In September 2013, Hawaiian Electric Co. told thousands of customers they couldn’t connect their new solar panels to its distribution grid. In some neighborhoods, HECO said, its system couldn’t absorb any more unused energy from home solar arrays. The moratorium, which lasted 13 months, made Hawaii a central battleground in the effort by utilities to control the rapid growth of independent solar companies across the U.S. And it was a big deal to people such as Robert Gould, a retired Northwest Airlines pilot living near Honolulu. He’d just paid $53,000 to have solar panels installed.
Gould and other customers protested loudly to state officials. They finally got help from Lyndon Rive, the CEO of SolarCity. The San Mateo, California, company is the biggest installer of rooftop solar panels in the U.S. and has 10,000 Hawaiian customers, Bloomberg Markets magazine reports in its May issue. Rive studied the situation and zeroed in on a key fact: HECO had never directly measured how much solar its grid could handle, relying on computer simulations instead. “Because the technology is brand-new, no one had ever done this in the field before,” says Colton Ching, HECO’s vice president for energy delivery.
SolarCity joined with HECO to run the tests, with help from the U.S. National Renewable Energy Laboratory in Golden, Colorado. They found that high-traffic circuits could absorb twice as much solar energy as the utility thought. After asking solar installers to reprogram equipment that connected them to the grid, HECO lifted its ban on new hookups late last year. Gould flipped the switch and connected his new panels to the grid in January.
Rive, 38, says the experiment in Hawaii was a step forward for him and his brother Peter, 41, and their famous cousin, Elon Musk, who helped found SolarCity in 2006. The trio is on a quest to reduce the world’s dependence on fossil fuels—Musk with his Tesla electric cars, the Rive brothers by replacing coal- and natural gas-generated electric power with solar. What was groundbreaking in Hawaii was that regulators pressured HECO to join with SolarCity in redesigning the state’s electricity grid, moving solar to the mainstream of the industry, Peter Rive says. The Rives, like their cousin Musk, approach the fight against climate change as a moral crusade. Lyndon regards the replacement of fossil fuels with clean energy as an urgent necessity. “We have to accept that what is happening today is impossible,” he says. “It will be suicide to continue that process.”
SolarCity is installing solar panels on homes and commercial businesses in 15 states. It has 190,000 customers, expects to double that to 400,000 this year, and is aiming for a million by 2018. As they grow their businesses, SolarCity and other energy upstarts—its chief competitors are Vivint Solar and the home solar unit of NRG Energy—are waging daily battles with big utilities. They accuse the electricity establishment of trying to thwart their expansion and, in some states, of competing unfairly by installing its own rooftop solar panels while still charging regulated, cost-plus rates that guarantee a profit.
Ching says HECO bears no ill will toward independent solar companies. “Solar rooftops are part of our larger plan to get 65 percent of our power from renewable sources by 2030,” he says. One reason: Island residents now pay 38 cents per kilowatt-hour for electricity, three times the national average. At 12 percent, Hawaii already leads the nation in the proportion of residents with rooftop solar.
Yet even as HECO agreed to increase the number of new solar connections, it asked the state Public Utilities Commission for permission to cut nearly in half the money it will pay future solar customers for sending power to the grid. The utility, whose parent company saw revenue drop 5.1 percent in the fourth quarter, also wants to charge future solar customers $71 a month to stay hooked up. Ching says these measures are necessary to even the playing field at a time when solar installations are heavily subsidized by the state and federal governments and the utility itself. Installers of solar panels get to take 30 percent of the cost off their federal tax bill. And 44 states, including Hawaii, have adopted laws or regulations guaranteeing homeowners retail prices for power they feed onto the grid, although utilities pay wholesale when they buy power from each other.
These regulations, called net metering, made sense when solar was in its infancy, says Ching, but no longer. Beyond the price guarantees, companies such as SolarCity are not regulated by state utility commissions, though those commissions have power over how expensive it is for them to wedge themselves onto the grid.
SolarCity and other panel installers are fighting solar surcharges that at least a half-dozen states are attempting to impose. In early March, the company filed suit against an Arizona electric utility called the Salt River Project, accusing it of anti-competitive practices for levying fees on home solar systems that SolarCity says are so severe they cut installations by 96 percent. Salt River pricing manager John Tucker acknowledges that new solar hookups have declined but says it’s because SolarCity needs to do a better job of teaching homeowners that solar makes sense even at the new, higher rates.
Controversy aside, SolarCity is at the leading edge of a transition from centralized power plants and one-way transmission lines to a much more complex system, says Ben Paulos, an analyst at GTM Research in Boston. In the future, Paulos says, homeowners, regulated utilities, and independent companies such as SolarCity will all be capable of not only generating but storing power. They’ll all possess sophisticated sensing equipment to manage both supply and demand across the grid in response to real-time fluctuations in price. “Ten years ago, the controls you needed to monetize this, to make sure everybody gets paid for each of these services, didn’t exist,” says Paulos. “Now they do. It’s the Internet of electricity.”
The Rive brothers’ goal for SolarCity is to provide a comprehensive service that includes the sale or lease of solar panels, plus installation, financing, and servicing. “We want to make sure it’s as easy to go solar as it is to get DirecTV,” Lyndon says. “No capital investment, no upfront money, nothing.” SolarCity says it has targeted states where it knows its panels can beat the price of conventional electricity generation. Within a year or two, it expects to greatly expand its ability to store sun-generated power for future use, utilizing batteries produced by Musk’s Gigafactory, now under construction in Nevada. In mid-March, SolarCity announced it will go into the business of producing microgrids—clusters of solar panels and batteries that will allow customers in remote locations to consume power 24 hours a day.
SolarCity also has something to offer the finance community. The company is bundling future cash flows from loans and leases and selling them to investors. The Rives are also bundling the 30 percent federal investment tax credit that SolarCity gets for each installation. As an unprofitable startup, it doesn’t need the credits to defer taxes, so it sells them to other companies. In February, Google invested $300 million in a so-called tax-equity fund Rive created for this purpose.
Like its corporate cousin Tesla Motors, SolarCity needs to persuade investors and shareholders that it can make a go of it. Last year, the company lost $56 million on $255 million in revenue. As revenue swells to an estimated $764 million in 2016, so will losses—to as much as $543 million, according to analysts surveyed by Bloomberg. SolarCity went public in 2012; its shares closed yesterday at $55.10, down from $74.01 in September, after lower-than-expected fourth-quarter revenue.
In a conference call to discuss 2014 earnings, Lyndon Rive reported that improved technology now allows SolarCity to mount solar panels on flat-roof commercial buildings in three days instead of the three weeks it used to take. During 2014, the company’s share of the U.S. rooftop solar market rose 9 percentage points, to 34 percent, as mom-and-pop installers failed to match SolarCity’s nationwide marketing clout, GTM says.
The Rive brothers come from an entrepreneurial tradition. Lyndon and Peter grew up in Pretoria, South Africa. Their mother, Kaye, is the twin sister of Musk’s mother, Maye. Their family includes business owners going back generations. “They installed a strong, tenacious thread of DNA,” says Nancy Pfund, a managing partner at San Francisco-based DBL Investors and a SolarCity board member. “They all get that business success relies on making the world better.”
Lyndon had no such goal when he made his first trip to California in 1998. He was there for an underwater hockey tournament, a game in which players wearing snorkels whack a puck around the bottom of a pool. Rive decided he liked California. He returned to Pretoria, sold a homeopathic medicine company he’d started in high school, and moved to Silicon Valley. In 1998, he and his older brother Russell started an information technology outsourcing company called Everdream. Peter joined the company later. They sold Everdream to Dell Inc. in 2007 for $120 million.
By that time, Lyndon and Peter had already gone solar. In the summer of 2004, Musk and his cousins had driven together to the Burning Man festival in Nevada, and on the way, Musk persuaded them solar was about to explode, Lyndon says. They started SolarCity two years later, with Musk putting up much of the startup money. He owns about 21 percent of SolarCity shares, worth more than $1.1 billion. Lyndon and Peter each own shares worth about $125 million.
For most of SolarCity’s history, it bought solar panels from China. In 2014, the company moved into manufacturing, spending $200 million to buy Silevo, a California company that claims its solar cells can capture 24 percent of the available energy in sunlight, a third more than most systems. SolarCity also inked a deal in which New York state contributed $750 million toward construction of a factory in Buffalo where the company will make Silevo panels.
The Buffalo plant is part of a wide-ranging plan by New York state to promote production of energy from renewable sources. This includes rewriting regulations so that independents like SolarCity and traditional utilities will both profit as solar grows. In Arizona, by contrast, utilities are fighting to keep their new rivals out, Rive says. SolarCity’s lawsuit against the Salt River Project follows a two-year battle to prevent Arizona Public Service from charging solar customers an extra $50 a month to help maintain its grid. APS launched an election-style campaign complete with billboards and television ads. In the end, regulators approved a monthly fee of just $4.90. Arizona and other state officials say the surcharges are fair because solar panel owners are benefiting from subsidies that citizens who don’t own homes or can’t afford solar panels aren’t entitled to.
The utilities also declare they, too, are fighting carbon emissions that contribute to climate change. HECO announced in December it’s building six large solar farms on Oahu. In February, Duke Energy accelerated its rooftop solar installations when it agreed to buy a majority stake in REC Solar, which generates solar power at, among other places, the Dole Plantation on Oahu. And NRG Home Solar says it plans to install 2,400 megawatts of rooftop solar by 2022; SolarCity now stands at 1,042 megawatts.
Lyndon Rive says he’s not worried as long as utilities don’t use their cost-plus advantage to bludgeon competitors and slow the pace of technical innovation. “I welcome utilities to compete with us, just not in the service areas where they already have a monopoly and the extremely low cost of capital that comes with it,” he says.
Back in Hawaii, Robert Gould is still angry he had to wait more than a year to connect his solar panels to the grid. He says he’s eager for Musk to build storage batteries for solar systems, so he won’t have to rely on HECO at all. “As storage costs come down, more and more people are going to say, ‘Take this grid and shove it,’” Gould says. “It’ll take 20 years, maybe less, but these utilities are going to find themselves in a world of hurt.”
This story appears in the May 2015 issue of Bloomberg Markets. With assistance from Mark Chediak in San Francisco.