with investors is so important. I also think this could be a pathway to offering securitized solar loans in the future, which would be another financing innovation.
The goal for SolarCity is to have the lowest cost of capital in the industry, which would allow the lowest cost of each kW-hr of energy produced. If leasing solar equipment continues to be the dominant product for the residential industry, this low cost of capital will be key to success.
Building a path to solar domination
What SolarCity has done is build the largest and most efficient sales, installation, and financing network in the industry. It has a first mover advantage by building a strong brand name and customer loyalty. With installations expected to grow up to 90% next year, the company is set up to gain share again and solidify its dominance in distributed solar.
Fool contributor Travis Hoium manages an account that owns shares of SunPower and personally owns shares and has the following options: long January 2015 $5 calls on SunPower, long January 2015 $7 calls on SunPower, long January 2015 $15 calls on SunPower, long January 2015 $25 calls on SunPower, and long January 2015 $40 calls on SunPower. 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.