Solarcity's business model could keep PV expensive in US
US photovoltaics installer SolarCity has announced that it will be going public. The media are focusing on whether the firm is a good investment, but the problem is that the firm's financial success will only make solar more expensive in the US.
A few days ago, SolarCity announced its plans to go public, and the announcement has drawn a lot of attention not only within the solar sector, but also among general investors. One reason is undoubtedly that the company's major shareholder is Elon Musk, the man behind the PayPal, Tesla, and SpaceX. SolarCity aims to raise some 200 million US dollars in the IPO (initial public offering). The firm basically installs solar roofs on small buildings – such as private homes and commercial properties – and sells the electricity to the building owner/user. In essence, the firm provides a financing model for people who want solar power but cannot afford to pay the installed system price upfront.
Third-party ownership is becoming a common business model in the US for photovoltaics, but it is less known in the world’s two largest PV markets, Germany and Italy. In those countries, third-party investors mainly come in when those who wish to invest do not have suitable roofs for solar themselves and therefore have to invest in installations on someone else’s roof. In the US, however, third-party ownership occurs even when the person who wants to invest in solar is also the roof owner. In effect, the third-party (here, SolarCity) replaces the building owner as the investor, thereby relegating the building owner to the position of a consumer – a buyer of solar power, not a producer.
The financial press is mainly focusing on SolarCity's failure to turn a profit up to now and on investigations into its tax returns. But actually, the firm will probably turn out to be a very good investment – and that is likely to be a problem for the US solar sector, depending on where you stand. Essentially, the company fills a gap left open by banks, which have yet to realize that solar is about to become a safe investment. Up to now, it should be noted, solar has not been a safe investment for the banks mainly because US energy policy has failed to provide a safe investment environment. With the price of rooftop solar dropping below the retail rate across more and more of the United States, SolarCity could prove to have timed its IPO very well indeed. The federal government is not even talking about improving the policy support for renewables, banks are largely still asleep, and no other nationwide competitor is on the horizon.
But before we get too excited, consider the outcome. SolarCity has no incentive to continue to lower its prices to keep up with the falling price of photovoltaics; on the contrary, it will have to provide its shareholders with the greatest possible return – that’s what corporations have to do by definition.
Furthermore, as the firm itself says, SolarCity mainly competes with your local utility. In the beginning, a small amount of photovoltaics actually helps offset peak demand, an effect that utilities welcome. But after that, photovoltaics owned by third parties begins to cut into utility profits, so utilities with a profit motive (basically, all investor-owned utilities) understandably oppose solar installations they do not own. In lieu of proper legislation, utilities can block solar installations in a number of ways, such as by charging a much higher grid connection fee to parties with a solar roof. One likely outcome would be a deal between SolarCity and local utilities to protect profits for both firms.
Protecting profits for so many parties will, however, only keep the cost of solar power up at unnecessarily high levels in the US, where the price of solar power is already higher than in much of the rest of the world even though solar conditions in the US are among the best. SolarCity is just another middleman that will demand a profit.
The solution to this dilemma in the US seems obvious from Europe: set up an investment environment in which homeowners and small businesses can get reasonable interest rates on loans to finance installations. The EU has mainly used feed-in tariffs to convince banks that renewables are a safe investment. Then, people can own their solar roofs themselves – no third-party ownership needed – and all of these buyers will put pressure on the market to bring down the price of solar.
Once third-party ownership has become entrenched in the US photovoltaics market, an even larger number of companies will have financial reasons to prevent the average American from becoming an owner of a solar array directly. Small investors will have to resort to leases from these companies and will otherwise be told to invest in these firms on the stock market. (Craig Morris)