SolarCity (SCTY)

[electracity]

I know many people on this forum feel like they sound like a broken record. At the risk of skipping my needle again, SCTY cannot roll out fixed loans right now because it would result in negative cashflow. What is the effective yield on SCTY bonds being issued right now? I'll give away the answer by asking another. If you have to borrow cash at north of 20% interest, how are you going to be able to afford to loan money to a customer, or finance the installation of their system at anything close to competitive rates?

That leaves the only other option - partner with a lender. If we've learned anything about what has fueled SCTY's success, it's that they can offer a cost-effective solar installation without requiring a penny up front from the customer. SCTY's growth is a result of the fact that very little financing is available to consumers for solar systems. Banks are not hungry for such opportunities. Banks have offered almost nothing that doesn't require the consumer to put up some cash. And even when the customer makes a down payment, banks have been generally unenthusiastic about solar loans. SCTY is not going to find a lending partner.

<hear needle skipping again> SCTY has a cashflow management problem. There's no way they can "roll out fixed loans" when they don't have the cash to do it and it costs them between 5 and 24% to borrow. No "lending partner" will ever finance 100% of the cost of the install or 100% of the remaining unlevered NPV of the contracts. <needle removed from record>

Well this is the core issue, isn't it? SBENSON pointed out that their Q1 guidance was likely so low likely because they couldn't borrow to fund the projects. Then in Q2 sales are projected to return to normal growth.

SCTY borrowing of mostly short term money against their capitalized installation costs turns out to be very risky. It seems to me that they have to partner with a lender to get their cost of funds down. But the business case for solarcity was the value created by the finance. So I have no prediction what they will do.

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Yep, sign me up. I don't think this is a complicated product to sell.

People with uncertain tax liability will love this too. Even people with certain tax liability might like the simplicity, certainty, and timing.

Let me lease/buy my model 3 this way too.


BTW, I think any loan with an escalator is consumer abusive. History shows unsophisticated people sign up for "cheap" without understanding the present value of their commitment, and banks use this ignorance to harvest values, often sold by unscrupulous agents. It's unjust, and a strong sign of organizational dishonesty or at least low integrity.

Unfortunately solarcity contracts for an inflated system value. They gain benefit from showing a system that would have an average value of $20K at $28K. Doing this they max the ITC, and stick the customer with a high cost if the system is purchased due to a home sale.

Most people who understood the tax deal jhm suggests would not buy the system due to unattractive terms. The "bread and butter" of solarcity is a simple deal (PPA) to a low information consumer.

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Seems to me that you are being obtuse, so you can ignore nuance and context, and see what you want to see. As I indicated in my original post, in the end, my only real issue is that SS created a complex product that didn't need to be so complex. I didn't like the escalators because I didn't need 30 years to pay back the loan and it reduced my return. Yes, my trust was a little shaken at the time because hiding fees and like is a tactic of predatory loans. However, in hindsight the escalators were there in black and white and my sales rep answered all my questions forthrightly. There was no attempt at deception. SS still installed my system on schedule for the quoted price knowing full well I intended to pay off the loan in full immediately. They will still service my system if needed, honor warranties, guarantee my production, provide me real time online system monitoring, and will replace my inverter when the time comes. No small local installer offers all those advantages. The local installer I didn't go with installed the system at my first house and does not advertise, so please don't pretend that you have some insider knowledge of the local PV installation market where I live. Paying a small premium for a large, financially stable installer, with a proven track record, that works safely, and does quality work is worth the piece of mind. You may find no value in that reasoning, but plenty of people obviously do. Instead of recognizing that reality you choose to believe everyone who chooses SS has somehow been hood-winked.

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It depends what you mean by "hood winked". If you goal was to make a sound financial decision to lower your cost of electricity, then you were hood winked. If your goal was to reduce your carbon foot print, then solarcity is an easy choice.

Solarcity is a financially sound installer, with their bonds returning 18%-25%?

 

[jigar]

The highest yields on Available Bonds - Buy Solar Corporate Bonds - SolarCity is 5.75

Where are you getting 18%-25%?

 

[SBenson]

The highest yields on Available Bonds - Buy Solar Corporate Bonds - SolarCity is 5.75

Where are you getting 18%-25%?

You are showing the secured-bonds backed by consumer contracts.

He is talking about unsecured corporate bonds. Cusips - 83416TAA8, 83416TAC4

 

[electracity]

The highest yields on Available Bonds - Buy Solar Corporate Bonds - SolarCity is 5.75

Where are you getting 18%-25%?

Bonds Detail

 

[jigar]

Thanks

 

[electracity]

You are showing the secured-bonds backed by consumer contracts.

He is talking about unsecured corporate bonds. Cusips - 83416TAA8, 83416TAC4

He is referring to the 15 year unsecured bond that solarcity is selling retail from their web site.

 

[SBenson]

Btw, the yields on these two bonds still show an inverted yield curve (bonds with nearer maturity has higher yield). This generally implies market is predicting that a default is a near term risk.

 

[electracity]

I would love to hear a bond traders take on this. They obviously don't follow the equity analysts, so how are they pricing? I suppose bonds traders specialize by industry segment.

 

[Foghat]

Can we agree that about 20% to 40% of the residential market would prefer a simple loan? If not, tell me what you think the size is. Then we can discuss whether it is best for SolarCity to simply pass on serving that segment.

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I happen t work for a major bank and know what I am talking about. SolarCity already offers a loan. Switching from a complex MyPower Loan to a standard fixed rate loan, especially one with a shorter term would actually be easier for SolarCity to fund. They would get there cash much quick. If you look at lie 10 in the Q4 2015 Review you will see that Levered cash flow is most constrained over the next ten year, then opens up substantially after that. Suppose SolarCity offer a fixed 10 year loan. The full cashflow including profit would be collected within ten year. This would be a huge improvement to cash flow.

jhm, I have to ask, what % of middle income amercia can take advantage of the ITC? I think that is a big sticking point for low monthly payments. If they can't do the ITC, Increasing fixed monthly bills for years to come is a major hurdle for a average homeowner already dealing with a menu of other big fixed costs like a car payment, mortgage, etc...

So, given the hurdles(I perceive), how big is the loan market? Is it 20% of the broader public? I'm not sure, but I feel that it is significantly lower then a product that reduces monthly expenses immediately.

I I look at this from a business perspective. I'm not against any financial product. I'm for what the broader consumer desires and right now given the dynamics of monthly expenses, lease ppa is that product by a wide margin. It's not even close. Again, the majority of Americans want to reduce monthly expenses, specifically utiltiy expenses. They see electricity as a given expense. reducing that right now is far more attractive then paying more now for a loan to reduce it later. Most Americans see energy as something they have to pay anyway, so a lower monthy payment is more attractive as opposed to a payback period. Savings now is more valued then savings later when it comes to electricity bill.

 

[Foghat]

Why is the Australian minister of trade and investment meeting with Solarcity execs at Solarcity headquarters today?

 

[dalalsid]

Why is the Australian minister of trade and investment meeting with Solarcity execs at Solarcity headquarters today?

Your batteries are going to kill our utilities. Please go bankrupt soon?

 

[Foghat]

Your batteries are going to kill our utilities. Please go bankrupt soon?

Ha funny.

dalalsid, I'm seeing the next battle of solarcity's business model being fought hard right now already. The battle is happening at FERC level involving PURPA. Buffet is really moving hard in this direction, since aggregation is setting up to begin soon(meaningful way in 2017). I think if anyone out there has some insight on this battle will be able to anticipate impact on Solarcity Bottomline with greater accuracy. This again, is the wholesale market(Solarcity grid services)which falls under federal regulatory oversight. PURPA related pricing and contract length are the center pieces.

In PURPA ruling, FERC says Entergy not obligated to buy from large QFs | Utility Dive

 

[electracity]

If solarcity ends up with 200000 california PPA customers with vanilla net metering, and 10% buy batteries, they will have a max of 120mWh per day to sell in california. By contrast, the Hawaii project recently announced is 52MWh and 13 MW.

 

[Foghat]

If solarcity ends up with 200000 california PPA customers with vanilla net metering, and 10% buy batteries, they will have a max of 120mWh per day to sell in california. By contrast, the Hawaii project recently announced is 52MWh and 13 MW.

That not how it works... The Hawaii deal is different then aggregation(grid services). solarcity's aggregation is paid for access to firm capacity per month. Hawaii is paying a price/kWh produced.

http://www.greentechmedia.com/articles/read/solarcity's-plan-for-tesla-batteries-share-grid-revenues-with-homeowners

But he did provide one metric for the value it could capture for SolarCity and its customers -- the rough estimate of $10 per kilowatt-month that California utilities pay for resources and investments to maintain grid capacity.
“In their case, they procure capital equipment and then depreciate it,” he said. “With solar and a battery, you can provide what is a firm capacity resource.”
That’s why the value is presented as a “per-month” figure, by the way. That’s not an amount of energy to be sold to the system hour by hour and day by day. Instead, it’s a payment in exchange for a firm commitment to turn its fleet of battery-backed solar systems into a reliable source of power at moments of peak energy demand, when utilities and grid operators need it the most.

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Back of the envelop, lets just use $10/kilowatt-month for rough estimation purposes. What could Solarcity get for 10,000-20,000 aggregated homes in a specifically expensive load location in PG&E utiltiy territory under demand response contract? How could this breakdown 50/50 between Solarcity and customer? How much would thst reduce cost/kWh for customer? How does that 50/50 reflect on revenue/Bottomline for Solarcity compared to net metering only?

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Does anyone know what advanced microgrid is getting paid for this?
http://www.greentechmedia.com/articles/read/advanced-microgrid-solutions-to-build-50mw-of-hybrid-electric-buildings

if known, might get more feel for what is potential for Solarcity aggregation. Remember the have about ~800mws of capacity under management in California alone.

 

[electracity]

I don't know how to translate $10/kw reserve to batteries. What solarcity can do with batteries is demand response. The value can't be too high or a competitor will simply reproduce the service on grid with equipment installed at utility scale prices.

The in-home pricing we see for the powerwall is $1000/KWh and $2000/KW.

Edit: Green Mountain Power will pay $32/month for powerwall access. So that is about 45% on the installed cost of $6500.

 

[dalalsid]

The value can't be too high or a competitor will simply reproduce the service on grid with equipment installed at utility scale prices.

That doesn't make sense. Home users are paying for the battery primarily for backup. The grid services are secondary to them to help reduce the cost of the battery. No home user is installing a battery to provide grid services. How is a utility scale provider going to compete with free?

 

[Foghat]

Solarcity is providing grid services, not the home owner. Solarcity gets paid for the services, then has an arrangement with participating homeowner to split proceeds.

In theory, Solarcity could contract anyone with a capable home system, so they could conceivably have sunrun, vivint, local installer installed homes under grid services resource contracts. This means they are not limited to solatcity only customers. This may prove that solarcity's aggregation software platform is extremely value IP. Since Solarcity has 1/3 of the market, their network might provide the greatest return for participating home owners, therefore quickly raising huge barriers to entry for other aggregation services competitors like sonnen, sunpower and the rest...

Aggregation as demand response looks very compelling as a peaker resource. From a prior post in August:

PJM spent $2bln on a peaker plant that has been used 13 times since 2009, which averages out to $25,000 per Mwh for demand response product. SCE spent $200mln in 2013, at $18,000 per Mwh for demand response.

what would a estimated cost/Mwh for Solarcity demand response in comparison? Might it be significantly cheaper to the grid then above numbers?

 

[electracity]

That doesn't make sense. Home users are paying for the battery primarily for backup. The grid services are secondary to them to help reduce the cost of the battery. No home user is installing a battery to provide grid services. How is a utility scale provider going to compete with free?

Do you think a lot of users will buy a battery for backup? Especially PPA customer who are apparently motivated by taking $10 of their electric bill?

 

[Foghat]

I don't know how to translate $10/kw reserve to batteries. What solarcity can do with batteries is demand response. The value can't be too high or a competitor will simply reproduce the service on grid with equipment installed at utility scale prices.

The in-home pricing we see for the powerwall is $1000/KWh and $2000/KW.

Edit: Green Mountain Power will pay $32/month for powerwall access. So that is about 45% on the installed cost of $6500.

This 10/kW-month is to Solarcity as aggregator. To
me, this means the amount of reserve is not dependent on individual batteries, but rather dependent on the entire network reserve. So some batteries may never be used but apart of the reserve network Solarcity includes in a demand response contract with the grid. I think it is more advantageous for us to look at Solarcity aggregation as a singular reserve by which the grid will call upon, not individual systems. The value of that network is vital here to pricing services.

 

[SBenson]

He is referring to the 15 year unsecured bond that solarcity is selling retail from their web site.

Somehow I never realised that Solar Bonds are unsecured. That's very interesting.