SolarCity (NASDAQ:SCTY.DL) is one of many solar installers creating big headaches for Hawaiian Electric Industries (NYSE:HE). That's because high electric prices in the island state have led so many utility customers to embrace solar power that Hawaiian Electric's systems can't handle it. But SolarCity sees the long-term implications of this problem and it wants to help be a partner in the solution.
Too much of a good thing
Solar power is a wonderful thing in a state that has plenty of sun and that has to import virtually all of the fuel it uses to generate electricity (mostly in the form of expensive, dirty-burning oil). That's why one in nine homes in Hawaii had solar power installed by the start of 2014, according to the Solar Energy Industries Association.
Because Hawaii is a collection of islands, the rooftop solar penetration rate varies by island. But in some areas it's as high as 20% -- well beyond the rates found elsewhere in the United States. It's one of the reasons why Hawaiian Electric, which has a near monopoly on the Hawaiian power market, started slowing down the connection of rooftop solar systems last year. It's grid just wasn't prepared to handle a doubling of solar installation each year between 2008 and 2012.
The impact on the solar industry in Hawaii has been notable, with solar permits falling drastically after Hawaiian Electric pressed on the brakes. While small players -- mom and pop installers -- may see this as a bad thing for their immediate business, larger players like industry giant SolarCity see it as a bad thing for the entire industry. Why? Because Hawaiian Electric's systems are the stress test that shows how hard it will be for the rest of the country to adjust to a rapid increase in rooftop solar.
Lending a helping hand
SolarCity teamed up with the U.S. Energy Department's National Renewable Energy Laboratory "to address operational issues associated with high degrees of distributed solar penetration on electrical grids," it said in a press release. The work "includes collaboration with the Hawaiian Electric Companies."
According to SolarCity's co-founder and chief technology officer Peter Rive, "SolarCity is committed to ensuring that solar is an asset to grid operators." What's most impressive, however, is that Hawaiian Electric has already started to loosen up, allowing more rooftop solar interconnections because it has "already seen such promising initial test results."
This is far from SolarCity being generous, however. This is a virtual necessity for the country's largest solar installer. Although working off of a small base, SolarCity's customer count has grown at more than 100% annualized since mid-2012. It's target is to hit one million customers by mid-2018, which will require annualized growth of nearly 70% between now and then. Note the slow down.
It's a whole lot easier to double your customer count every year when you have 30,000 customers (second quarter 2012) than when you have 170,000 customers (third quarter 2014). With around a 36% share of the rooftop solar market at midyear (the company claims to have installed more solar than the next 50 competitors combined in the second quarter), SolarCity is doing a great job of leading the market. But success like that will just make the company's future growth harder to achieve.
The last thing SolarCity needs is utility industry headwinds getting in the way. And that's exactly what Hawaii shows is likely to happen if SolarCity doesn't get out in front of the problem. And it's a big problem because the time for building a leading brand is now while the government is still offering incentives to help offset the costs of solar. Solar costs are, indeed, falling quickly. But by the time they drop enough for mass adoption, someone will already have grabbed the leading industry position.
SolarCity looks like it's that someone. And for good reason: It estimates that reaching one million customers will create an annual revenue stream of roughly $1 billion. Those revenues will be contracted for "decades" into the future, creating a powerful, and hopefully profitable, annuity-like business.
Helping out in Hawaii, then, is a no-brainer and well worth the effort. Because utilities successfully integrating rooftop solar into their grids is likely to be so important to SolarCity's long-term plans, however, you should keep a close eye on Hawaii. If things go well, SolarCity's aggressive customer growth goals are within reach because utilities will be able to handle the solar influx. If not, SolarCity could have more trouble meeting its long-term goals than the market expects. And the market doesn't like to be let down.
Reuben Brewer has no position in any stocks mentioned. 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.