Solar panel technology has been around for over 50 years, but most of us have not had access to the technology until the most recent decade. Since 2000, a number of companies have tried to bring solar panels to the mainstream with little success. SolarCity, which started in 2006, aims to change that pattern by gaining mass adoption through the alignment of an innovative business model and operating environment.
A Bright Business Model
SolarCity’s business model revolves around 2 value capture streams, Leases/Power Purchase Agreements (PPAs) and solar energy system sales. Of the two, PPAs are the most popular and primary growth driver for the company.
When SolarCity starts a PPA with a customer, SolarCity installs a system on the customer’s roof for no fee. For a entire life of a typical 20 year contract, the customer pays for electricity generated from the installed panels at much lower rates than they normally would have paid a utility company. These rates are also secure being nearly locked in for the 20 years vs. utility rates that trend dramatically upward over time. SolarCity maintains ownership and service requirements, but they also own what amounts to an annuity like cash flow from the energy the customer utilizes.
Customers do not pay for the installation but instead reduce their utility bills. SolarCity profits the sale of energy to the customer which is almost guaranteed… OVER A 20 YEAR LIFE!
An Operating Model to Light the Way
To support this unique model, SolarCity has invested heavily in their operations. Key components to support the business model include personalized customer interaction (sales, design, and installation), innovative manufacturing, and creative partnerships:
- Sales and Marketing: SolarCity’s business model requires heavy interaction and marketing to individual consumers. SolarCity utilizes a door-to-door sales force and recently acquired a direct-to-consumer marketer, Paramount Energy, to help bring a personal touch to all of its customer interactions.
- Design and Installation: SolarCity uses local teams for design and installation work. A simple design to installation process starts with a consolation about the product and qualifications (does the home meet certain requirements). Next, expert engineers design a solar power system based on the customer’s home dimensions and energy needs. Next installation is typically done in one day and SolarCity takes care of all of the permits and inspections. SolarCitys unique and personalized installation experience provides a strong competitive advantage.
- Manufacturing: For the first 7 years of existence, SolarCity sourced their components from outside suppliers. This limited the SolarCity’s ability to innovate and improve the technology within the value chain. In 2014, they acquired two companies, Zep Solar and Silevo, to help integrate additional manufacturing into their operations. Since then, SolarCity has been credited with top of the line panel development and innovation compared with other panel installation companies within the industry.
- Operating Partnerships: SolarCity is kicking off a partnership with Tesla Motors’ Powerwall (energy storage technology) to efficiently manage customer energy use during the day. Currently, a solar panel’s energy covers roughly 70% of the customer’s energy needs, but with more efficient usage this percentage could climb to 100% thereby lowering the customer’s bill and further optimizing the value capture of the business model. Further, this partnership increases value with very limited capital investments for SolarCity. Low capital investment with high value add is a win win for the company.
Early results were mixed but recent trends are showing positive signs for long term value. Total cost per watt (basically a measure of how efficient the company is creating each watt of energy) has steadily decreased since 2011 from $4.73 per watt to under $3. Market share in the residential space has grown from 17% to 38% in the past 4 years and total customer growth has grown at a 94% CAGR since 2012. ROA has moved from -590% to -152% in three years (yes this is very bad but typical for an early stage solar company with heavy investments that pay off over a long time horizon).
With positive trends in business results and a management team focused on long term investments, SolarCity is set up well to continue to create and capture long term value. With years of expansion and opportunities in front of them, things look bright for SolarCity.
http://marketrealist.com : SolarCity’s Multi-Stream Business Model
SolarCity Investor Presentation, November 2015