What are the challenges of growing a solar installation company? SolarCity provides some good insight into that question as it reports earnings for the first full quarter since it became a public company last December.

Raising funds to support its financial product offerings, signing up a greater number of new customers, expanding its operations, and shortening the project completion process are just some of the issues outlined by SolarCity’s executives during their discussion with financial analysts yesterday.

These issues are nothing new, of course, but SolarCity’s financial results help to quantify some of their costs. Given that the solar market is still young, most of SolarCity’s competitors are private and often much smaller.

The California company installed more megawatts of solar energy projects during the first quarter than it initially anticipated (46MW instead of 41MW). But it didn’t raise its 2013 installation forecast, which remains at 250 MW this year. SolarCity boosted its first-quarter sales to $28.2 million but posted $31 million in losses.

“At this stage, we still find ourselves delivery constrained. It’s a matter of scaling our residential operation as well as bringing in our commercial projects on schedule that prevent us from increasing the guidance from 250MW right now,” said CEO Lyndon Rive during the conference call. “We are just focusing our operational capacity.”

SolarCity runs on a business model that is quite different from many of its competitors. The company does the sales, engineering, installation and maintenance with its in-house crew. Rivals such as Sungevity, OneRoof Energy, Sunrun and Clean Power Finance farm out the installation and maintenance work to roofers and other installers. Some of them want to build their brands and invest in marketing and sales to consumers while others sell their financial products and services to installers. Vivint, which has built a large home security system business before getting into solar, operates more like SolarCity.

SolarCity’s model requires much more capital to scale up the business. It needs to hire and train more people, maintain trucks and other tools of the trade and set up shop in expanding its reach across the country. It also has to aggressively court consumers.

The company does business in 14 states, and in March it announced a plan to set up operations in Nevada. The company saw its operating expenses grow from $24.7 million in the first quarter of 2012 to $34.5 million a year later. It serves home and business owners, as well as schools and government agencies. It’s getting into the utility market, too. By the end of the first quarter, SolarCity had accumulated 54,416 customers, and most of those customers are in the residential space: 33MW of the 46MW it completed during the first quarter went to homes.

Raising enough money to finance leases and power purchase agreements is another big challenge for SolarCity and its competitors. With leases or power purchase agreements, customers pay a monthly fee for the electricity generated from the solar panels on their rooftop. They don’t own the panels, however, since they didn’t pay for the high upfront costs of the equipment and labor that can run around $20,000 for an average system in places like California.

The investors that give the funds that support those financing options own the solar electric systems, and they get to take advantage of a 30 percent federal investment tax credit and count on revenues from the monthly payments for the duration of the contracts, which usually run 20 years. As of May 10, SolarCity has enough funds to finance 158MW worth of projects.

SolarCity is a formidable fundraiser. In its 2012 annual report, the company said it had raised $1.7 billion to finance installations since its inception from companies such as U.S. Bancorp, Google, PG&E and Credit Suisse. SolarCity also puts in its own money in some of the funds to finance the installations. The pressure to raise money consistently is even greater now that SolarCity is a public company and must not only show growth but also generate profits at some point. It doesn’t want to be in a situation where the demand for its leases outstrips the funds available, something that happened to SunPower during the first quarter of this year.

SolarCity also needs to shorten the amount of time it takes from selling solar panel systems to installing each project. It has 195MW of backlog, some of which are planned as multi-year projects. But overall, the company wants to sell and install the equipment during the same month, Rive said. To accomplish that, the company is constantly looking for ways to simplify the installation process by using different designs for racks and other components. It also invests in software to reduce the time it takes to apply for permits and complete the sales process.

SolarCity has been an interesting company to watch since its start in 2006. It was one of a crop of venture-backed companies in the emerging residential solar market. Now, how well the company can grow its business and make a profit will be used by investors to evaluate other solar retail service companies that want to go public.

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Odds are, it’s a pretty safe bet even for the venture capitalists that have been scared off by the lack of consistent returns in cleantech investing. Last year there were a record-breaking 3.3 gigawatts worth of solar panels — or 16 million individual solar panels — installed in the U.S., making solar power the fastest-growing energy source domestically, according to Solar Energy Industries Association and GTM Research.

There are a few reasons why the installation of solar panels exploded last year: the price of solar panels dropped dramatically, companies have been offering financing deals that cover the upfront costs of the systems (like Clean Power Finance), and some states have been offering strong incentives to get panels installed. It’s not a coincidence that states like California with the best subsidies for solar panels had the most installations last year.

Clean Power Finance is a solar software and financing company, and it can put money into a variety of solar installers across the country. It originally grew its business on providing Software-as-a-Service tools to solar installers to start the sales, rebate, and lead-gen processes, but more recently started providing financing agreements like power purchase agreements (PPAs) for rooftop solar for home owners. A PPA is a contract over a time to buy the solar power as a service, and commonly avoid having to pay the upfront installation fee.

Solar installer SolarCity, which has a similar business model to Clean Power Finance, went public last December and its stock is trading around $18.50 Monday morning — $10 above its debut price. Sungevity, another solar financing and installation company, was able to raise a large round of $125 million of equity and project finance earlier this year.

Loving solar a little too much

Clean Power Finance previously raised funds from Clean Pacific Ventures, Sand Hill Angels and founder Gary Kremen, who is a long time entrepreneur and investor, and who previously founded of Match.com. Clean Power Finance raised another $25 million from Google Ventures, Kleiner Perkins Caufield & Byers, and Claremont Creek Ventures back in 2011.

Solar financing and installation is one of the few bright spots in cleantech investing. It’s a business model innovation, which is based around solar panels becoming a low cost commodity, and banks or corporations becoming comfortable putting up the upfront funds for the installation. In contrast solar manufacturing innovation has proved to be far tougher as an investment category (Solyndra, Miasole, etc.). The solar module manufacturing industry is also seeing mass bankruptcies this year, precisely because the cost of solar modules has gotten so low.

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NRG Energy already builds solar panel projects for commercial and industrial building owners. Doyle told me that the company has been “heartened” by the amount of Fortune 300 companies that have wanted to install solar panels on their rooftops. Distributed solar panel systems have been gaining momentum, said Doyle, adding that they’ve been delivering higher growth than utility solar systems. In an interesting twist, that puts NRG Energy in grwoing competition directly with utilities, notes Bloomberg.

The emergence of the solar lease, or other financing options for solar, has helped unlock huge growth in solar panel rooftop installations in recent years. Essentially a third party, like SolarCity or Sungevity, raises a few hundred million dollar fund from a bank or a big company like Google, and uses that money to provide the up front capital for a home roof top system, which can cost tens of thousands of dollars to install. The homeowner doesn’t have to pay that upfront cost, but pays the solar leasing company a monthly bill that is usually lower than its former utility bill. Over time the bank or “the Google” gets paid back with a return that can be around ten to twelve percent.

As I reported last month, three quarters of the solar panels installed on home roofs in 2012 in California were financed and owned by these solar service companies, and not the home owner. These “third-party owned” solar systems collectively generated $938 million in revenues last year.

It’s one of the more lucrative businesses in the solar market these days. So why wouldn’t NRG Energy want to be in it. SolarCity, a former startup that has helped pioneer the business, went public in December 2012 at $9.25, saw its stock soar 40 percent on its debut day, and has now more than doubled to $18.57 Monday morning. Other companies that offer solar financing options include Sunrun, and Clean Power Finance.

The emergence of NRG Energy in the solar leasing business could be a real threat to the companies already operating in it. NRG Energy earned $1.59 billion last year, which was a decline from the previous year, but which is clearly far larger than the fairly new companies like Clean Power Finance and Sungevity.

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Companies that have developed these types of financing models for solar include SolarCity, Sunrun, Sungevity, Clean Power Finance, and others. These companies commonly raise money from banks and even Google to put up the initial funds to install the solar panel systems and then the solar customer enters into a contract to buy the solar electricity over time, usually something like two decades. The bank can ultimately get that money back, plus 10 to 12 percent more, because solar systems provide revenue in the form of energy bills.

These companies are also some of the startups that have been founded in the clean energy sector that are actually making substantial money these days. SolarCity held a successful IPO last year, while Sugevity, Clean Power Finance and Sunrun have grown significantly.

While 75 percent of home solar systems built last year were owned by third parties, just over half, or 56 percent, were owned by third parties in 2011. The top cities with these third party owned solar systems in California include San Diego, San Jose, Bakersfield, Los Angeles, Fresno, San Francisco, Corona, Murrieta, Clovis and Temecula.

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Apple’s massive solar farm in North Carolina, photo by WCNC-TV

Here’s the 7 projects:

• A solar financing model: NREL and solar financing startup Clean Power Finance will use $2.26 million to analyze data from 1,300 solar installation companies to try to create new types of community and regional financing methods.
• A publication and patent reader: SRI International, the University of Toledo and GE will use $600K to create software that can read and analyze science publications and patents to unearth innovations that can lower the cost of solar.
• Articulate a solar theory: Gordan Moore had his own law for chips, and some in the solar sector talk about a Swanson’s Law for the dropping cost of solar, but folks at MIT will use close to $500K to study the tech evolution process of solar and to create an overarching theory.
• Better forecasting of production costs: Researchers at the University of North Carolina at Charlotte, Arizona State University and the University of Oxford will use almost $950K to analyze data about patents, prices and production to create better forecasts of solar cell, wafer and panel prices.
• A model for solar markets: Sandia National Labs, the University of Pennsylvania and the California Center for Sustainable Energy will use $2.3 million to process data about solar markets and to create a model looking at how economic and social issues impact solar installations.
• Better strategies for community-led solar purchasing: Yale and SmartPower’s New England Solar Challenge will use $1.9 million to develop new strategies to that can make community solar buying programs work better.
• More effective solar installation in Texas: The University of Austin will use close to $500K to collaborate with six Texas utilities to create more strategic ways to install and interconnect solar in the state.

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Competition in the residential solar panel installer business — and the accompanying services industry — has intensified as the drop in solar panel prices has led to a solar panel installation boom in the U.S. The Solar Energy Industries Association estimates that there were 3.2 GW worth of solar panel capacity installed in 2012 in the U.S., up from the 1.89 GW installed in the U.S. in 2011.

Founded in 2007, Sungevity handles sales and marketing, system designs and financing deals, for residential solar panel systems, but the company farms out the installation work to contractors. Other companies like SolarCity — which recently went public — does all that and also installs the panels. Other competitors include SunRun, Clean Power Finance,  Solar Universe, Brightergy and Solmentum.

Sungevity, led by the charismatic former Greenpeace-r Danny Kennedy, and CEO Andrew Birch, already grew a lot in 2012. Kennedy told the New York Times for a magazine article last year, that the company’s “revenues grew by a factor of eight in 2010 and doubled again in 2011, and employees grew to 260 from 3 since the company was founded.

The equity funding came from investment fund Brightpath Capital Partners, home improvement company Lowe’s, and investors Vision Ridge Partners, Craton Equity Partners and Eastern Sun Capital Partners. The project financing came from an unnamed bank and private equity firm Energy Capital Partners.

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But that doesn’t mean there aren’t bright spots on the horizon, and major opportunities for certain kinds of solar startups in 2013. Here’s our list of 13 solar startups to watch in 2013 — some may be under the radar, but all have managed to do one of the following recently: raise money, build factories, launch innovative products and services or otherwise make progress despite the hard times (or because of it).

1). Solar Mosaic: The company brings solar power investments to the masses with its recently launched public online site. Residents of California and New York (as well as accredited investors) can invest in any of the projects for as little as $25 and get what should be a steady, long-term return (of 4.5 percent for the first projects). The company sold out three projects less than 24 hours after the launch this week.

2). Alta Devices: Portable solar chargers could cut the number of batteries a soldier must carry onto the battle field and provide an alternative source of power for drones. Alta Devices is focusing on the military first with its highly efficient solar cells and hopes to use these contracts to scale up manufacturing, slash costs and eventually enter the more conventional solar market where much cheaper solar cells now dominate.

3). Clean Power Finance: The company raises funds to offer power purchase agreements or leases for solar panel installers to market and sell them to homeowners. The company also launched an energy credit trading service and assembled a database of local permitting rules in 2012 so that retail service providers could spend less time and money for figuring out the paperwork they need to do.

4). GlassPoint Solar: With its novel greenhouse design for its solar thermal energy equipment, GlassPoint Solar is targeting the oil industry with its solar steam production, which pries loose oil from wells for easier extraction. Oil companies are warming up to using solar energy to produce steam rather than natural gas, which remains expensive in regions such as the Middle East.

5). QBotix: The company uses robots that move along a tracking system and tilt solar panels during the day to follow the sun. GPS and wireless technology are used to detect problems and monitor the systems.

6). Genability: How do you show customers the amount of energy savings they could achieve or money they could make by going solar? You need accurate data on utility rates, and that’s what Genability specializes in. The startup collects and crunches electric rates — which change often — from utilities across the country. SunPower, SolarCity and SunEdison are customers.

7). Semprius: The prices of silicon solar cells have tumbled in recent years thanks to mega factories by manufacturers mostly in China. To compete, solar cell manufacturing startups must develop something much more efficient that can find other uses as well. Semprius, like Alta Devices, is achieving this by using gallium-arsenide for its cells, but it also is making the solar panels for housing them. The company raised $7.5 million and opened a small factory in North Carolina last year and is targeting the military as well.

8). Stion: After Solyndra’s bankruptcy in 2011, few venture capitalists wanted to invest in using copper, indium, gallium and selenium (CIGS) to make ultra-thin solar panels (that’s the same material Solyndra was working with). Many CIGS startups went out of business or got scooped up in firesales. Stion has survived so far after lining up investments in Taiwan and Korea, and it started shipments from its Mississippi factory last year.

9). SoloPower: The company is another CIGS startup that has made progress toward commercializing its technology while its peers disappeared into oblivion. SoloPower turned on its 100MW factory in Oregon last year and secured a federal loan guarantee to help it expand if it meets milestones.

10). SCS Renewables: As interest in investing in solar power generation grows, investors will want to know where they can find quality projects. SCS Renewables runs a match-making service that also helps developers to massage their projects into presentable shapes in front of banks and other investors.

11). Silevo: With a new type of hybrid solar cell technology and its first factory in China instead of the U.S., where it’s headquartered, Silevo has mapped out a plan to scale up production and keep production costs low enough to attract customers with its efficient cells. 

12). TenKsolar: Out there in Minneapolis, tenKsolar has designed a wave-like solar energy system that pair solar panels with separate panels that are lined with a reflective film to direct light to the solar cells. The unusual design caught the attention of Korean conglomerate Hanwha, which led a $15.5 million round in 2012.

13). OneRoof Energy: The startup teams up with roofers and electricians to sell rooftop solar systems and financing products such as leases as part of new roofing or re-roofing projects. OneRoof Energy is part of a group of solar installers, such as the now public SolarCity and high-profile startups Sungevity and SunRun.

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Roughly one in three installers said they have avoided expanding their businesses to over an average of three regions because those areas would make it difficult (ie. expensive) for them to obtain permits, the survey said. Government agencies and utilities can take up to almost eight weeks collectively to sign off on permits. The survey also showed that 11 percent of installations happen in cities or counties that don’t have rules in place to issue permits.

The survey, conducted by San Francisco-based solar financing startup Clean Power Finance, is part of a project funded by the U.S. Department of Energy’s SunShot initiative. SunShot supports projects that seek to reduce the cost of installing solar panels so that solar energy can price competitively against power from coal or natural gas power plants.

The program also has allocated money to develop more efficient solar cells and design systems of solar panels and other components to make them quicker to install. Cutting red tape isn’t a sexy subject, but non-hardware costs can make up 41-50 percent of the expense of selling and installing a photovoltaic system, said a recent report by the National Renewable Energy Laboratory.

These so-called “soft costs” in general refer to the costs of marketing, signing up customers, helping customers line up financing, designing and installing a solar systems, applying for permits and even monitoring the system’s performance post installation. Many of the solutions on the market that are reducing soft costs are using software and are focused on communication strategies.

For some venture capitalists, who have shied away from putting money into capital-intensive technologies such as solar cell manufacturing, they have found solace in investing in software-centric startups. The executives at SolarCity, which just went public, have talked about the importance of solid software – and they develop their own – in coming up with business expansion plans.

With the SunShot funding, Clean Power Finance is knitting together a national database of local regulations for issuing permits to install solar electric systems and connect them to the local electric grid. The database isn’t just for solar retailers. It also could serve as a guide for cities, counties and utilities looking for good role models as they draft their permitting regulations.

“What is often ignored is when we talk about solar permitting it’s as if installers are bearing all the costs. The city is bearing the cost, too,” said James Tong, senior director of Clean Power Finance and the leader of the database project. He’s gotten responses from government agency officials who say, they, too, are frustrated by poorly organized and incomplete paperwork from installers.

Clean Power Finance released an early version of the database in September, and it plans to release a more data-rich version in early 2013, Tong said. He hopes to get more crowd-sourcing going to help him expand the database. The project started only in late 2011 and is set to run for three years, after which the company plans to continue to maintain and expand it and to make it available for free.

The survey aims to identify and quantify the challenges that the installers, government agencies and utilities face in promoting or regulating a relatively new but growing type of business. Tong conducted the survey this past summer and received responses from 273 residential solar installers who had completed 546 projects in 12 states, which include California, New Jersey, Colorado, Hawaii and New York.

The survey found that installers on average deal with two agencies, such as a city’s planning department and the local utility, but sometimes they have to contend with five. It’s ideal to have to face just one, though, Tong noted that scenario is unlikely unless the utility also happens to be run by the city.

So what is the ideal permitting experience for installers? The specifics will vary depending on whom you talk to. But in general, they want to be able to file their applications easily, such as by electronic submission. They don’t want to wait a few months to get all the permits and complete the sale, especially when it usually takes them less than two days to fill out the paperwork. They also want to avoid high permitting fees, though there doesn’t seem to be a consensus on what is considered excessive. The database project, if successful, could provide an invaluable service and help to track the growth of the solar industry.

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Clean Power Finance already offers other financing products for solar developers to use to pay for installing solar panels. But with the new service, installers or project investors who need financing can sell the renewable energy credits associated with their projects to Clean Power Finance to help fund future projects. Clean Power Finance then sells those energy credits to customers, such as utilities, who use the energy credits to meet their renewable energy goals. The startup is acting as sort of an energy credit broker.

Clean Power Finance is moving ahead of some of its venture-backed rivals by entering the credit trading market. As the solar market grows and matures, it will see more players offering a greater range of financial products or creating new ones. SolarCity, for example, is working on aggregating solar leases to create asset-backed securities, which will then be sold to investors.

Solar energy credit trading plays a key role in boosting solar generation in states such as New Jersey and Massachusetts. These states require their utilities to buy an increasing amount of renewable electricity, and they allow the utilities to buy the energy credits as an option to meet the mandates.

New Jersey, in particularly, has become the No. 2 market in the country, after California, and it was home to the more new installations than any other states during the first quarter of this year. Other active solar energy credits trading markets include Pennsylvania, Delaware and Maryland.

The availability of solar leases has driven the growth of the residential solar market in the U.S. Homeowners who opt for leases can reduce their share of — or eliminate — the expensive, upfront cost of the solar energy equipment and installation and pay a monthly fee instead for solar electricity. Clean Power Finance, along with rivals such as SolarCity, SunRun, Vivint and Sungevity go out to raise money from banks or other investors to fund the leases.

Not everything always goes smoothly with this emerging economy for trading renewable energy credits. New Jersey offers a cautionary tale of an energy credit market spinning out of control. The state saw a great demand for energy credits that pushed up the prices for them to over $600 each a few years ago. That created a rush of project development, which then flooded the market with too many energy credits for sale. Prices plummeted to a quarter of that value toward the end of 2011. A similar crash also happened in Pennsylvania. The low prices forced the developers to drive down the cost of their projects.

New Jersey decided the way to fix that problem is to tell its utilities to buy more solar power. It recently amended its solar legislation to do just that.

Clean Power Finance also offers software for installers to manage their sales process. The company is backed by venture capital firms such as Kleiner Perkins Caulfield & Byers, Clean Pacific Ventures and Claremont Creek Ventures.

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