Fighting the Good Fight – Is Solar City Too Dependent on Regulation?

Whilst policies to tackle climate change have boosted the residential solar installation market, Solar City must navigate opposition from entrenched utility players

The rising level of greenhouse gases (GHG) is globally recognised as being the root cause of climate change. Since fossil-fuel based electricity supply accounts for around 30% of total US greenhouse gas (GHG) emissions (1), increasing the proportion of renewable energy supply is a common and well understood approach to reducing GHGs. Recognising that market forces alone won’t lead to the required pace of investment federal and state governments have introduced subsidies and policies to make these investments more attractive, benefitting solar installation companies such as Solar City (NASDAQ:SCTY). Complicating the matter, however, are the public and private utility companies. Their business model is at risk and they typically have monopoly-like pricing control and/or close ties to the local government entities making pricing decisions. Companies such as Solar City must learn to adapt quickly to the changing regulatory environment or risk being regulated out of existence.

 

Residential Solar – A New Hope

Solar City was established in 2006 by Lyndon and Peter Rive after a suggestion by their cousin Elon Musk, who then became the chairman and initial investor. The company provides solar panels installation services in the US to households and businesses through a range of financing options including the outright purchase of the panels, loans, leasing arrangements, and power purchase agreements.

Solar technology has constantly improved over time with the cost of solar now being more than 50% lower than in 2009 (2). This has increased the accessibility of residential solar systems, especially when combined with generous federal and state subsidies. For example, in 2007 the California Solar Initiative provided for a budget of over $2BN to install c.1,940 MW of new solar capacity by 2016, which reduced the cost of a solar system by almost 50% when combined with federal tax credits (3).

median-installed-price-trends-over-time(2)

As well as cash and tax incentives other policies, such as net metering, have been put in place to encourage solar ownership over the long term. Net metering is an energy policy designed to incentivise investments in renewable energy. It allows households and businesses who produce excess energy to reduce their utility costs by providing them with credits for the electricity they produce. These energy credits can either be utilised by the household/business at another point in time (e.g. later in the day, or the next week/month) or sold back to the grid at a specified rate.

These economic and environmental incentives have been very attractive to consumers, typically middle income households, and as demand for alternative energy grew, solar installers such as Solar City grew rapidly to meet this demand since 2008. However, the rapid growth quickly caught the attention of the incumbent utility players.

us_solar_electricity_production

 

The (Utility) Empire Strikes Back

Utility companies led a campaign to slow the growth of solar which, although broadly unsuccessful, impacted key markets. For example, in early 2015 Salt River Project Agricultural Improvement and Power District (SRP), Arizona’s largest utility, introduced a surcharge for solar customers only that would increase the monthly bill by around $50. SRP claimed that solar customers should pay their fair share of grid maintenance costs, particularly as they still rely on the grid during peak usage times such as during the night. Solar City filed a lawsuit against SRP on anti-competition grounds but this did little to stem the demand impact and new solar installations fell by c. 96% (4). Similarly, earlier this year in Nevada the Public Utilities Commission (PUC) reduced the net metering rate for solar customers, reducing the credits earned on excess energy production (5). In response to the anticipated reductions in demand, Solar City had to make 550 employees redundant impacting members of the local community.

 

Addressing Future Regulatory Changes

Although it is not clear what other regulatory changes are on the horizon Solar City must take steps to preserve the value proposition of residential solar. In the short-term they could try more to influence the policy makers to limit further detrimental regulatory changes, perhaps joining forces with other pro-solar enterprises as well as corralling public opinion to have more influence. They could also potentially form partnerships with the incumbent utilities, avoiding competition altogether. This could be combined with a more long-term strategy of investing in technology to make ever cheaper solar cells to offset the reduction in economic benefit.

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References

(1) “Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990–2014”, US Environmental Protection Agency, April 15 2016, accessed November 3, 2016, https://www.epa.gov/ghgemissions/us-greenhouse-gas-inventory-report-1990-2014

(2) “Tracking the Sun IX – The Installed Price of Residential and Non-Residential Photovoltaic Systems in the United States”, Galen Barbose and Naïm Darghouth, Lawrence Berkeley National Laboratory, August 2016, accessed November 3, 2016, https://emp.lbl.gov/publications/tracking-sun-ix-installed-price

(3) “California Solar Initiative (CSI)”, California Public Utilities Commission, accessed November 3, 2016, http://www.cpuc.ca.gov/general.aspx?id=6043

(4) “Our response to anti-competitive behavior in Arizona”, Solar City, March 3, 2015, accessed November 3, 2016, http://blog.solarcity.com/our-response-to-anti-competitive-behavior-in-arizona/

(5) “SolarCity cuts 550 Nevada jobs, blames new net metering rate”, Sean Whaley, Review-Journal Capital Bureau, January 6, 2016, accessed November 3, 2016, http://www.reviewjournal.com/business/solarcity-cuts-550-nevada-jobs-blames-new-net-metering-rate

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6 thoughts on “Fighting the Good Fight – Is Solar City Too Dependent on Regulation?

  1. Interesting post! A few thoughts: it seems like attempting to influence regulation will be expensive and challenging for Solar City given its size relative to major utility players. For reference, Solar City’s 2014 revenues were USD 255 Mn vs. Salt River Project’s USD 3 Bn (Source: company annual reports).

    I would love to hear more about how Solar City could partner with incumbents to avoid competition. I would assume that any such effort would be flagged as oligopolistic and neutralized by anti-trust regulators.

    As renewable energy technologies mature, government subsidies for Solar City will likely be rolled back. Solar City will need to compete in a world with less and less renewable subsidies. All things considered, it seems that the company can only survive by innovating to keep its prices low and minimize its reliance on the grid during peak hours. This means cheaper PV cells as well as bigger batteries.

  2. I particularly appreciated your suggestion on partnering with local utilities as an option for SolarCity moving forward. Utility companies could benefit by lowering their own carbon footprint while diversifying their portfolio, a necessity for any company moving forward. There is absolutely a power grab occurring with utilities and direct to consumer renewable energy companies. One would assume that both industries would benefit from partnerships.

    Has SolarCity looked at changing their business model, specifically their pricing model for residential consumers? Currently, most SolarCity installations are done through a leasing model, which drives away many possible customers, as they may not actually realize the marginal return in energy savings. I am curious if SolarCity would attract more customers by selling the PV panels and installation outright, given the low cost of panels and the energy savings potential.

    Most importantly though, as you mentioned in your post, solar companies need to find more efficient and appealing ways to produce revenue, as government subsidies seem to be fading.

  3. Thanks for this T.O.M. The issue of grid balancing and who pays for the grid is just such a quagmire, not just in the US but all over the developed world. Over the years hundreds of millions of dollars have been invested to develop a grid system which finds it pretty hard to integrate distributed generation. In the UK, the network operators can’t even get their heads around treating such generation as generation but always referred to it as ‘negative consumption’! Ultimately there just is no easy answer here and its such a dense complicated issue that any change of regulation is always going to upset one side or the other. It does make me feel hopeful about developing countries however as they may well be able to make the most of these newer technologies without being encumbered by the enormous (and historic) cost of the grid. Cheers!

  4. Great post! Solar City’s dependence on government regulations is certainly one of the many issues facing the industry today. Although solar tax credits help reduce customer costs, I wonder if the existence of credits meant that solar companies were less incentivized to develop cost-effective solar panels. Federal tax credits were originally scheduled to expire in 2016 and were recently extended till 2021. Solar City’s stock prices suffered badly when the market priced in the risk of tax credits expiring (as originally scheduled). Investors appear to believe that solar cannot compete without government help. Did the extension of tax credits till 2021 just delay Solar City’s failure? Did government efforts to reduce dependence on fossil fuels create an unsustainable solar industry? I believe that solar energy must be commercially competitive to have a long-term positive impact. Your idea of partnering with utilities may be the only solution to this problem.

  5. It’s interesting to see how utilities and regulators are removing incentives now that solar has reached grid parity. I can understand why utilities would charge people for using their grid – they spent millions of dollars building these things so that they can sell power through them, and now that people are generating their own power, why shouldn’t they pay to use the benefit of the grid? Further, if they do not charge these households for selling solar on the grid, then all the current grid maintenance costs will have to be pushed down to the remaining users who do not have solar. This will in turn make using conventional power very expensive, and make solar even more attractive, which then causes people to switch to solar, resulting in higher prices and a death spiral for utilities. While this may be an interesting new world order, I doubt it will be beneficial for society (at least in the near term) as many people and industries still need utilities who can supply a reliable source electricity. Hence, I would not be so quick to demonize utilities who provide a public service and are trying to survive.

  6. This post and topic brings up a very interesting issue in the climate change world, the relations between government with public utilities companies and clean energy companies. How much do theses companies depend on current regulation and/or monopoly style pricing mechanisms tolerated and promoted by government themselves. As I said before, in order to solve the problem with clinate change we need strong government regulations and smart public policies, but not THESE!!

    What some utilities companies have been doing with net metering to Solar City and other solar panel companies goes against sane competition and should not be tolerated. Ultimately what we need is an end to current government induced monopolies in the utilities industry and smart public policies to incentivize consumer behaviours that align with society’s climate goals.

    Old utilities companies should be the ones learning to adapt quickly to the changing regulatory environment or risk being regulated out of existence.

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