The solar industry is changing so fast that quarter to quarter we can see changes in how companies are running. In the last two quarters alone, SolarCity Corp (NASDAQ:SCTY.DL) has launched a loan product, changed the way it reports value generation, and brought an energy storage product to market.
To keep up with what's going on the conference call can be a great place to hear about what management sees in the future. Here were my five takeaways from Lyndon Rive and team during SolarCity's first quarter conference call.
The SolarCity business model
"SolarCity is essentially two companies in one, with the development company and the power company. The development company is responsible for acquiring customers and getting solar systems installed. The power company provides the financing and then collects 30 years of recurring revenue through studying the energy." -- Lyndon Rive, CEO
This is how SolarCity is starting to look at itself and as the solar industry evolves it's probably the right way to do so. Owning and operating solar systems over 20 years (the real length of a power purchase agreement) is different than cutting installation costs and making sales each quarter.
As the industry transitions to more cash and loan sales, which will be priced more competitively, this will also give us a look at whether the installation business is profitable or not. Keep an eye on how financial reporting adjusts to this new way of looking at the business in the future because judging the profitability of a development company and a power company will take more transparency than today's income statement and a retained value calculations.
Contracts are piling up
"We produced over 1 terawatt hour of energy over the last 12 months. Our contacted customer payments increased by $1.2 billion this quarter, and we now have $6.1 billion of contracted customer payment. We also have over 217,000 customers." -- Lyndon Rive, CEO
This will give you an idea of how large the power company has become with $6.1 billion in contracted revenue to collect over the next 20 years. It's also telling that SolarCity is nearly a quarter of the way to its goal of 1 million customers by mid-2018. It'll need to keep growth up to get there, but it looks achievable if tax incentives don't change (which they are scheduled to do in 2017).
Commercial solar growth
"We have started to do commercial work with our crews and are seeing outstanding increases in productivity. As an example, we installed 157 kilowatt large commercial flat roof in three days, versus an industry standard of over 20 days using our Zep mounting hardware." -- Tanguy Serra, COO
Residential solar has always been SolarCity's bread and butter but it's now pushing into commercial solar. One reason is the greater scale the company can get with a smaller sales force. But margins in commercial are generally lower because this is a highly competitive market right now. So lowering costs by making installations easier is a key step for future sales growth.
The real cost of energy storage
"Our solar battery backup system will sell for $5,000 as an add-on to a lease or a PPA, which is comparable to other backup generator option. It's important to note that the Tesla price of $3,500 doesn't include the inverter, permitting, the installation, management software and electrical equipment to wire out the circuits that need to be backed up. All of those things are included in our turnkey service in our solar battery system." -- Peter Rive, CTO
When SolarCity's chairman, Elon Musk, announced Tesla Motors' (NASDAQ:TSLA) Powerwall he quoted a $3,500 price tag, which a lot of people ran with as the cost of adding energy storage to a home. But that's only the cost for a battery and doesn't include the inverter (to make DC current into usable AC current and vice versa) or installation.
SolarCity's solar-power systems already include an inverter so that cost isn't substantial, but installation and markup will add $1,500 to the Powerwall's cost. That should give consumers a better idea of what an energy storage system will really cost.
Please don't cut ties with the grid
"we'll be offering a $0-down lease in Hawaii next year that will give customers the ability to go completely off-grid. With that said, I want to reinforce that customers removing themselves from the grid is a bad policy outcome." -- Peter Rive, CTO
While Tesla Motors is trying to disrupt the grid, SolarCity is trying to balance offering innovative energy solutions without starting an all out war with utilities. And this quote shows the conflict SolarCity is even having with itself.
In places like Hawaii, where energy costs are extremely high and solar energy is abundant, it may make financial sense for customers to cut the cord to the grid. But if they do so en mass it'll cause chaos to the entire electrical system, which would have negative spillover effects for SolarCity.
Slowly, the company wants to offer solutions that make cutting ties to the grid possible, but it also doesn't want to give utilities a reason to point to them as the ones upending energy peace on the grid. So, SolarCity is trying to play both sides for now.
Innovating the future of energy
SolarCity is creating a company that could be the utility of the future, could be a solar sales and installation company, may be an energy financing giant, and could be the driver of taking consumers off the grid. Or maybe some combination of all of those models.
What we know is that solar energy is winning the battle against utilities and SolarCity is leading the charge. Without profits it's hard to know if its investments for the future will pay off, but for now the market believes SolarCity has the right model. Time will tell if that's really true.