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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. john Bush

    The politicians are mostly interested in paying off donors when it comes to solar energy. The simple reality is that solar panels, deep cycle batteries and LED lighting make it very easy to meet all the lighting needs for most homes and most if not all electronics requirements. The hard part is high draw items like HVAC systems, clothes washers, dryers etc. A home can be retrofitted almost anywhere to handle light load requirements and this can take a big load off the grid but it is hard for politicians to cash in on it so not much support. they prefer big costly complexes that draw a lot of attention but are much less efficient when line loss is factored in. We are poorly served by our government.

  2. Don Parker

    What is not said here about the “business model” is that it is all about greatly inflating the “fair market value” of what the company installs and then taking an inflated 30% tax credit based upon that inflated value. The inflated “fair market value” claimed is almost enough to cover the entire cost of the installation. Taxpayers would be much better off with a tax credit or other payment based upon the kilowatt hours actually produced by the solar.

  3. Dmitriy Y

    This development was clear already in 2009-2010, without questions or reservations to those who chose to look at Solar realistically and realized that same as with first DVD player priced around $2000 dropping to $20 (100 times) due to demand and production scale, Solar panels will be cheaper when demand increases, and multiple competing technologies will ensure that proper technologies will be available for most if not all applications. I wrote an open letter to Obama as part of my blog in 2010, outlining the upcoming Solar boom as well as proposed for Government to help homeowners purchase Solar systems by financing them and getting paid through reduced utility bills – a win-win for all. Instead of Government, private companies are now making a killing on selling overpriced installations of largely outdated solar technologies.
    Here is what will happen in the near future (which I also outlined at the same time back in 2010):
    1) Ultimately, ALL Solar installation companies will either go out of business or be acquired by regular Utility companies (Con Edison, KeySpan, Duke, etc). Since Solar installations make most sense when cut into the grid, regular Energy companies will realize that each Solar installation is nothing more than a source of energy that they should be paying for, just as they pay now for coal, hydro, nuclear, oil, gas and other sources of energy. They will install solar and pay the owner for the energy, but charge a maintenance fee, for which they will service such solar installations. Standalone solar installers make no sense even now, but they are leveraging slowness of traditional energy companies and even such giants as Lowes and Home Depot who should be installing solar instead of mom-and-pop shops.
    2) Solar panels are already “dinosaurs” concepts, that will be dead in the next 5-10 years, to be replaced with “integrated solar” – solar technologies built into regular items, like roof shingles (see Dow Chemical’s solar shingles for example), solar windows, and other new materials up to “liquid solar” – a type of lacquer that will be applied to any surface and generate energy.
    3) The real money in Solar will be with patents and technologies, enabling most effective and efficient capture of solar energy and conversion and storage of electricity in various applications.
    If anyone doesn’t see any of this as clearly today, as I and many others did back in 2009-2010, too bad. This is it, like it or not.

  4. The big players missed it because they are completely fossilized. Anybody who didn’t see this coming has been getting his information from Fox News.

  5. Karsten Boysen

    Yeah, but why is Nanosolar not even mentioned? The Silicon Valley co prints solar panels on aluminum foil way cheaper than silicon panels, but guess what? All of their production is bought up by Germany. you can’t get really cheap solar in the U.S. Hmmm, Very strange!!!
    — K-mart

  6. Bismilar

    Solar panels could have been much further along if Senator John McCain of Arizona hadn’t sabotaged them every time they appeared on any bill in congress. He was in the pockets of Big Oil and refused to allow Solar energy to gain a foothold in this country. The amazing part of this story is that the morons in Arizona continued to elect McCain and never questioned whether he was undermining the prosperity of Arizona and the nation. We could have been free of foreign oil years ago but politicians have no integrity and would gladly sell the nation from under us than to endanger the incomes of their billionaire supporters.

  7. Joey LeMonier

    The challenge for NRG and GE is they don’t know how to sell. They can finance and even install, but convincing a customer to switch from local utility to solar is were I and my associates come in and bring tremendous value to the changing space

  8. Artificially driving up gas, and electric prices so people will be forced to buy the more costly, inefficient solar & wind energies that are devastating the poor & elderly is NOT a good business model no matter how you spin it

  9. I had to laugh at the first photo that showed all the solar panels on the buildings. The crazy thing was that the panels are facing different directions. Solar is still very expensive unless you use government handouts (other peoples money) to lower the cost. The panels have to be facing the south the be effective at all. Some of the panels in the picture must be facing east or west which will not allow you to get maximum use of the panel thus raising the cost of producing any power out of those panels.