SolarCity at the Frontier of Climate Change

Climate change is one of the most pressing problems facing humanity today. Equipped with innovative photovoltaic technologies and a revolutionary financing business model, SolarCity aims to expand globally and dramatically decrease emissions greenhouse gases from fossil fuels. But is this goal too big to accomplish? Is a merger with Tesla the only way out?

Climate changes remains one of the most pressing issues facing the world today. Environmental effects of human industrial behavior underlie most of the mechanisms causing climate change. One of these human industrial behaviors is our great dependency on fossil fuels [1]. Fossil fuels such as coal, propane, and petroleum are burnt for energy production and in turn release greenhouse gases such as carbon dioxide into the environment. Carbon dioxide creates a blanket in the atmosphere that absorbs electromagnetic radiations in the infrared range and prevents them from being dissipated away from the planet, increasing the temperature of earth in the process [2]. The level of atmospheric carbon dioxide has increased by 40% from 280 ppm in 1750 to 400 ppm in 2015 owing to our increasing dependency of fossil fuels [3]. High levels of greenhouse gases in the atmosphere leads to a more broken ozone layer, an increase in the earth’s temperature, and a systematic warming of the globe. Burning of fossil fuel also leads to acidification of rain, which in no small ways plays key roles in climates change [4].

Taken together, the pressing need for finding alternative sources of energy has become arguably one of the most exciting social enterprises of the 21st century. Companies that are positioned to provide value by solving the worlds important problems in this sector easily become scalable and provide great potential for generating substantial profits.

SolarCity is one such company. Founded in 2006 by brothers Peter and Lyndon Rive (cousins of Elon Musk), Solar City is an American provider of energy services that designs, installs, and finances solar power systems. Harnessing the sun’s energy as either light or heat through the photovoltaic effect, which was first discovered by the French physicist Edmund Becquerel in 1839, SolarCity has install solar panels across the United States to generate over 120 megawatts of electrical energy since its founding. Unlike burning of fossil fuels, which release gases with greenhouse effects into the atmosphere, solar energy generation produces no deleterious effects on the atmosphere.

SolarCity has done very well by making the photovoltaic technology to harness the sun’s energy accessible to millions of Americans. The company employs over 13000 employees and has increased to a valuation to 2.6 billion since its founding. SolarCity’s environmentally responsible way of generating energy has enormous impact on climate change and sets the stage for expanding other clean energy methodologies for combating climate change.

Despite its promising future, SolarCity has still not been able to scale globally and grow from an economic perspective. While the business model of providing financing for solar panels to customers makes global diffusion of the technology very feasible, lack of adequate liquid assets and inability to innovate has made SolarCity unable to economically flourish as a company. The executives of SolarCity are therefore faced with the challenge of truly scaling their business, while remaining profitable.

Towards this end, Tesla, another clean energy technology company that focuses on electric cars, is currently working on acquiring SolarCity. I believe SolarCity will benefit greatly from this merger, insofar as it will provide synergies that will unleash the true potential of SolarCity and expand its reach around the world. If SolarCity can expand its global reach, the world will see significant decreases in the use of fossil fuel for energy generation and thus decrease emission of greenhouse gases that mechanistically lead to exacerbating climate change. The goal should be for every house in the world to have a roof with built in photovoltaic technology to harness solar energy. SolarCity will be positioned to develop new innovative technologies for harnessing other clean energy sources and make solar energy accessible to all, which will ultimately make the world a better place.

 

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References:

[1] Paul Mann, Lisa Gahagan, and Mark B. Gordon, “Tectonic setting of the world’s giant oil and gas fields,” in Michel T. Halbouty (ed.)Tulsa, Okla.: American Association of Petroleum Geologists, p. 50,

[2] Plass, G.N., Carbon dioxide and climate change, Scientific America, Dec 4, 2008

[3] Naomi Oreskes, “The Scientific Consensus on Climate Change,” Science 3 December 2004: Vol. 306 no. 5702 p. 1686 DOI: 10.1126/science.1103618

[4] Mike Lockwood, “Solar Change and Climate: an update in the light of the current exceptional solar minimum,” Proceedings of the Royal Society A, 2 December 2009

[5] “Solar Industry Data; Solar Industry Breaks 20 GW Barrier – Grows 34% Over 2013”. SEAI Research & Resources. Solar Energy Industries Association. 2015

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4 thoughts on “SolarCity at the Frontier of Climate Change

  1. I think the big question is whether the merger is a bailout of SolarCity by Tesla or a necessary strategic step. Your argument is that it is a strategic step because of the synergies that would be unlocked by the deal. I disagree with this assertion. Currently, SolarCity and Tesla already have a partnership that allows customers to benefit from both company’s services, so the deal seems unnecessary and does not create a lot of additional value for either company. I see this merger more as a financial bailout for the financially troubled SolarCity by Tesla at the expense of Tesla shareholders. We shouldn’t forget that Elon Musk also has personal interests in both companies. While I hope the merger goes well and that the company’s integrated offering of solar PV, batteries and electric cars is popular, I did not think the merger was the right move.

    1. Also, I came across an interesting editorial / article that shares the view that the merger is a bailout and not strategically driven. Worth checking out if you have some time! http://www.forbes.com/sites/greatspeculations/2016/06/22/elon-musks-solarcity-bailout-is-painful-for-tesla-shareholders/#311998d43aa0

  2. Agree with the bailout comment. SolarCity is facing multiple challenges, including rising cost of capital and customers that are starting to trend away from the lease and rising rates to competitively bid solar installations with loans attached (you can find some more details here http://www.fool.com/investing/general/2016/04/20/the-biggest-challenges-solarcity-faces-in-2016.aspx)

  3. While SolarCity is getting all the good press in part due to its connection with Elon Musk, Sunrun a direct competitor is often overlooked. The company is in the top 3 US Solar Residential installers, is publicly listed, and is used to turn a profit…yes, a profit “Sunrun’s net income rose more than fourfold in the second quarter to $32.6 million, or 31 cents a share, from $7.5 million a year earlier.” (http://www.bloomberg.com/news/articles/2016-08-12/sunrun-soars-after-beating-rooftop-solar-installation-forecast). Instead of being vertically integrated like SolarCity and all of Elon Musk’s companies, Sunrun subcontracts its installation and most of its customer management process, making its business model less capital intensive. So I disagree with your assessment that “the lack of adequate liquid assets, inability to innovate has made SolarCity unable to economically flourish as a company”. What SolarCity needs is not a bailout but a rethink of its business model: is being vertically integrated the right model for residential solar?

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