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the bigger risk in my mind-
In say the 10 year time frame, when current leases cost more than double the going rate of new systems at that time- It may actually be cheaper for an owner to default and replace. I think there is a potentially massive arbitrage created by the massive cost reductions coming in newly produce systems, (many funded through roof replacement etc); and are 30% or less of current lease rate costs. I believe we are going to experience a technological (and volume driven) cost curve that rivals the semi-conductor and matches the device throw-away-and-replace-obsolescence experienced with computers and similar. This will come concurrently with both PV and Captive storage combined.
I acknowledge you have to believe these reductions will occur to be worried about this scenario-
but since I do...
then I do..
jhm beat me to this. But will post anyway 
Potentially high default rates is a *very* overrated risk for SCTY.
1) Their Retained Value calculations have a discount rate of 6%. This is higher than average 30-year mortgage rate which is at 3.89% right now.
On the contrary SCTY's default rates are lot lower than normal mortgages. They have a chart in one of their investor presentations.
So default rates are more than adequately already priced in.
2) SCTY checks home owner's credit before giving out the contracts or approving transfers. There are minimum requirements and they don't take subprime borrowers.
3) If a homeowner defaults on their contract, they would be paying a *higher* amount for electricity from utility. Naturally it means the homeowner can't afford utility rates either.
How many households have you come across (in your lifetime) that can't afford utility electricity and live without power? Whould they be qualified to get the panels/contract in the first place?
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To add, one should be willing to mess up their Credit to default. There is a cost to it. How many people will "default" just to save a few tens of dollars per month? especially prime borrowers.
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Credit spreads will decline as they build longer track record over time, especially with their low default rates. So even if benchmark rates rise, their cost of capital will be flat, up to a point.
Only if you are expecting some sort of hyperinflation, where interest rates go up like crazy, *and* utility rates won't go up, then SCTY will have a problem. That is extremely unlikely.
Potentially high default rates is a *very* overrated risk for SCTY.
1) Their Retained Value calculations have a discount rate of 6%. This is higher than average 30-year mortgage rate which is at 3.89% right now.
On the contrary SCTY's default rates are lot lower than normal mortgages. They have a chart in one of their investor presentations.
So default rates are more than adequately already priced in.
2) SCTY checks home owner's credit before giving out the contracts or approving transfers. There are minimum requirements and they don't take subprime borrowers.
3) If a homeowner defaults on their contract, they would be paying a *higher* amount for electricity from utility. Naturally it means the homeowner can't afford utility rates either.
How many households have you come across (in your lifetime) that can't afford utility electricity and live without power? Whould they be qualified to get the panels/contract in the first place?
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To add, one should be willing to mess up their Credit to default. There is a cost to it. How many people will "default" just to save a few tens of dollars per month? especially prime borrowers.
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Credit spreads will decline as they build longer track record over time, especially with their low default rates. So even if benchmark rates rise, their cost of capital will be flat, up to a point.
Only if you are expecting some sort of hyperinflation, where interest rates go up like crazy, *and* utility rates won't go up, then SCTY will have a problem. That is extremely unlikely.
No- it's not recession related- these are long term (20 year-ish) leases.
Johan
Ex got M3 in the divorce, waiting for EU Model Y!
No but if people's economy starts falling apart the will start defaulting on their different loans. And they might choose to not pay their SolarCity lease before they stop paying the home mortage or car loan for example. In this case it's not like Solarcity can just show up and take down the panels and demount the whole system, that would be very costly for SC and they'd be loosing a lot of money either way.
If you don't pay your car loan for serval months a debt collector comes and takes your car. If you don't pay your mortage the bank forcloses, you're evicted and the bank sells the house. What happens if you don't pay your SolarCity lease?
But I agree with other posters; the risk if mostly just theoretical and since the system made financial sense in the first place something truly remarkable would have to happen in the electricity markets for it not to make sense even during a recession.
Zzzz...
Member
But their systems are internet connected, with software monitors etc. Couldn't SC just disable/modify inverter firmware remotely?
And in that case customer would had to pay utility prices anyway...
Yes, they can and they will. It is clearly stated in the contract. So the consumer would have to pay for electricity anyway. So why would they default on SCTY contract, mess up their credit and then pay to the utility a higher fee? That doesn't make any sense.
People generally take contracts seriously. Even when there is an arbitrage opportunity, people don't walk away from contracts. How many people default on their rental contracts just because they found a cheaper rental on craigslist?
Yes, I agree. It is as theoretical as theoretical gets. Unfortunately, vast majority of the risks I have seen people throw around are all very theoretical. Sort of like, hey what happens to TSLA if there is a big earthquake in California.
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A sample contract is here:
http://www.solarcity.com/sites/default/files/solarcity-contract-resi-ppa-example.pdf
Page 6 talks about defaults.
I looked and passed on a Solar City system for my house. My reasoning is as follows:
1). Solar City was offering to sell electricity to me at 15% less than the current cost of electricity from my local utility.
2). Solar City embeds a 4% annual escalator in their leases.
3). I am in the LED business. Lighting consumes 34% of annual energy use in the USA. LEDs are 80-90% more efficient than existing lighting. So as LED utilization increases, it can have a MAJOR impact on macro energy production. If 10% of businesses switched to LED lighting, this could be a 3-4% annual decrease in national energy usage.
4). Things like the Tesla Batteries at commercial and utility scale will kill off the expensive peak demand production.
So with 3 and 4 above I can see the cost of electricity coming down substantially in the future even with renewable energy mandates. So if your Solar City lease increases 4% annually, and if the cost of electricity is stagnant or decreases in the future, your Solar City lease can end up costing more than buying from the utility. I can certainly see some consumers saying go ahead and take the solar panels away, it is cheaper for me to buy from my utility.
If the peak demand suddenly drops all the peaker plants will be stranded assets and cost could go up for the average user as the utilities are forced to spread out their cost over their entire user base.
I take an economist's skepticism at the emboldened portion of your argument. On the margin, I suspect, the American consumer will respond to a diminished electric bill by finding other ways to consume electricity. A second (3rd/4th) EV? A refrigerated pool in Yuma for the pet polar bear? A heated pool in Paxson for the koi pond? And so on.
jhm
Well-Known Member
Actually, I'm a bit concerned about this as well. What particularly concerns me is the use of escalators. Under the PPAs, the rate paid per kWh goes up 2.2% each year. The assumption here is that utility rates will go up like that and so the customer will be happy just to be saving a few cents per kWh over the utility rate. But I see problems with this. There is the possibility that utilities actually become more competitive over time. If your escalated SolarCity rate becomes higher than your utility rate, will you switch back to the utility? The more likely scenario is that other solar providers may come along to offer better rates. Either way if SolarCity starts to see rate competition, it will have to lower its rates defensively. So why build in an escalator into a 20 year contract if it just exposes you the price competition. The answer I suspect has been that this is the way to hold down the per kWh rate initially, a kind of loss leader. Another problem with this from an investor viewpoint is that this pushes more of the net retained value way off into the future. I would simply prefer to see the cash come in sooner than later. I think as a prospective customer I would be more confident to get in a contract with no escalator. The customer gets the assurance that their rate will never go up, not even for inflation. A hedge against inflation is a good selling point, especially for people living on a fixed income.
Over 20 years with 6% discount, 13 c/kWh with a 2.2% escalator has the same present value as 15.45 c/kWh with 0% escalator.
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Has SolarCity always included escalators in their contracts? For some reason I thought their prices were locked in over the life of the contract and that was part of their sales pitch.
Anyway, 2.2% escalator doesn't seem too bad.
Looking at EIA.gov Electricity data browser for Avg Retail Price of Electricity from Jan2001, to Feb2015, seems like price increase over the last 15 years is considerably more than 2.2% annually.
What makes you think utilities would get more competitive?
Anyway, 2.2% escalator doesn't seem too bad.
Looking at EIA.gov Electricity data browser for Avg Retail Price of Electricity from Jan2001, to Feb2015, seems like price increase over the last 15 years is considerably more than 2.2% annually.
What makes you think utilities would get more competitive?
jhm
Well-Known Member
Cheap solar and batteries.
Plus the need to compete with cheap solar and batteries.
Not too worried though.
jhm
Well-Known Member
The Big Play
SolarCity CEO: Why You Should Buy a Tesla Battery - Bloomberg Business
I've been puzzling over this interview Lyndon Rive gave. The interviewer was keen on why SolarCity wants to move ahead with the 10 kWh Powerwall weekly and not the 7 kWh daily and seemed to assume that the point of these batteries were so that customers could go off grid. Lyndon was clear that the weekly was just for back up and not to enable off grid living. Moreover, he was emphatic that going off grid would be a really bad policy outcome. Rather, he wants customers to stay connected and potentially provide "grid services."
In a way, this does not make much sense. Customers stay connected, but get a $3500 battery just for back up. Moreover, we know that SolarCity typically gets 80% to 90% of the meter already due in large measure to generous feed in tariffs. No doubt customers will place positive value on battery backup, but it is not clear how this creates value for SolarCity. It adds cost to the installed system, but there really is not much more energy to sale to the customer. If SolarCity already has 80% share, weekly backup batteries may add another 10% or so, but this marginal gain does not seem worth the extra $3500 added to the average $15000 installation. Certainly adding 28 kWh of Powerwall units at a cost of $12k so that the customer can go offgrid does not make sense for SolarCity.
So what is it? What is the play here that makes this really work for SolarCity. Again Lyndon's insistence that going off grid was a bad policy outcome offers a clue. The big play here is offering grid services. When offering grid services the utilities themselves become the customer. It's not at all about selling a few more kWh to customers. It is about aggregating all those rooftop systems with just enough storage that they can lever feed in to the grid so as to provide peak power, voltage regulation, demand response (charging) and perhaps other services I do not understand at this point. SolarCity need a big enough book of PV+storage to drive utilities and regulators to the bargaining table to Crack open enough regulatory leeway that they can begin to sell these aggregation services. Once this happens the weekly Powerwalls will be quickly paid for and daily Powerwalls will be quickly deployed. This happen because the 2 to 3 percent of households within SolarCity's book can now be deployed to provide value to the other 97% of the utility's service area. This is a very big play that my just double the value of each installed.system.
If I am correct about this big play, then it will be a critical development for shareholders. It is the sort of thing that could double the stock in a very short timeframe. Of course, we have no guarantee that SolarCity can pull this off. It would require major policy changes. So the actions of utilities and regulators are critical. But I also feel that some sort of new arrangement is inevitable. Solar and the utilities are on a collision course, and at some point the existing framework falls apart. Off grid is a really bad policy outcome because distributed energy resources have something to offer everyone.
So let's see if we can dig into this, and figure out when and how this can go down. If we can anticipate this transition, it will be a huge investment play.
SolarCity CEO: Why You Should Buy a Tesla Battery - Bloomberg Business
I've been puzzling over this interview Lyndon Rive gave. The interviewer was keen on why SolarCity wants to move ahead with the 10 kWh Powerwall weekly and not the 7 kWh daily and seemed to assume that the point of these batteries were so that customers could go off grid. Lyndon was clear that the weekly was just for back up and not to enable off grid living. Moreover, he was emphatic that going off grid would be a really bad policy outcome. Rather, he wants customers to stay connected and potentially provide "grid services."
In a way, this does not make much sense. Customers stay connected, but get a $3500 battery just for back up. Moreover, we know that SolarCity typically gets 80% to 90% of the meter already due in large measure to generous feed in tariffs. No doubt customers will place positive value on battery backup, but it is not clear how this creates value for SolarCity. It adds cost to the installed system, but there really is not much more energy to sale to the customer. If SolarCity already has 80% share, weekly backup batteries may add another 10% or so, but this marginal gain does not seem worth the extra $3500 added to the average $15000 installation. Certainly adding 28 kWh of Powerwall units at a cost of $12k so that the customer can go offgrid does not make sense for SolarCity.
So what is it? What is the play here that makes this really work for SolarCity. Again Lyndon's insistence that going off grid was a bad policy outcome offers a clue. The big play here is offering grid services. When offering grid services the utilities themselves become the customer. It's not at all about selling a few more kWh to customers. It is about aggregating all those rooftop systems with just enough storage that they can lever feed in to the grid so as to provide peak power, voltage regulation, demand response (charging) and perhaps other services I do not understand at this point. SolarCity need a big enough book of PV+storage to drive utilities and regulators to the bargaining table to Crack open enough regulatory leeway that they can begin to sell these aggregation services. Once this happens the weekly Powerwalls will be quickly paid for and daily Powerwalls will be quickly deployed. This happen because the 2 to 3 percent of households within SolarCity's book can now be deployed to provide value to the other 97% of the utility's service area. This is a very big play that my just double the value of each installed.system.
If I am correct about this big play, then it will be a critical development for shareholders. It is the sort of thing that could double the stock in a very short timeframe. Of course, we have no guarantee that SolarCity can pull this off. It would require major policy changes. So the actions of utilities and regulators are critical. But I also feel that some sort of new arrangement is inevitable. Solar and the utilities are on a collision course, and at some point the existing framework falls apart. Off grid is a really bad policy outcome because distributed energy resources have something to offer everyone.
So let's see if we can dig into this, and figure out when and how this can go down. If we can anticipate this transition, it will be a huge investment play.
Somewhere there is some audio of Lyndon spelling exactly this out. He said there is one (or two) markets that are working on changing policy to allow this and every contract has this ability built into it with a 50/50 split between the homeowner and SolarCity. He also mentioned that the Utilities need this about 50 times a year which is what they 10Kw packs are designed for.
jhm
Well-Known Member
Very nice. It would be good to find this clips. The video I reference above has a few statements about grid services but does not really speel this out. Its wonderful to see this is written into contracts. This shows serious forethought.
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Yeah, microgrids hold big opportunity for turning utilities into customers. If utilities really do have major problems with bidirectional power flow, then microgrids can handle power sharing with the microgrid and provide grid services in aggregate back to the grid. So if there really is a problem here, SolarCity can solve it. Otherwise, the utility may just be bluffing.
Obviously, the next step beyond rooftop power for homeowners is sharing rooftop power with neighbors. Feeding in to the grid and microgrids are both ways to do this. The bad policy outcome is losing the ability to share power with neighbors.
I believe the "0 dollar down" plan always had an escalator clause, but they offer other plans as well that remove the escalator, but require an upfront payment.
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