Tesla Motors' (NASDAQ:TSLA) Gigafactory isn't the only Gigafactory Elon Musk has been working on, as another of his major investments, SolarCity (NASDAQ:SCTY), revealed earlier this week. SolarCity signed a deal with the State of New York that commits the company to spend $5 billion in the state over the next 10 years in return for a massive $750 million subsidy from the state.

SolarCity's Gigafactory is a huge investment by both SolarCity and the State of New York on the future of solar, and it changes the company's business model dramatically.

Solarcity Rooftop Solar Installers

SolarCity workers install a residential solar system, which will be made with SolarCity's own panels within a few years. Image source: SolarCity.

What SolarCity is building
The gigafactory SolarCity is building will be a 1 million square foot facility in a development park called RiverBend in South Buffalo, New York. The facility will house equipment that will turn n-type monosylicon wafers into cells and then solar modules. 

Initial plans are for 1 gigawatt in capacity, primarily converting wafers into cells using Silevo's Triex technology and then assembling cells into modules. Management alluded to adding equipment further down the supply chain sometime in the future, but for now the key will be making cells and modules using Silevo's technology. 

Solarcity Solar Community Image

Employing 2,000 workers to install systems like those above is part of the deal with the State of New York. Image source: SolarCity.

The handout
What's unique about this deal is the structure of New York's subsidy. The state will actually both build the building SolarCity will be housed in as well as buy the equipment SolarCity designs for manufacturing. Construction costs allot for $350 million for the building and $400 million in equipment. SolarCity is responsible for cost overruns and has estimated that its capital expenses will be about $150 million.

In return for the $750 million investment, SolarCity has agreed to "spend or incur approximately $5 billion in combined capital, operational expenses, and other costs in New York during the 10-year period following full production," employ 1,460 high-tech jobs, and other vague provisions to boost economic growth. SolarCity will also employ 2,000 employees selling and installing systems in New York (which it would have done anyway). 

Presumably, another promised 1,440 contractor and supplier jobs, and most of the billions in spending, would come from materials and labor costs that go into building the panels themselves.

Most notable in the agreement is that SolarCity's cost for using the $750 million capital expenditure New York is making is a whopping $1 per year for 10 years with an option to renew for another 10 years. Yes, you can read it here: Rent on the $750 million investment could total $20 over the next 20 years.

To put this subsidy into context, with no direct benefit for the state for its $750 million investment, the subsidy amounts to $153,061 per job outlined in the agreement. 

Scty Storage Inverter Highrez

SolarCity's energy storage system built by Tesla Motors will also come from a highly subsidized plant. Image source: SolarCity.

Why this is a massive risk for SolarCity, New York, and Elon Musk
To me, the subsidy is shocking, but so is the risk that's being taken on Silevo's solar technology.

There's a reason solar companies don't build their manufacturing plants in the U.S. and a reason most solar companies that did in the 2000s went bankrupt. The cost structure for both capital expense (mitigated by subsidies) as well as labor is too high to compete in today's cost-competitive solar market. That background shows why the subsidies were necessary for SolarCity to be competitive manufacturing modules.

Maybe more importantly, investors need to consider that SolarCity is scaling a Triex technology that's unproven beyond a 32 megawatt pilot plant in a market littered with companies that have failed to scale new technology efficiently. There's also no guarantee that supply of n-type monocrystalline silicon will be abundant enough to meet demand by 2016 when the plant is expected to be operational. SunPower (NASDAQ:SPWR) uses this silicon and is expanding manufacturing with a new plant next year, and even Chinese competitors are moving to n-type monocrystalline for the lower degradation and higher efficiency the material provides.

But SolarCity is also in a unique position because it can no longer cost effectively import cheap solar panels from China (due to import tariffs) and wants to install a more efficient panel than commodity panels. It can't buy panels from efficiency leader SunPower because they're competitors in residential solar, so this left the Silevo acquisition as the best option, despite the risk.

It's just a good thing for investors that most of the financial risk falls on New York, because if it didn't the company would need hundreds of millions of dollars to complete the plant and run the risk of failing like others have done.

For the state's taxpayers, the deal may not be so sweet, and we only have to remember back to Solyndra to remind taxpayers how quickly a promising solar plant can become a ghost town. For everyone's sake, I hope history doesn't repeat itself this time around.

Travis Hoium manages an account that owns shares of SunPower and is personally long shares and options of SunPower. The Motley Fool recommends SolarCity and Tesla Motors. The Motley Fool owns shares of SolarCity and Tesla Motors. 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.