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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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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The startup is called EnergySage, and it has designed a site to enable consumers to get multiple bids from installers, view those bids in formats that make it easy to compare various line items in their quotes, and even check out the specs of the solar energy systems already installed in their neighborhood. The site is in private beta testing, but already has dozens of installers and homeowners, said John Gingrich, vice president of corporate development at EnergySage. The company has raised less than $1 million since its inception, including money from angel investors and the DOE grant, and currently it’s working on raising another $1 million round.

Buying a set of solar panels and getting them installed are big purchases. The prices rival that of a new car and the technologies involved are unfamiliar to the vast majority of people. “We help consumers get apples-to-apples comparisons and answer questions to help them cross the finish line,” explained Gingrich.

Wading through the solar service providers

It’s only been in recent years that new companies have appeared to serve the solar retail market, thanks in big part to state incentive programs such as the California Solar Initiative, which offers rebates and tax breaks for rooftop solar. Some of the better known, venture-backed solar service startups are SolarCity, Sungevity, and SunRun.

Many of these solar service companies began to introduce leases to entice those who don’t want to fork over tens of thousands of dollars upfront for a solar energy system. In California, the largest solar energy market in the country, over half of the residential rooftop systems installed in 2011 involved leases, according to state regulators. The popularity of such alternative financing options also propelled the growth of companies such as SolarCity, which pulled off an initial public offering in December.

I wrote about a need for a “Kelley Blue Book” for solar back in 2011 because objective and informative sites for consumers were lacking. States that subsidize solar installations often have some advice to give, or publish a list of installers that have gone through some vetting process, but being on a list doesn’t guarantee good services.

EnergySage emerges

EnergySage’s site could be a useful tool. The company, founded in 2009, launched its beta site about 18 months ago, and it already offers a shopping guide for solar and other clean power technologies, such as solar water heaters and geothermal pumps. But the new site will have more features, like reviews and comparison charts, and will serve as a communication center for consumers to connect with installers.

EnergySage designed the new portal not just for consumers but also for the installers. One of the goals of the project is to reduce companies’ customer acquisition costs, which include the expenses of advertising and signing up customers. Anecdotes put the customer acquisition cost at around 15-20 percent of the cost of each system sold for some installers.

EnergySage makes money by charging installers a commission, on a per-watt basis, for every new contract signed. The company used to charge based on the gross sales of a system, but the often big variations on system prices between two neighboring states drew complaints from installers who argued that they shouldn’t pay more for a sales lead.

Not every installer will be able to use the site to find new customers. EnergySage reviews and signs up installers, and there are around 50 now across New England and in New York, New Jersey, Pennsylvania, Maryland and Virginia. By the end of this year, the company wants to include California, Washington, Oregon, Hawaii, Colorado and Florida.

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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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The company provides leases or power purchase agreements to consumers who pay a monthly fee for the electricity from the solar panels installed on their rooftops. This way, the home owner doesn’t have to pay the expensive, upfront cost of the equipment and installation but still gets to use a cleaner source of power. Lease or power purchase agreements are long-term contracts – 20 years for those from Sunrun – that sometimes guarantee consumers lower electric rates than what they have been paying their utilities. This model has become popular in states such as California and Massachusetts.

Sunrun is part of a group of startups that set up shop about half a dozen years ago to tackle the emerging solar retail service market. Sunrun provides the financing and owns and maintains the solar equipment, and it’s built a network of contractors that do the installation work and help market Sunrun’s financial services. The company said it has has more than 20,000 customers in 10 states since its inception in 2007.

Since then, the solar retail service market has grown tremendously, and competition also has intensified. The company has run bill board ads and launched a new marketing campaign recently. Other solar service companies have used the same types of advertising as Sunrun. Some team up with nonprofits to market their services. Sungevity, for example, announced Wednesday it’s working with the Sierra Club, and customers who go to a Sierra Club website to sign up for Sungevity’s service will get a $750 cash gift card. Sungevity also will then donate another $750 to the Sierra Club.

Some of Sunrun’s venture-backed competitors include SolarCity, Sungevity and Clean Power Finance. SolarCity plans to do an initial public offering, and Sunrun, which recently hired a chief financial officer, could also be heading in that direction, too.

Overall, Sunrun has raised $145 million in venture capital. The latest round came from investors including Madrone Capital Partners, Accel Partners, Sequoia Capital and Foundation Capital.

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The Department of Commerce’s decision determined that Chinese companies have indeed been selling products at below fair market prices, and the ruling addressed part of a broader trade complaint filed by SolarWorld and other manufacturers last October. To offset the impact of the below-market pricing, the commerce department reached a preliminary ruling to impose an import tariff of about 31 percent on solar cells from 61 Chinese manufacturers and nearly 250 percent for the rest.

It’s worth noting that the tariffs will affect only silicon solar cells made in China but not solar panels made in China with silicon solar cells from another country. Plus, the commerce department could modify the tariffs when it issues a final decision in October.

Paper tiger

The 250 percent tariff sounds scary, but the fact is the biggest Chinese solar companies such as Suntech Power, Trina Solar, Yingli Green Energy and Canadian Solar will face the 31 percent tariff. While that 31 percent tariff will likely raise the wholesale prices, there are ways to manage it.

For months Chinese manufactures have been brainstorming around ways to lessen the impact of any tariffs. They have been talking to solar cell makers in Taiwan about buying and shipping their cells to China or elsewhere to be assembled into panels. A company like Canadian Solar, for example, could buy Taiwanese solar cells and assemble them in its Canadian factory (most of the company’s manufacturing is in China, hence it’s considered a Chinese company) or hire a manufacturer in Korea. Chinese companies also could set up solar cell production outside of China.

Shyam Mehta, a senior analyst at GTM Research, estimated that hiring Taiwanese companies to make cells will increase production costs for Chinese companies by 6 percent to 12 percent, which “is meaningful but manageable.”

Solar installers

While manufacturers figure out their strategies, solar service providers – from companies that provide consumer financing to roofers who install solar panels – need to come up with plans to cope with higher solar panel prices. People in the solar retail sector, understandably, have strongly opposed the trade complaint. They contend that the solar market growth could slow if they have to pay more for solar panels.

Certainly, profits will shrink if costs increase. But that doesn’t mean retail service providers will raise their prices or raise by a whole lot. They will likely absorb the added costs and still make good money, especially by increasing the sales volumes (the solar market is hardly saturated). We are not talking about razor-thin margins that will be rendered non-existent by the tariffs.

For a while now, investors and solar retail service providers have talked about how they could deliver or receive very good (double digit) and long-term returns. We’ve seen banks and other types of investors such as Google putting up funds in hundreds of millions to finance leases and power purchase agreements, which are long-term contracts in which consumers pay a monthly fee for solar electricity instead of the high upfront cost of installing and owning solar panels. Consumers opt for these financing plans because they take away the hassles of doing research and picking equipment manufacturers, and because they are often promised lower utility bills. That promise of lower utility bills is a key selling point, and any solar retailer who took that away will lose a serious competitive edge.

Competition in the retail sector has intensified in recent years, and that, too, will make it difficult to raise prices and still compete effectively. Venture-backed startups such as Sungevity, SolarCity and Sunrun started in 2006 or 2007 and have expanded well beyond their home turf of California. Many more have shown up and some of them that first made their fortunes in a different business, such power company NRG Energy, home security company Vivint and roof installer PetersenDean. Consumers only benefit when they have more companies to choose from.

Lastly, solar panels don’t make up the bulk of the price of a solar electric system. In fact, they take up around 20 percent, and the rest comes from the costs of other components, sales and marketing, permits and labor. A bigger worry for installers has been these non-solar panel costs, particularly in permitting and marketing and sales. The average price for a residential system by the end of last year was just over $6 per watt (and less $5 per watt if a homeowner bought a system outright rather than doing a lease), GTM said, while the wholesale price for solar panels was near $1 per watt (it was $1 per watt when I caught up with Chinese solar panel makers at PV America West in March). UPDATE: Solar panel prices fell around 50 percent in 2011 while the average price for a residential system dropped 3.6 percent during that time.

The solar industry wants to show critics that solar electricity can be affordable and compete with power from fossil fuels and it deserves government subsidies to help reduce costs. To raise prices in a big way will only give ammunition to critics that solar is far from prime time. That’s one outcome everyone in the solar industry, regardless of which side they are on in the trade dispute, would hate to see.

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The San Francisco startup, founded in 2009, was formerly called Solmentum, but it changed its name to Gen110 in January this year to reflect a broader goal to be an “energy concierge,” said its CEO, Jason Brown. The new name refers to the 110-volt electrical wiring and outlets commonly found in a home and serves as a metaphor for generating clean power where it’s consumed, Brown said. He declined to disclose the amount of investment from Kleiner.

Gen110 focuses on finding and convincing consumers to sign up for solar leases and put solar panels on the rooftops of their homes. It sells financing plans from Sunrun and works with roofing company PetersenDean for installing the solar equipment. Gen110 has lined up over 2,000 customers and 10 MW of installations since its start three years ago, Brown said.

Gen110, which focuses on the California market, is occupying a more narrow slice of the solar market than what companies like SolarCity and Sungevity do. SolarCity does all its own sales and marketing and solar system design and installation, and it raises funds from banks and investors to finance leases and installations. Sungevity does all that except the installation work, which it outsources to local contractors. Sunrun’s model is similar to Sungevity’s.

Gen110 wants to do more than solar sales and marketing and plans to move into areas such as energy efficiency, fuel cells, energy storage or even electric cars, Brown said. The company would sell financing packages from other firms to enable consumers to afford more energy efficient equipment, such as LED lighting and use cleaner sources of power. But the company plans to announce what else it will do beyond solar later this year, Brown said.

Selling solar

A marketing and sales business may not sound so innovative in the vein of developing a new compound for solar cells or software to manage battery packs. But an effective marketing and sales strategy is crucial – and overcomes a huge challenge – for any company that wants to provide solar services, from offering financing plans to installing solar panels. The cost of lining up a customer can be as much as 20 percent of the average cost of selling and installing a system at home, at least in California, said Travis Bradford, an investor in Gen110, in a blog post last year.

As the solar market matures and good money can be made, it’s natural to see more companies cropping up to offer more specialized services. Two months ago, I highlighted a startup called Ethical Electric that wants to market and sell clean power without having to install or own renewable energy equipment or distribution lines like a traditional utility.

Gen110’s intended move beyond solar also follows similar decisions by a growing number of companies that started out as solar service providers and have since branched out to other energy-related services. For example, SolarCity also sells energy efficiency equipment and services and offers lithium-ion batteries from Tesla Motors to go along with a solar electric system.

Like other solar companies, Gen110 collects data to figure out which homeowners might make ideal customers. Brown wouldn’t say what kinds of data the company analyzes to find customers, but he said the information is more than just satellite images showing the size of a home or whether it’s got a swimming pool (which would indicate the homeowner has a high energy bill). Generally, a homeowner who spends at least $100-$150 for power each month would make a good target for Gen110, which then sends out sales people to try to talk to the homeowner in person.

Selling a solar service plan effectively requires a look at the utility bills and energy consumption behavior of the homeowner and an explanation of how a lease plan could help him or her save money in the long run. In a lease, consumers typically put little or no money down and pay a monthly fee for the solar electricity generated. The lease is long-term and is supposed to offer rates that are similar or lower than what consumers would pay to their utilities. Ownership of the solar systems goes to the companies that finance the installations, and consumers may or may not get to own the equipment at the end of their leases.

Most Americans “don’t know what they pay per kilowatt hour. They aren’t aware of the impact of rate hikes or don’t want to think about it,” Brown said. “Face to face customer education is the only way to get mass scale adoption of energy.”

Photo courtesy of Gen110

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The company is launching a marketing push for its energy efficiency service by announcing Tuesday a loan program from Admirals Bank of Boston. Homeowners can use the loan program to help finance energy efficiency audits and subsequent home improvement work, the cost of which typically ranges from $4,000 to $12,000, said Lyndon Rive, CEO of SolarCity in San Mateo, Calif.

“We are getting into more than electricity sales [to include] the full management of your energy at home — everything that consumes energy in your house,” Rive said.

The loan, and the accompanying announcement that it’s expanding the energy efficiency service to the East Coast, provides a snap shot of a company that is a solid fund raiser and has helped to popularize the use of leases and power purchase agreements to remove the expensive barrier for going solar.

But competition has grown quickly in solar. The company recently bagged an $81 million equity round for expansion, technology development and acquisitions. An IPO would give it more capital to grow the different services it offers beyond solar, such as installing electric car charging stations.

Expansion mode

The company, founded in 2006, is making a push for its new services at a time when the business of installing solar systems has moved beyond the startup stage to attract a growing number of companies that have established brands. Vivint, known for its home security business, lined up $75 million last year to push its solar service. NRG Energy is now targeting the same kind of rooftop projects that SolarCity does after buying Solar Power Partners last year to create an in-house development team.

SolarCity, which has been going after larger and larger projects, also is now competing more so than ever against companies such as SunEdison and  SunPower which, incidentally, filed a lawsuit last month alleging data theft by former employees who went to work for SolarCity.

Then there are the roofing materials companies and electricians and roofers and various other businesses that have jumped into the solar market in recent years. Finally, not to mention venture-backed solar startups that have broadened their reach beyond their home state of California, such as Sungevity and Sunrun.

Growing the energy efficiency business is a key part to show SolarCity can scale beyond solar. The company hasn’t touted its energy efficiency services as much as it has its solar installation work, at least not in press releases, though Rive did invite Forbes into his home last year for a video tour to explain the results of an energy audit by his own staff.

Software and rebates

The company has worked on about 5,000 energy efficiency projects, some of them already completed, since mid-2010 when it bought Building Solutions and launched the service in several western states and Texas. The company improved Building Solutions’ software to do more accurate energy audits, recommend and prioritize upgrades and better quantify energy savings, said Levi Blankenship, manager of energy efficiency services at SolarCity.

While SolarCity offers leases for solar, it doesn’t provide similar financing arrangements for energy efficiency upgrades. Owning and operating solar energy systems and collecting monthly payments from their electricity production makes a good business case, but the same can’t be said for owning, say, furnaces, air duct insulation or water heaters, Rive said. So customers pay cash upfront for the retrofits, and some could turn to banks for home improvement loans. Federal, state and local incentives for energy efficiency upgrades also have helped to defray the costs for many.

And unlike the solar lease, which guarantees the amount of electricity produced each month, an energy efficiency contract from SolarCity doesn’t provide energy savings guarantees. It’s difficult to promise a certain amount of energy savings when the company can’t control how much energy a household uses, and that use can change with, for example, an addition of family members, Blankenship said.

The company does do a post-installation evaluation within a week or so to verify what energy savings will likely be if energy use doesn’t change, Blankenship said. This evaluation is sometimes necessary for claiming government rebates. SolarCity entered the energy efficiency business around the time when California started an incentive program called Energy Upgrade California that gives rebates based on projected energy savings of a retrofit project rather than the cost of buying individual equipment. The company is now expanding its energy efficiency service to the East Coast regions, such as New Jersey, New York and Massachusetts, where it already offers solar installation.

Photos courtesy of SolarCity

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