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Why SunPower Is Expanding In Nevada As SolarCity Leaves the State

By Travis Hoium - Feb 20, 2016 at 2:20PM

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Nevada has become a hot button state in solar, so why are these two companies looking at it so differently?

Image: SolarCity.

SunPower Corp ( SPWR -0.85% ) announced the completion of a 15 megawatt solar power plant this week and it was sure to kick a little sand in the face of SolarCity ( SCTY.DL ) in the process. Less than a week after SolarCity reported weak Q4 2015 results and weak Q1 2016 guidance -- partly because it was forced out of Nevada -- SunPower announced the new power plant with SolarCity nemesis NV Energy

Not only did SunPower take a stand with NV Energy, it invoked the Nevada Public Utilities Commission in the press release, the regulators who just put residential solar rules in place that caused every major installer to flee the state. But understanding how SunPower can be a friend of NRV Energy and the Nevada PUC, while SolarCity is a villain takes a deeper look into the solar industry.

Large solar plants like this one are what SunPower is focused on in Nevada. Image: SunPower.

Are utilities friend or foe to solar?
The first thing to understand is how utilities and regulators look at solar energy. In large part, they're not against it, but they could be against how it is installed and compensated.

Under traditional net metering rules, solar customers only pay for the net energy they use during a month. That means that if they create extra energy from their rooftop solar panels during the day and send it to the grid they're effectively getting compensated their full retail rate. According to the EIA, that rate was $0.127 per kWh for Nevada residents in November 2015. 

When a residential solar company comes into a state like Nevada it sells energy for less than the utility's rate ($0.127 per kWh in this example) and then calls the difference cost savings for the customer. This gives a customer choice and freedom from a utility. But this model is also reliant on the homeowner getting credit for the full $0.127 per kWh, or something close to it. That was the problem with the PUC's decision in December to compensate homeowners at the wholesale rate: it eliminates those savings for customers.

Now let's look at this scenario from the perspective of the utility and the regulator. For a utility, SolarCity is trying to come in and steal electricity demand and if it gains too much market share it will make it harder to run the grid because fewer people will need energy during the day when it's sunny and the second the sun goes down it'll have to provide all the energy customers want (known as the duck curve).

From the regulator's perspective, it's seeing customers buy energy from SolarCity and other rooftop solar companies and pay $0.11-$0.12 per kWh for that solar when it can facilitate large utility scale projects for less than $0.05 per kWh. Add with the duck curve complications that could be on the horizon and the argument that rooftop solar transfers costs to non-solar customers (which is hotly debated around the energy industry), you can see why a utility would prefer to buy cheaper utility solar rather than have customers put up their own solar. Note: I'm not saying this is the correct argument, just that it's a valid one.

Finding a way to work with utilities
The dynamic above can create an adversarial situation between rooftop solar companies and utilities/regulators. Usually those differences are ironed out and states are trying to come up with "fair" ways to compensate rooftop solar, but in Nevada the dynamic is downright nasty.

That brings us to the very different relationship between SunPower, the PUC, and NV Energy. Rather than taking customers away from the utility, SunPower is building large solar plants that provide clean solar energy, are built at a competitive price all three agree on, and are built on a very predictable basis. This makes SunPower a partner with the utility and PUC rather than an adversary.

The impact is pretty big from this partnership too. SolarCity said it lost about 20 megawatts  per quarter in demand from shutting down its business in Nevada. When it announced the 15 megawatt solar system at Nellis Air Force Base, SunPower highlighted that this followed the 13.2 megawatt system built on the base in 2007. The company is also building the 100 megawatt Boulder Solar I project and just signed a power purchase agreement for the 50 megawatt Boulder Solar II project. All of the projects will sell energy to NV Energy and all were approved by the Nevada PUC.

Business model and relationships with incumbents matter
Without question the solar industry is changing the electricity industry as we know it. But understanding how companies are working to revolutionize the industry is just as important as knowing who the players are. In Nevada, the residential solar industry took an adversarial role against the PUC and NV Energy and lost.

SunPower, on the other hand, has taken a strategy of partnership with both parties, leading to large contracts that will help drive the company's growth in 2016 and beyond. For now, that is clearly the winning strategy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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