Solar Power Can't Survive Without A Lot Of Help
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
SolarCity (NASDAQ: SCTY) came public at the end of 2012, and although its shares haven't taken off, its business model sounds like the perfect answer to some of the thorniest problems in the solar market. However, a quick peek under the covers reveals that SolarCity probably couldn't survive without the government's support.
How it works
Essentially, the company builds and owns the solar systems it installs, handling all of the legal and regulatory issues with getting the system up and running. Then it sells the power to the owner of the building on which it lives, or leases it back to the owner. Just like that, all of the headache of a solar installation is gone. A professional takes the lead, and the building owner gets the benefits without the hassle.
Even better, SolarCity than monetizes the system by contributing these assets to investment funds in return for cash that SolarCity uses to keep building out its systems. The company has created over 20 funds worth more than $1.5 billion. This comes very close to self-funding and reduces the expense for the building owner. That's a win win.
If it sounds too good to be true...
This sounds like the perfect marriage of renewable power and finance, but the first couple of Risk Factors in its prospectus highlight the company's Achilles heel:
“Our business currently depends on the availability of rebates, tax credits and other financial incentives.”
“We rely on net metering and related policies to offer competitive pricing to our customers...”
The federal government provides support to all sorts of businesses, ranging from agriculture to solar power. Some of these businesses can stand on their own without the assistance, but others would find it difficult to survive. For example, few people would choose to put ethanol into their cars if the government didn't mandate it. This, in turn, helps corn growers, since corn is the primary source of ethanol. Sugar is another example, where the government has stepped in to stop competition and, thus, cause U.S. citizens to pay more for sugar than they might otherwise have to. While this beefs up corporate profits, it isn't much of a benefit otherwise.
There are, in the end, good and bad things from this government involvement. One area that is definitely benefiting from government largesse today is solar power. The government, at both the state and federal levels, is providing a raft of support without which solar would be a non-starter.
For example, the installation of solar power systems are supported by rebates and tax credits, among other incentives, that quite literally make the difference between such an installation being economically viable or not. Additionally, net metering rules, mandated in many states, allows those with solar systems to “earn” revenue from their solar cells at the same rate the customers pay the utility for electricity.
This latter issue has caused several utilities in California to cry foul, including PG&E (NYSE: PCG) and Edison International (NYSE: EIX), the state's two largest players. Essentially, these utilities argue that net metering doesn't take into consideration any of the costs associated with energy transmission. So the individuals and companies that are using the net metering are getting the benefit of the wires for free. Thus, every other customer has to pay for the “freeloaders”.
Solar power has come a long way since its commercial introduction. It is far more efficient and viable today than it was just a few years ago, particularly with the price of solar cells dropping precipitously, to the chagrin of cell makers like Suntech Power Holdings Co. Ltd. (STP) and First Solar, Inc. (NASDAQ: FSLR). Indeed, the shares of these two companies have been hard hit by the price drop, though they were once both market darlings.
Not Ready For Prime Time
There is no doubt that solar power is a great technology. However, solar isn't ready for prime time until it can viably support itself, and SolarCity isn't a good choice as a long term investment until it can. Simply put, if the government stops supporting solar power, many of the benefits of installing solar power panels disappear. If the benefits dry up, its highly likely that SolarCity's business dries up, too.
ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!