Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

It's been a rough year for the big solar companies (see this).

Sunrun, though, has kept growing, beating its own guidance in the second quarter and trumpeting the opportunity to disrupt, by its estimation, a $400 billion retail electricity market.

Investors don't seem so sure. The stock duly jumped 15 percent on the day those results came out -- but at about $6, it's still less than half of where it debuted just over a year ago.

The Rundown
Sunrun has fallen about 57 percent since its IPO in June 2015
Source: Bloomberg

Two sets of numbers that could be weighing on minds are costs and Sunrun's own estimates of what the solar systems it installs are worth.

On costs, Sunrun's are noticeably higher than those of its peers. Sunrun points out that there's a bit of an apples-and-oranges thing going on here because, unlike its rivals, it uses outside contractors to do a lot of its installations. However, even plugging in the company's figures for only "Sunrun-built" installations leaves them higher overall.

Up There
Sunrun's unit costs are the highest of the big three solar-leasing firms
Source: The companies
Note: "Sunrun built" represents the reported installation cost plus Sunrun's regular sales and administration costs.

Even so, Sunrun reckons its panels create a lot more value than they cost to build.

Net Present at the Creation
Apart from in early 2016, Sunrun estimates it creates almost $1 a watt of net present value each quarter
Source: The company

Value, like beauty, is of course a subjective thing, especially when you're discounting cash flows from monthly lease payments projected to dribble in over the next 20 or 30 years. These net present value numbers put out by solar-leasing firms, and the assumptions behind them, have been argued back and forth for years. I for one think the standard 6 percent discount rate used is too low for an industry yet to go through even one complete cycle.

Another standard assumption is that when customers' standard 20-year leases are up, they'll sign up for another one in exchange for a small discount on power pricing or just buy the thing outright. Anything's possible. But I'd venture that there is no guarantee that when our kids grow up, they are going to want 20-year-old technology sitting on the roof of the family pile.

This matters because the "renewal value" embedded in those valuations adds up.

Beyond the Horizon
Renewal value equates to a big chunk of, and sometimes more than, Sunrun's unlevered project value
Source: The company, Bloomberg Gadfly analysis
Note: Renewal value calculated by dividing the change in Sunrun's absolute renewal value estimate by megawatts deployed under leases and power purchase agreements.

Sunrun says that while these figures reflect the portfolio overall, adjustments to pricing assumptions mean the run rate for renewal value is now closer to 50 cents. That is still around half its estimate of the value created with each watt of capacity installed -- and it remains a highly questionable assumption. Assume a homeowner wants the panels just taken down in 20 years because they can buy better ones themselves. Say it costs the company $1,000 to remove them and discount that back at 6 percent; suddenly, 50 cents of assumed value becomes a 5 cent deficit.

Growth is a fine reason to invest -- provided you're reasonably convinced there's a decent profit waiting at the end of it.

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

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net