SolarCity (SCTY)

[Foghat]

I think smart occupancy sensor thermostats like Nest and Ecobee is probably as good as it gets for HVAC energy management. Ecobee more than Nest, because of the multiple sensor option.

Extensive use of demand response on residential HVAC is probably never going to happen. The time the utility wants to cycle AC is on the hottest days of the year in the evening. No one wants to come home from work on a hot day and have the utility cycling the AC. Household members now fight over a 1 degree change on the thermostat. Will these household allow the utility to change temp for $10/month? I don't think so. Especially because the people who have things like Nest thermostats and backup batteries have disposable income. They pay for luxury, not discomfort.

Demand response will probably work for heat pump water heaters and EV charging. Beyond those two items it is added inconvenience.

No, Solarcity does not control the hvac. They manage the energy consumption to provide that air conditioning. The peak loads/spikes are shaved and in mass. The utiltiy calls on Solarcity to do this during peak hours. Solarcity networked(grid) communities may switch to partial self consumption or full self consumption, or if talking about the duck curve, they could also time shift solar energy(from daytime production) to the 6-9pm time frame to reduce "the head".

Solarcity doesn't force you to change your behavior, they change how energy efficiency is mangeed to comply with your behavior. That's demand response.

Nest provides data to the system to appropriately react to reduce electricity costs for s consumer. For the grid services, Solarcity can analyze all the big data in aggregate and react to utilties needs for demand response for the grid at large.

 

[Ampster]

That is a great explanation and illustrates one of the benefits of aggregation.

 

[electracity]

That is a great explanation and illustrates one of the benefits of aggregation.

Actually it isn't. Solarcity will only be in the middle between PPA customers with batteries and the utility.

Inverters with batteries will respond to commands directly from the utility if that functionality is enabled. From Solar Edge:

StorEdge™ is SolarEdge’s all-in-one solution that uses a single grid-tied DC optimized inverter to manage and monitor both solar generation and energy storage. The StorEdge™ solution provides Homeowners with backup power to pre-selected loads in the event of grid interruption. Smart energy management allows storing of solar energy in a battery to meet export limitations, offer demand response and peak shaving, and perform time of use shifting for reduced electric bills.

 

[Ampster]

Actually it isn't what? A great explanation? An illustration of the benefits of aggregation? @Foghat has a clear writing style and I find it is easier to understand than your style. Don't take it personally, it is probably just me.

An alternate way to lead off your response would be a sentence that tells the reader why it isn't a great response. Is he actually incorrect or do you just disagree?

 

[Johan]

Actually it isn't what? A great explanation? An illustration of the benefits of aggregation? @Foghat has a clear writing style and I find it is easier to understand than your style. Don't take it personally, it is probably just me.

An alternate way to lead off your response would be a sentence that tells the reader why it isn't a great response. Is he actually incorrect or do you just disagree?

He claims SCTY can't function as a utility, while Foghat claims they can. So it's up to everyone to make up their own minds. I don't see a reason why SCTY couldn't act as a distributed utility, with a combination of generation (surplus electricity generated by customers) and storage (batteries in customer's homes and perhaps going forward also other more centralized forms of storage).

 

[Ampster]

Thanks for the clarification. I tend to agree with you that SCTY could act as a distributed utility. If that fits within what the Supreme Court said about FERC ability to supercede local control over DERs, then that decision is good for SCTY.

 

[dalalsid]

Actually it isn't. Solarcity will only be in the middle between PPA customers with batteries and the utility.

Inverters with batteries will respond to commands directly from the utility if that functionality is enabled. From Solar Edge:

StorEdge™ is SolarEdge’s all-in-one solution that uses a single grid-tied DC optimized inverter to manage and monitor both solar generation and energy storage. The StorEdge™ solution provides Homeowners with backup power to pre-selected loads in the event of grid interruption. Smart energy management allows storing of solar energy in a battery to meet export limitations, offer demand response and peak shaving, and perform time of use shifting for reduced electric bills.

The utility is in the business of extracting money for power from me. Solarcity would be in the business of trying to help me save money by providing a service to the utility. Now as much as no middle man would be advantageous, do you trust the utility to be competent with this service? If so the utility should directly go head on with scty in rooftop solar + storage. They already have a captive customer. Telling the customer, "hey let me put panels on your roof and I'll give you a 10% discount on power" would be much lower SG&a than scty.

 

[EldestOyster]

a UPS might be great for 1 hour backup 12 times a year, but if it can't support the 12 hour blackout once per year, then its not a replacement for a generator (or larger batteries) that does.

A UPS is a good analogy of battery-based demand. For one thing, it's instantly available. For the other problem, let's say one of your long distance power links goes down. Your situation, "You have 10 milliseconds to fix this problem before you start shedding load" changes to one of, "Batteries are supplying power; you have 30 minutes to find more sources".

 

[electracity]

He claims SCTY can't function as a utility, while Foghat claims they can. So it's up to everyone to make up their own minds. I don't see a reason why SCTY couldn't act as a distributed utility, with a combination of generation (surplus electricity generated by customers) and storage (batteries in customer's homes and perhaps going forward also other more centralized forms of storage).

Solarcity can aggregate batteries, there is just no reason to believe they can make much money doing it. Their only advantage is households where they own the inverter because they sold a PPA.

Inverters have microprocessors that run interface programs that can be controlled remotely. It takes a simple application program plus the right security protocols to make the inverter do what is desired. There nothing difficult about writing the code to control one or many inverters. Solarcity's only advantage is that their PPA customers have no choice but to use them as their agent.

People who own their own solar plus battery system will pick the aggregator/agent who offers the best deal. The best deal will likely come from the utility, because it cuts out the middle man.

 

[ggies07]

Hey jhm, since you keep up with the oil side, have you seen this? What do you think?

Exxon Fails to Replace Production for First Time in 22 Years - Bloomberg Business

 

[Jack6591]

Sanders And Clinton Offer Different Solutions For Nevadas Sabotaged Solar Industry | ThinkProgress

Hillary's Solar Proposal

 

[Jack6591]

Hillary Clinton's Vision for Renewable Power

Half a billion, that's a good round number. I like it.

 

[electracity]

Hillary Clinton's Vision for Renewable Power

Half a billion, that's a good round number. I like it.

100 cumulative GW is the GTM forecast for 2020. Clinton's proposal is 140 GW.

Solarcity's problem is not lack of demand. We will find out this year if the PPA business model is valid.

 

[jhm]

Hey jhm, since you keep up with the oil side, have you seen this? What do you think?

Exxon Fails to Replace Production for First Time in 22 Years - Bloomberg Business

Thanks! This is interesting and I had not seen it.

So what is going is both necessary and largely an accounting issue. First the price of fuel falls, some oil and gas in the ground become worthless because the cost of extraction exceeds the price of the fuel. So accountants must impair these assets and reserves on the balance sheet shrink. Of course if the prices of fuels recover these nonrecoverable reserves become profitable to extract and come back on the balance sheet. So this is the accounting issue.

But the deeper issue is that companies like Exxon should be very cautious about replenishing reserves right now both for short term and long term reasons. The long term reason is that global demand for oil and gas may well begin to decline within the next ten years. I personally believe 2021 will mark the structural decline of demand for all fossil fuels. But even if my projections are wrong, it may be safer for Exxon to sit on just a 16 year supply than a 17.4 year supply. An awful lot of demand can be lost to renewables and EVs is just 16 years.

The short term reason to pull back right now is that most of the industry is going bankrupt right now, and there is a fire sale of oil and gas assets to be bought up at below the cost of creating such assets. So if Exxon can keep their balance sheet in order, they will be in a position to buy up distressed assets. I've heard accounts that middle eastern oil companies want to scoop up cheap asset, and a lot of private equity is buying too. So now may be a good time to be a vulture capitalist.

So while I'd loves to see oil majors pull back for long term reasons, I suspect the short term opportunity to feast on carrion is just too tasty for them. Notice in a glut failing producers will continuity to pump until they are forced to sell. So the assets get priced lower. The new owners continge to pump, but they've got a much lower cost basis. So now they can operate and profit at much lower price levels for oil and gas. I think prices will stay low for quite some time.

BTW natural gas is continuing to fall even as oil has appeared to stabilize around $30. NG is falling to $1.80/MMBtu. It does not make as many headlines as oil, but it appears to have no bottom.

 

[jhm]

Duke Energy's plan for new gas generation 'problematic,' NC regulatory staff says | Utility Dive

Here's an interesting bit. Duke Energy would like to replace a coal plant in the Asheville, NC area with a combined cycle natural gas plant. (Asheville is one of my favorite vacation destinations, and I've actually been to Lake Julian where the coal plant is. Quite a lovely area if you overlook the coal.) So Duke is having a hard time convincing the NC Utility Commission that a 540-MW CC gas plant is needed. Specifically because of advancing "generation, transmission and storage technologies", read renewables and batteries kick butt, the NCUC does not believe that the gas plant is needed now or will be needed in 8 years.

I find it heartening that renewables and batteries are starting to make it hard for any new gas plant, and CCNG is the most efficient, to enter the planning process. Moreover, this breaks the trend of replacing coal with gas. Rather, the new trend will be simply to replace coal with renewables and batteries, and avoid building bridges to no where. As the pipeline of new gas plants dry up, solar will take more market share and both coal and gas will be in structural decline in this country.

I'd also give credit to Tesla for issuing an early price of $250/kWh on Powerpacks. This moved the economic needle on storage and has been impacting the planning process ever since it was unveiled. Thus, Tesla is changing what pencils out for utilities long before sufficient quantities of Powerpacks will have hit the market.

 

[jhm]

Warren Buffetts quieter quest to kill solar in the US west : Renew Economy

This lays Buffet's strategy out pretty clearly. The effort to reduce renewable utility PPAs to 3 three years down from 20 is to skirt around PURPA. This aims to kill off competition to coal and gas from utility scale solar and wind. A three year PPA is really insufficient to finance any new productive capacity, but the target here is clearly utility scale wind and solar.

We usually discuss her Buffet's strategy to suppress distributed solar, but in actuality it extends to all renewables. Moreover, the motivation is not merely to make money on the utilities, but also to keep trains loaded with coal and to keep other fossil fuel infrastructure profitable. So really we need to see Buffett as a vertically integrated monopolist. It is the value of the entire supply chain that matters to him. Curiously, this exposes Berkshire Hathaway investors to huge risk as all fossil fuels enter decline. BH is well position to hold the bag on stranded assets.

Oddly enough, I think this may prove advantageous to distributed solar and batteries over utility solar. It is much easier for Buffett to suppress utility solar and distributed solar. Within a few years, homeowners and businesses will find it cost effective to install combined solar and storage systems that have no need to interconnect with the grid. These systems will be given little motivation to contribute any value to the grid, and the 20th century cost structures of BH utilities will continue to mount. This will drive grid defection and load defection to the breaking point. So when economic reality sets in BH will crash hard. They will have one of the most overvalued book of obsolete assets. So write offs will be massive as 21st Century realities set in.

 

[ggies07]

Thanks! This is interesting and I had not seen it.



But the deeper issue is that companies like Exxon should be very cautious about replenishing reserves right now both for short term and long term reasons. The long term reason is that global demand for oil and gas may well begin to decline within the next ten years. I personally believe 2021 will mark the structural decline of demand for all fossil fuels. But even if my projections are wrong, it may be safer for Exxon to sit on just a 16 year supply than a 17.4 year supply. An awful lot of demand can be lost to renewables and EVs is just 16 years.

You are welcome! Yeah, I agree about the decline in general as well even though I haven't put enough analysis on it to give a year like you, but I could see that. I also see a lot of demand lost within the next 16 years and couldn't believe that's all they had when I read that.

Warren Buffetts quieter quest to kill solar in the US west : Renew Economy

This lays Buffet's strategy out pretty clearly. The effort to reduce renewable utility PPAs to 3 three years down from 20 is to skirt around PURPA. This aims to kill off competition to coal and gas from utility scale solar and wind. A three year PPA is really insufficient to finance any new productive capacity, but the target here is clearly utility scale wind and solar.

We usually discuss her Buffet's strategy to suppress distributed solar, but in actuality it extends to all renewables. Moreover, the motivation is not merely to make money on the utilities, but also to keep trains loaded with coal and to keep other fossil fuel infrastructure profitable. So really we need to see Buffett as a vertically integrated monopolist. It is the value of the entire supply chain that matters to him. Curiously, this exposes Berkshire Hathaway investors to huge risk as all fossil fuels enter decline. BH is well position to hold the bag on stranded assets.

Oddly enough, I think this may prove advantageous to distributed solar and batteries over utility solar. It is much easier for Buffett to suppress utility solar and distributed solar. Within a few years, homeowners and businesses will find it cost effective to install combined solar and storage systems that have no need to interconnect with the grid. These systems will be given little motivation to contribute any value to the grid, and the 20th century cost structures of BH utilities will continue to mount. This will drive grid defection and load defection to the breaking point. So when economic reality sets in BH will crash hard. They will have one of the most overvalued book of obsolete assets. So write offs will be massive as 21st Century realities set in.

Confession guys - I have BH B stock and I need it to do well for the next two years until I can get that Model 3 because it's going to be at least 6k of my down payment. I've been a big fan of Buffet, read his books, liked his style, but I hate that it is coming down to this, our future.

I've always heard he buys a business and lets the managers do the work, so I'm not sure how much his hands are in this battle, but if so, I'm not happy.

 

[Lessmog]

I've been a big fan of Buffet, read his books, liked his style, but I hate that it is coming down to this, our future.

I've always heard he buys a business and lets the managers do the work, so I'm not sure how much his hands are in this battle, but if so, I'm not happy.

Not knowing anything more about Buffet than just about his name, I'm inclined to stick my neck out and say that strategy is unlikely to be delegated to "managers". At least historically; the man is gettin on, isn't he?

 

[SBenson]

Are you saying that the sixth ABS will be issued in Q2? That would be fine with me. I think it is good to spread this cash out.

Apologies I think I mistook what you said earlier. Yes, I do expect the sixth ABS to happen in Q2. In any case it's such a small deal that it won't make much of a difference to my overall point.

I still get the impression that you see this company living hand to mouth and could fail in one bad quarter. This sounds like basic solvency is still your issue.

I thought we were trying to draw a fine line between solvency and liquidity in earlier posts. Some ultra-bears might argue that SolarCity is not solvent. But I am pretty comfortable with the assumption that SC is basically solvent. But I do think that liquidity is a big issue for them.

With reference to the chart in slide-10, the key issue SolarCity is facing is that a lot of value is locked-up in wayy out years and the firm is having difficulty monetizing it. Every new install is essentially taking up the cash from the front and shoveling it on to the back, less liquid space. That is what brings this business model into question.

Effectively
- the business needs debt to 'run' the operation.
- the business needs debt to 'grow' the operation.

Even if there is 0 growth in new-installs, in other words only do 800MWs of installs in 2016, they still need lots of 3rd party financing.

I think they will be fine for the most part in terms of secured-financing (recourse or not) but they can easily hit a wall with unsecured-financing.

Consider this, they did the Silverlake convertible deal in Q4 and raised $113mln. They still had a net decrease in cash of about $25mln. Had they not done that, the cash would have gone down to $280mln at the end of the quarter. This clearly illustrates living hand-to-mouth.

There are a lot of spooky little details around the silverlake deal but I will leave them aside to not derail the conversation. But I hope we can all easily appreciate that silverlake deal is much more of a one-time deal in nature than a repetitive financing proposition.

So if cash needs are similar in Q1, what happens to net-cash in Q1? How long can they survive like this?

Also, consider the potential increased capital spending needs owing to the Buffalo factory. The 10K clearly states:

"In particular, we may incur substantial expenses in connection with the completion of the manufacturing facility under construction in New York and as we purchase equipment in excess of the amounts spent by the Foundation."

A quick scan on the 10K did not provide any estimates for this. One has to wonder where any cash will come from. The imposed timeline by NY state is very stringent too. Here are a few relevant details:

"In addition to the other obligations under the Riverbend Agreement, we must (i) use our best commercially reasonable efforts to commission the manufacturing equipment within three months of Manufacturing Facility completion and reach full production output within three months thereafter, (ii) employ personnel for at least 1,460 jobs in Buffalo, New York, with 500 of such jobs for the manufacturing operation at the Manufacturing Facility, for the initial two years of collaboration commencing after Manufacturing Facility completion, and we have committed to the retention of these jobs for five years,"

Where will money come from?

Personally I don't care about the 1.25 GW goal. I'd be happy with 800 MW. Tracking cumulative installation, this would take them from 1.7 GW to 2.5 GW, an that is respectable growth. Getting to 2.9 GW would be fantastic, but not at the cost of weakening their financial position. So I would prefer to end the year with more cash, more working capital, and only a $400M decline in DevCo CF (less than half the $821M from last year). So if they did all that and got to 25 GW cumulative, I'd be quite pleased.

I too think aiming for 800 MWs is much more appropriate than 1.25GWs. But I am not sure how Mr.Market will perceive such guidance. In my opinion, part of current SCTY stock price still reflects future growth. Lower the growth, lower the growth-premium. I think it's reasonable to expect the stock to fall on this news.

Additionally, I am not so sure $400Mil additional DevCo borrowing will be enough for it. I think it will easily be north of $600mil. And yet, even at $400mln, I am not sure if they will have an easy time raising that much cash.

The ultimate salvaging of the situation is to somehow monetise the out year cashflows (from slide-10). They want to try to do that by asset sales. I am quite skeptical of such sales for a number of reasons. I can dedicate an entire mega-post just on that. In my view even if such a sale happens, it will be more one time in nature accessing old friends and distant relatives, much like the silverlake deal.

Additionally such sale, based on pricing, will call the 6% discount rate into question and there is a big chance will put pressure on the stock. Or maybe the immediate cash relief will propel the stock up. It's a toss up.

I'd also like to see about 250 MWh of storage installed. 140 MWh residential (20k Powerwalls ) and 90 MWh commercial (900 Powerpacks) would bring in another $120 M in revenue (not all recognized in first year). I'm not sure is Tesla Energy is upto supplying this. If the supply were there, they could double or quadruple this. As they bring on the batteries, I think the market will positive respond. This will be a nice expansion of their current business model.

I don't see their current model as broken: I see it as incomplete. So I am eager to see them offer much more. It will be much more fun when we are trying to guess how many MWh they will sell each quarter.

I am quite puzzled. How will SolarCity pay for these batteries up-front?

If the business model is cracking just under the weight of panels, once you add the burden of financing the batteries, it will simply put that much more burden and effectively accelerate the business failure.

Are you thinking that Tesla will provide some sort of financing plans to SolarCity, where it doesn't need to pay upfront? That will simply transfer the business model mess up from SolarCity to Tesla. I am not sure if any of Tesla shareholders will like that.

Now that is only addressing liquidity issues with on-boarding batteries.

Separately, in my view I don't get the sense that battery installations will be immensely profitably to SolarCity. It appears as though between the ITC and grid-services, they might be able to recoup the costs. But will there be sizable profit? That's highly speculative at this point.

 

[Subhuman]

Oddly enough, I think this may prove advantageous to distributed solar and batteries over utility solar. It is much easier for Buffett to suppress utility solar and distributed solar. Within a few years, homeowners and businesses will find it cost effective to install combined solar and storage systems that have no need to interconnect with the grid. These systems will be given little motivation to contribute any value to the grid, and the 20th century cost structures of BH utilities will continue to mount. This will drive grid defection and load defection to the breaking point. So when economic reality sets in BH will crash hard. They will have one of the most overvalued book of obsolete assets. So write offs will be massive as 21st Century realities set in.

This is exactly what Lyndon was talking about when he said bad policy will lead to grid defection. Similar to the Nevada debacle. If the grid players would play nice most people would feel inclined to have a connection. However, with the net meter changes and additional fees, etc. people are going to find that a stand alone system is far superior and pull the plug. Once they pull the plug there will be no going back.