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

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 (s SCTY) 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.

SolarCity NASDAQ

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.

134 Responses to “As solar panels boom, it was the simple business model that the big energy players missed”

  1. scott McIntyre

    I am the CEO of Solar Energy Management (www.Solar EnergyMgmt,com) in Tampa Florida. Our state has NO energy policy and thus is in the solar dark ages. The utilities have paid the politicians to keep distributed solar policy from improving. In spite of that fact our firm has been installing tens of megawatts of solar power with innovative commercial solar power solutions which take full advantage of the federal 30% tax credit and depreciation. Smaller innovative solar power companies like ours are direct proof that solar power can work financially. We recently were awarded a 1.5MW solar power system contract which will be the largest commercial solar power system in Florida. Solar power works now even in states like Florida that don’t have energy policies.

  2. Sixa Mane

    My question to anyone and everyone What about Las Vegas. You need day and night power we never sleep. If a solar power can run the city day and night im sure people will be sold. I love the fact if you really want untouched territory that can also change the world My Navajo people on the Rez use them as a turning point we have no electricity and running water.

  3. Don Corleone

    A story about solar-energy business models without a single mention of the massive taxpayer subsidies spent by governments around the globe?! So much funny money has been pumped into alternate energy and solar that no one really knows how sustainable the growth and profits are. Well, except the mafia — they know a good business when they see one. They’re all over the sector.

  4. Jenya

    solar panels degrade at about 3% per year, it means when they pay them off in average 7-10 years period you r panel will produce 21 to 30 % less energy

  5. Here in North Carolina, where Duke Energy’s coal ash spills will cost us (the rate payers) hundreds of millions of dollars to clean up, the true cost of coal-fired power plants has come into stark focus. Smart companies like Duke have figured out how to let the government subsidize their business and/or allow a monopoly while letting shareholders and rate payers absorb the risk. The financial industry also comes to mind.

    Subsidies and tax laws are used in the US as tools to shape public policy. Our leaders have decided that cheap energy (fossil fuels in particular) is important. To a much lesser extent (1/6 to 1/10 or less of the fossil fuel subsidies, by some estimates), they have also decided that renewable energy is worthy of investment to get it kick-started. If we as a people decide that reducing carbon emissions is important, we could probably replace the energy subsidies for all fuel sources with a carbon tax.

    There are many examples of government investment in infrastructure and in new industries and technologies that benefits the public. Public roadways, the origin of the Internet (cue Al Gore jokes here), Velcro and microwave ovens (thanks, NASA!), and the list goes on.

    We’re using a home equity loan to install solar panels on our roof this week. The energy we will generate (which is easy to estimate accurately assuming normal weather patterns) more than pays for the interest on the home equity loan, so we’re not out of pocket a penny on this project. I don’t expect we’ll sell much energy back to Duke on the net metering program- it should mostly be consumed by our home. If we have excess generation, our next-door neighbor gets our electrons, and Duke gets to charge them full retail price, which is what they’re crediting us for. I would not appreciate selling at wholesale so that Duke can charge a transmission fee to send my electrons a hundred feet.

    The finances work out because of state & federal tax credits, but on the other hand, I’m not contributing to as much coal ash waste generation or CO2 production.

  6. NAYou

    Traditional energy companies hate solar because they can’t contain it. Who owns the sun? The potential for people going off-grid scares them.

    I have solar in Arizona. I’m grid-tied at least for the first 10 years because APS subsidized my installation. But I own my system and feed back much more power than I use.

    After my installation APS started trying to end the solar subsidies (their answer to a corporations commission mandate for % of sustainable energy) and reduce the amount they pay for energy fed to the grid. They got half of what they wanted.

    They have a lot invested in the coal plant 20 miles from here that belches fumes and has toxic ponds around it from the plant. They are trying to keep the cost of solar high so people won’t switch.

    It may not be the answer to everything but in Arizona it is ridiculous not to use all the roofs for solar. It’s foolish for a desert state to rely as much as AZ does on hydroelectric, and coal is just nasty. Hydroelectric may make more sense in Canada, where they actually have water.

  7. Solar Energy USA

    The technology is to the point where any average U.S. homeowner can go solar. Solar leasing companies like SolarCity exist to present the question of “To buy solar or to lease solar?” Very similar to the buying v. leasing an automobile conversation.

  8. Karl Davis

    Solar City’s “good news” is that it lost $24 million on $63 million of sales in the last quarter? The place where I work tried getting into solar and found similar “good news” and finally gave up on it. Hey, maybe we’re old fashioned, but we’re used to making a profit on sales.

  9. David Smith

    To whoever complains about subsidies and you are in the U.S., does this mean you also favor removing subsidies for ALL energy? After all the industry that gets some of the most subsidies have 3 of the 5 most wealthy businesses in the fortune 500. Oil companies, and they get subsidies for oil exploration. Natural gas, same. Subsidies. So if you remove ALL subsidies then you could start to formulate the notion of cost, since right now you can’t track it since part of the cost is coming from your tax dollars.

  10. David Crosby

    There are fatal flaws in this business model. One, it takes decades for the homeowner to pay off the debt. They aren’t really saving any money. Two, the fundamental flaws in solar power also remain–it only produces electricity when the sun shines. Electricity demand on the grid does not match up well with solar electricity production. Natural gas power plants can scale up and down their electricity production to match demand and market price, which fluctuates throughout the day. And those are just some of the reasons Solar City has struggled to make a profit. If it were truly a disruptive business model it has been around long enough to have disrupted the energy model. It hasn’t.

    • Maybe you are responding to a different article because pretty much everything you typed is wrong. There is no debt to pay off. They save money. Electricity demand on the grid matches matches amazingly well with solar electric production. The model has not been around long but has already been very disruptive. Solar City is not struggling. etc. etc.

  11. Bill Piper

    What gets me is a few years ago the cry was that the country would run dry of energy sources and be burning massive amounts of dirty coal. Today gas and natural gas flows cheaply and freely again with wind and solar taking more of the energy load every day. What’s coming down the road-Fusion finally????

  12. jason crimson

    All of Solyndra’s solar panels failed. They did not make a solar panel that could continue to work. It was a fake company set up to steal money with the critical support of Washington, DC corruption.

  13. James Clapper

    Here is fact SWIFTY oil and gas exist BUT they are finite commodities . When they
    expire if another heating and power source is not in place you , I and everyone else on this planet will return to the dark ages . Why ? Without them nuclear reactors will be the only inexhaustible source of electricity other than hydroelectric . Eventually we will no longer safely store nuclear waste and we will destroy the habitability of this planet . .. Priorities need to be aligned and right wing philosophy must be excluded b/c it is a path to suicide . m.j.c.

  14. I actually research this stuff...

    Solar is about cash flows. There are parts of the US where solar projects (residential, commercial, and utility) can have a positive NPV without government support. The larger issue is cost of capital which is why you’re seeing companies like NRG and SunEdison launched yield cos. Cost of capital is currently high as solar is a new asset class. As the market gains comfort with the cash flow quality of these projects, credit spreads will reduce and Solar will become more viable.

    At the end of the day Solar energy is becoming cheaper and last I checked my PG&E rates are only going up.

  15. 0.3E9m/s

    It’s sad that the fossil fuels public relations machine has been so successful at making Solyndra the well known brand for photovoltaics. Lost in that propaganda blitz was the fact that Solyndra bet against silicon. They thought their oddball minerals would be cheaper or more efficient or something.

  16. Screwed

    My 25 panel system cost 32,000 ! I save approx $100 per month. With the $9,600 FedTax credit and the $10,400 Rebate screwing from the state of Florida, It will take me 12.5 years to pay back the loan @ $100 per month savings on electric bill ! SO, Solar isn’t worth installing!

  17. eyeforeye42

    GE’s problem is that they need to make pretty good margins else they sell the business. They sell innovation and when the product becomes a commodity (anyone can do that) they sell the business off because it can’t compete at the margins needed to satisfy the investors they have.

  18. eyeforeye42

    GE’s problem is that they need to make pretty good margins else they sell the business. They sell innovation and when the product becomes a commodity (anyone can do that) they sell the business off because it can’t compete at the margins needed to satisfy the investors they have.

  19. John Van Wagenen

    Why should utilities invest in this when they can have individuals buy their own solar panels and charge people to put excess wattage back into the system. This is what more and more utilities are doing.

  20. Ray Boggs

    And Solar Home, Inc. in California, a 16 year old pioneer of the solar industry wants to be a bigger player than both SolarCity and NRG in the residential PV market with it’s much lower pricing on higher performance solar systems coupled with $0 down financing with tax deductible interest. How’s that for a challenge?

  21. robert c

    President Ronald Reagan took office in 1981, and one of his first moves was to order the solar panels removed. It was clear Reagan had a completely different take on energy consumption. “Reagan’s political philosophy viewed the free market as the best arbiter of what was good for the country. Corporate self-interest, he felt, would steer the country in the right direction,” the author Natalie Goldstein wrote in “Global Warming.”

    One of the many steps backward by the GOP.

  22. e rebert

    I live in Pa and I’ve got a solar system (about 3 years). It’s ok but the real strength of the economics were built on subsidies. I got a 30% federal tax credit and another 25% cash grant from the state. So my cost was heavily subsidized and what was more interesting was the on-going SREC generation payments, which were actually worth about 4X the electricity cost (about $.32 per kwh versus $.08 per kwh of the eletricity itself). On that basis, my payback would have been about 5 years (no imputed interest on the funds invested). HOWEVER, the SREC market cratered and went from $300 per SREC to about $30 currently so my return is now out to about 15 years. I’m still happy so far with the investment, but I doubt seriously the value in this company is ever going to be what’s suggested in this article.

  23. Jim Starowicz

    They didn’t miss a thing!! The special interest have been blocking the advancement into another growth industry, once we were envied for the many, now those that envied have our innovative trades and the experience to carry forward, for over forty years! As the con excuses fell, forecast they would, now only left with funding the denial of climate change and the human factors causing the rush towards!

  24. kevin

    For 13 years my wife and myself have lived on solar power. We are not on any grid and were not connected to any company. I must say it is very sweet never having having an electric bill. The cost of our solar system was about $8000. If you divide 8000 into 13 years that is the number we spent on electricity. By this time next year we will be able to divide 8000 into 14 years. So far our overall cost has been about 50 dollars per month. With each passing month the overall cost is less.