The Miracle of SolarCity

Elon Musk’s Tesla and SpaceX are impressive. But the solar company he founded with his cousins could be transformational.
By Daniel Gross | Slate

Solar CityThere’s a huge, ongoing, and justifiable obsession with Elon Musk and his ventures—chiefly Tesla, the electric car manufacturer, and SpaceX, his private spacecraft business. It’s not surprising a biography of the man was a best-seller this year. But to my mind, the most important and interesting venture that the polymathic South African immigrant helped start is the one that gets the least press. That’s SolarCity, a company that aims to paper America’s rooftops with solar panels.

Musk’s work with Tesla may inspire the most obvious comparisons to Henry Ford. But SolarCity—where Musk is the chairman, and whose concept he suggested to two of his cousins, Lyndon Rive (now the chief executive officer) and Peter Rive (Lyndon’s brother, now chief technology officer)—might offer some even more apt parallels to Ford’s career.

When it comes to forging new industries, coming up with a new technology is only the beginning. As I’ve noted before in this column, innovation in business models and processes can be as important as the initial Eureka moment. Henry Ford didn’t invent the internal combustion engine. But he did put together and perfect a combination of processes, methods, and tools—the superefficient assembly line, vertically integrated manufacturing, enormous scale, bold human resources policies like the $5 day, and cutting-edge financing techniques—that transformed the car from an expensive toy for the rich into a utilitarian vehicle for the middle class.

SolarCity has perfected a combination of functions and disciplines that could make mass adoption of the solar panel possible.

Now, Tesla has pioneered a new mode of selling cars—direct to the consumer instead of through dealerships. And it is attempting to integrate vertically by constructing its own massive battery factory. But at its root the company is selling a small number of very expensive sports cars to very rich people. Tesla is essentially where Ford Motor Co. was in 1903, before the Model T.

SolarCity, which I first wrote about six years ago when it had just a few hundred employees, has a smaller market capitalization than Tesla ($5.7 billion, compared with almost $34 billion for Tesla). But you can make the case that it has the potential to be more economically influential. SolarCity employs 12,000 people, and is adding 500 positions per month, as Lyndon Rive told me earlier this week. Tesla sells about 12,000 vehicles per quarter around the world. So far this year, SolarCity has been adding about 12,000 customers per month in the U.S. On Friday, it reported that it had 262,495 customers as of June 30. (Both companies generally post losses rather than profits.)

SolarCity, which focuses on putting solar panels on the roofs of homes and buildings, didn’t invent the solar panel. But, like Ford Motor Co. did a century ago, it has put together and perfected a combination of functions and disciplines—efficient assembly, economies of scale, vertical integration, and innovative financing techniques—that could make mass adoption possible. And it continually seeks and finds ways to expand its market.

Let’s review. Several years ago, the high cost of solar panels was a prohibitive deterrent to adoption; homeowners would have to pay $30,000 to $50,000 upfront in exchange for savings that would trickle in over time. So SolarCity developed a solar lease strategy that lets people put solar panels on their roof for no money down and start saving money instantly. According to GTM Research, arrangements like solar leases accounted for 72 percent of the new installed residential solar capacity in 2014. SolarCity alone accounted for 34 percent of those installations—the market leader by far.

The ability to save money on power with no money down is an appealing proposition. But building these systems is a very capital-intensive business. A developer like SolarCity faces the same problem an individual does—it has to put up a lot of cash upfront while the revenues (in the form of tax credits and streams of lease or power payments) won’t materialize for months or years. It’s a money-losing proposition, at least in the early years. (SolarCity reported a net loss of $375 million in 2014.) To continue growing, it developed another new set of financing techniques. It made deals with big Wall Street firms like Goldman Sachs to finance the construction of thousands of systems and packaged the leases into bonds that can be purchased by individual investors.

Home rooftop installation is a business in which it is difficult to gain cost savings through economics of scale because it involves doing one-offs—30 panels on a house here, 24 panels on a roof there. But SolarCity figured out a way to turn this retail business into something that more closely resembles a wholesale one. It has made a series of deals with the Defense Department to put solar panels on large clusters of military housing: 6,500 homes in Hawaii, and 6,000 homes on installations in the San Diego area. In California, its largest market, SolarCity has built a network of 40 warehouses, which serve as efficient distribution and staging areas for single-home projects. And in an attempt at vertical integration, last year it purchased solar panel manufacturer Silevo. SolarCity is now building a huge plant in Buffalo, New York, that will supply low-cost panels for its installer.

Now SolarCity is using this scale, experience, and financing muscle to break into a new market: small businesses. For large companies that have good credit and lots of buildings with giant roofs—like Walmart and Ikea—solar is a no-brainer in states that have attractive incentives. Installers are eager to work with them because it is much more economically efficient to build a single 5,000-panel array than to build 100 50-panel arrays. That has left small-business owners, who tend to have smaller roofs and less robust credit, in the dark. “Typically, installers had no interest in a commercial system under 500 kilowatts [about the size of a Walmart roof],” Lyndon Rive told me in an interview this week.

Earlier this week, SolarCity announced it would start offering solar leases in California to small businesses. The terms are similar to those on offer to home owners: no money down, an immediate savings of 5 to 25 percent on current electricity rates, plus a guarantee that rates won’t rise over the 20-year lifetime of the lease. Systems can be as small as 30 kilowatts (100–125 panels). “We’ve built the infrastructure to do the installation work ourselves,” Rive told me. Through installing thousands of home rooftops, SolarCity has developed processes for planting systems on roofs quickly and at a low fixed cost. SolarCity is also marrying one financing innovation—the solar lease—to another. In California, businesses can now participate in so-called property assessed clean energy programs, under which property owners can borrow money to make improvements and pay back the funds through an assessment that is like a property tax.

Rather than grab a share of an existing market, as Tesla is trying to do, SolarCity is tapping into innovations to create entirely new markets, as Ford did. Of course, there are a couple of significant difference between the SolarCity of 2015 and the Ford Motor Co. of 1915. Sales of the Model T didn’t rely much on government subsidies; SolarCity and other installers have been huge beneficiaries of a federal tax credit for investments in solar power that is scheduled to end after 2016. Henry Ford made a ton of money on an operating basis even as he invested in manufacturing capacity and hired thousands of workers. SolarCity? Not so much. At least not yet. In the second quarter, while revenues grew 67 percent from the year before, the company reported an operating loss of $132 million. In the meantime, it is fortunate to be growing rapidly at a time when cash is available to fund the construction of solar panel systems. On Tuesday, the company announced plans to raise another $124 million in debt backed by solar leases.

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