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Martin LaMonica

A View from Martin LaMonica

SolarCity IPO Tests Business Model Innovation in Energy

Solar installer SolarCity, which is expected to go public soon, shows the potential—and risks–of using new business models to advance mature technologies.

  • December 11, 2012

Amid the stream of news about solar company failures, SolarCity plans to do the seemingly improbable: raise money by going public on the stock market.

SolarCity first started in California and then expanded to other solar-friendly states, including Arizona and states in the Northeast U.S.

SolarCity’s initial public offering, which reportedly could happen this week, shows that the U.S. solar market is robust—at least at one end of the industry’s value chain. Many panel manufacturers are in a fight for survival but as an installer, SolarCity is benefiting from lower-cost products. (See, The Bright Side of Solar Industry Shakeout.) 

SolarCity’s IPO could be seen as a gauge of investors’ appetite for clean technologies in general. But the company’s story offers a different lesson for energy investors and entrepreneurs: the importance of an innovative business model. SolarCity hasn’t invented the greatest solar cell ever seen, as so many other startups have tried. Instead, it used information technology and clever financing to deploy solar at scale.

Through its IPO, SolarCity hopes to raise as much as $150 million. In a roadshow presentation with prospective investors, it touted its rapid growth—a compound annual growth rate of 109 percent since 2009—and a compelling pitch to consumers: we can offer you cheaper and cleaner electricity than the grid. Adding to the buzz around SolarCity is its chairman, entrepreneur Elon Musk, who said he will purchase $15 million worth of common stock. 

SolarCity was among the first to adopt a financing model that first took hold among commercial customers to residential solar. The company installs panels and consumers either pay for the power they produce, a monthly lease, or they buy the system themselves. SolarCity prices its offers so that the consumer pays about ten percent less for monthly electricity bills when they finance, CEO Lyndon Rive said during a road show video

This model has helped fuel rapid growth in residential solar. Research company Bloomberg New Energy Finance estimates that last year nearly half of residential solar installations were tied to a third-party financing company last year, double the rate from the year before.

SolarCity presents a number of risks, too. Its ability to offer electricity cheaper than the grid depends on government subsidies for renewable energy—the 30 percent federal tax credit is set to expire in 2016—and on state regulations that allow net metering, or selling distributed power back to utilities. In its prospectus, SolarCity also notes that lower electricity prices in the future and difficulty finding cheap source of capital for financing could become problems. Another concern is that government officials may question how SolarCity values its solar installations, which already happened in one disputed case

Given the popularity of financing, we can expect more companies to become solar installers. Home security and roofing companies have already started offering solar leases and utilities have experimented as well, effectively renting rooftop space for distributed solar generation.

SolarCity has sought to differentiate itself from other service providers, such as electricians who offer solar installation. The company has developed proprietary software systems, some of which it has patented, for generating sales leads or creating proposals. It’s also tried to diversity from solar. Two years ago, it acquired a home energy efficiency company, an additional service it can offer to existing customers. In that way, SolarCity isn’t just a solar company, Rive said during the roadshow video.

“Our vision is to become the most relevant energy company of the 21st century and we’re going to do this by selling cheaper and cleaner energy through distributed generation,” he says.

Is all that enough to attract retail consumers to its stock? SolarCity faces the challenge of explaining a business model that’s not immediately obvious and trying to generate the excitement of a fast-growing tech company when much of its business is in services. A number of energy-related hopefuls, including solar project developer BrightSource Energy, had to pull their planned IPOs and others, such as inverter maker EnPhase, have not performed very well. SolarCity has grown rapidly but it has not yet been profitable. (See, Cheap Solar Panels Aren’t Enough to Make Installers Profitable.) 

All solar companies will be subject to how fast the market overall grows, but the downstream end of solar—that is, the installer business where SolarCity is—is one area where there’s clearly a need for innovation. The “soft cost” of residential solar panels in the U.S., which includes sales, permitting, and installation, is twice that of Germany, according to Lawrence Berkeley National Laboratory.

Regardless of its reception on Wall Street, SolarCity can count itself as one the pioneers in solar financing and the brand it’s established as one of its best assets. Given the challenges developing breakthrough technology in energy, SolarCity’s growth until now shows that solar still demands innovation in business, not just material science. 

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