What: Shares of SolarCity Corp. (NASDAQ:SCTY.DL) had plunged as much as 15% in trading as of 2:00 p.m. ET Thursday after the company got more bad news out of Nevada.
So what: Late in December, the Nevada Public Utilities Commission proposed adding fees to homes with solar and changing rules about how solar energy going from homes to the grid would be compensated. They proposed rules changing the solar feed to the wholesale rate for electricity rather than the net retail price a customer pays for energy, a policy known as net metering. This effectively lowers the savings customers get from putting solar panels on their roofs and therefore the rate residential solar companies like SolarCity can charge for the electricity they sell to customers through power purchase agreements (for more detail, read my analysis here).
What was unprecedented about the proposed ruling is that it was retroactive, meaning it will affect all of the SolarCity customers who have already put solar on their roofs. Not only does that mean SolarCity won't make money on Nevada rooftops in the future, it means the company may incur losses on systems that are already installed.
When the ruling first came out it was preliminary and what changed last night is that regulators denied a stay on the new rates for customers, meaning they officially took effect this past Jan. 1. Previously, there was some hope the ruling would be overturned because of an outcry of support for solar energy from both businesses and consumers.
We don't yet know the impact this ruling will have on SolarCity but it'll be significant. The company announced that it was pulling out of the state in December and has eliminated 550 jobs as a result of the move. That will no doubt change SolarCity's growth trajectory and its costs, at least in Q4 2015 and Q1 2016, although we won't know the full impact until management updates investors. We could also see a reduction in expected retained value because customer defaults or contract renegotiations will likely be much higher than management previously expected in Nevada.
Now what: Nevada wasn't SolarCity's biggest state by a long shot, but it was one of the highest-growth states in the country, quadrupling installations between Q2 2015 and Q3 2015 when it was a top five residential solar state, according to GTM Research. Presumably, SolarCity was one of the biggest beneficiaries of that growth. Now, Nevada is going to fall off the map and the growth will need to come from somewhere else. Worse yet, customers won't be getting the savings they were promised, which could decrease value generation for SolarCity's contracts long term.
I wouldn't be surprised if the net metering ruling is changed eventually, but that may take action from the legislature and could take time. For now, the damage is done and Nevada has gone from a strength to a weakness for SolarCity. That's not something investors are happy about today and rightfully so.