The Not-So-Simple Life for Solar

The plans are worth less, and there's more competition, including from Fannie Mae.
At Closing, June 19th
1.49 USD

On its latest earnings call, SolarCity was dragged over the coals for being too complicated. Simplicity won't be a cure-all in this business, though.

SolarCity's complexity partly reflects the fact that it and its peers operate in an industry intimately tied to America's Rube Goldberg machine of renewable energy incentives. About two-thirds of solar systems are sold under long-term power purchase agreements (PPAs) or leases. They are installed and owned by a third party such as SolarCity, to which the homeowner pays a monthly fee over, say, 20 years. Homeowners put little or no money down, because solar companies can use renewable-energy tax credits to finance the cost of installing the system and then get paid out over time by the customer's monthly payments. The idea is that the present value of those payments adds up to more than the costs. 

Yet this model of big, near-term losses and cash flow trickling in over years also makes the companies' results read like a non-GAAP masterclass and leaves valuation a highly mobile target. 

So there is some hope a simpler model will take over. Wouldn't it be easier, for example, if you could just borrow the money cheaply to buy your panels and own them outright? For the companies, wouldn't it be great to get all the revenue upfront?

SolarCity last week unveiled a new solar loan product in 14 states, with annual rates as low as 2.99 percent and even one of those Nest thermostats thrown in as a freebie. Rivals such as Vivint Solar and Sunrun offer loans alongside leases, too. A lot is riding on these loans catching on. SolarCity, for example, talked them up several times in that dreadful first-quarter call a month ago as a means to help revive growth -- and its share price.

Quick, Quick, Slow

Source: Bloomberg

Loans should open up a whole new set of customers put off by the complexity of PPAs and leases. Yet they also underscore two troubling trends.

One is that the core business for the big solar companies, selling PPAs and leases, remains under pressure. When SolarCity first took an axe to growth targets last fall, it did so because the cost of chasing marginal customers had become unsustainable. Take a look at its losses, along with those of Vivint Solar and Sunrun (the less said about SunEdison, the better):


EBITDA losses at three big solar firms have risen almost six-fold since 2012

Source: Bloomberg

In the past, companies could argue GAAP financial results simply didn't capture the value of cash streams over 20 years or more. Depressed stock prices -- and analysts having the temerity to ask questions like "what is SolarCity?" -- show this argument won't quite cut it anymore.

With leverage rising and Wall Street not quite as forgiving, loans aren't simply a means to boost growth. In a report this week, Credit Suisse analyst Patrick Jobin noted one advantage loans have over PPAs: A much higher proportion of the system's value comes up front in the form of cash. And cash, not notional net present value, is definitely king in this environment.

At the same time, Jobin also noted that the overall value of a loan for SolarCity was much less than that of a traditional PPA. In his model, discounted over 20 years at a 6 percent discount rate, the loan was only worth about half.

This makes sense. A loan is a much simpler product, and the barriers to entry are low. In April, for example, Fannie Mae announced a loan product of its own that would effectively let homeowners borrow a little extra to finance the purchase of panels, paying it back like a mortgage.

Fannie Mae has been a called a lot of things over the years, but renewable-energy pioneer is not one of them. If a homeowner can arrange for a mortgage-like loan -- a product as familiar and American as apple pie -- and then take bids from several local installers to put up the panels, then they might just do that instead of going with a bundled loan from one of the big solar developers.

This isn't to say putting up solar panels will become just like having your gutters fixed. Solar systems include cells, inverters, software and (increasingly) storage. To get the most out of them, they will have to work efficiently, especially as states change electricity pricing regimes under pressure from utilities alarmed at the rise of such competition.

That leaves a potential role for integrated solar service companies to fill even if the financing gets simpler. Still, competition is only going to increase. Mortgage lenders, like the utilities with which solar companies already lock horns, enjoy low capital costs and existing customer relationships to exploit.

For the solar companies, loans look like a Band-Aid; a sacrifice of future margins to the cause of raising cash now. Their real challenge remains the same one SolarCity spelled out last summer: cutting bloated costs and debt. It's that simple. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Liam Denning in San Francisco at

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