As solar panels boom, it was the simple business model that the big energy players missed

Image courtesy of Apple.

Solar panels are now remaking the energy equation in the U.S. and breaking records for installations every quarter: There were more solar panels installed in the U.S. over the last 18 months than the last 30 years. But when it comes to making money off of this solar boom, some of the largest energy companies in the U.S. have (so far) left money on the table.

Why? It wasn’t that they didn’t have access to some obscure panel technology patent that was invented years ago in a university lab. Or that they didn’t have deep knowledge of how cheap solar panels would one day become. It was a drop-dead simple business-model innovation that they — for whatever reason — didn’t jump on.

At the World Energy Innovation Forum at the Tesla factory in Fremont, Calif. this week, the CEO of GE, Jeff Immelt, said during an onstage interview that GE had focused so intently on how bad the solar panel business was that they “missed SolarCity.” “My God I wish I had thought of that,” said Immelt.

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Immelt isn’t the only energy leader that has been thinking about SolarCity. The CEO of NRG Energy, David Crane, told me during an interview earlier this year that NRG wants to be as big or bigger than SolarCity in its newly launched residential solar financing and installation business, which is similar to the one that SolarCity founded in 2006.

If you haven’t heard of it, SolarCity is the now-public company founded by South African entrepreneurial brothers Lyndon and Peter Rive; their cousin Elon Musk is SolarCity’s chairman. SolarCity has built a business off of financing and installing solar panels on the rooftops of buildings owned by families and businesses.

SolarCity can provide the upfront financing for the solar system so that the customer doesn’t have to put any money down to get the panels, and this is the key that has unlocked the solar panel business. Instead of paying tens of thousands of dollars for a solar panel system, the customer pays SolarCity for the cost of the solar energy on a monthly basis, which can be less expensive than what they’ve been paying the local utility. Depending on the deal, the contract can last a couple decades.

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In its recent earnings report last week, SolarCity said it had more than doubled its revenue to $63 million for the quarter compared to last year while cutting its losses for the quarter almost in half to a loss of $24 million (from $41 million last year), and it also raised its guidance for the year. SolarCity has a goal of becoming one of the largest suppliers of electricity in the U.S., and it’s on its way to getting there — it says it will exit 2014 with more than 2 gigawatts of cumulative solar power deployed. The company went public in late 2012 at $9.25 per share, and it’s now trading just under $50 per share.

SolarCity actually didn’t even pioneer this business model. That was SunEdison — Jigar Shah founded SunEdison in 2003 with a new financing model called the solar power purchase agreement (PPA). SunEdison was acquired by solar materials maker MEMC in 2009 for $200 million.

When I tweeted about Immelt’s confession this week, Shah tweeted in response: “@jeffimmelt and I keynoted an MIT panel together in 2007, he didn’t miss SunEdison he ignored it.” Shah has even written a book about how to get wealthy off of clean energy and climate, and hint: a lot of it is about the business model.

Several years ago GE was actually in the solar panel business, and was working with partners on various types of manufacturing. GE wanted to make solar power as big of a business as its wind power division selling wind turbines (which is huge). But for companies that were making solar cells, wafers and panels, the bottom dropped out of that market a couple years ago. GE put many of its solar manufacturing plans on hold as the market got ugly.

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Massive Chinese solar manufacturing companies — propped up by low cost government loans from the Chinese government — were making more solar panels than there was world demand for and they were making them below market value. The cost of silicon, the main ingredient in traditional solar panels, also cratered, making solar panels cheaper than they had ever been. This was a terrible time for solar manufacturing companies — like (infamously) Solyndra, but also two dozen others that are much larger — but it was a great time to be a company in the business of installing and financing super cheap solar panels.

The good news for huge energy companies like GE and NRG Energy is that it’s not too late to get into the business of installing and financing solar panels on rooftops. Yes, there are big brands developing the market like SolarCity, and it’s starting to get competitive and crowded. The more established companies are gearing up — just this week SunRun, another solar financing player, announced that it has raised another massive equity funding round of $150 million.

But the market for solar panels is just at the very beginning in both the U.S. and the world. NRG Energy launched its residential solar financing and installation company more formally earlier this year (though had been trying to do it in fits and starts over the past couple of years), and Crane sees the market as pretty wide open. He told me NRG is trying to learn from some of the fast moving and innovative large internet companies like Apple, Google, Amazon and Facebook that have managed to stay nimble and industry-leading despite being so large and so consumer-facing.

The fact that GE and NRG Energy missed this business model innovation the first time around isn’t all that surprising. It’s the century-old tale of entrepreneurs and startups moving faster, thinking more creatively and operating more flexibly than big conglomerates — and winning. This of course has happened in countless business over the centuries, causing massive disruption in industries like telecom, video distribution and photography.

But that it’s happening in energy and clean power right now is exciting because it shows that the entrepreneurial spirit can have a fundamental affect on the huge and entrenched energy sector. Which gives hope that there might be a way to disrupt climate change after all.

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