SolarCity, the Brick and the Frog

 | Apr 11, 2014 | 6:00 PM EDT
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For most homeowners, SolarCity (SCTY) offers a simple proposition. For no cash down, SolarCity will install and operate a solar power system on the homeowner's roof. In return, the homeowner commits to buy power from that system for the next 20 years. It is a terrible deal, and smart consumers should run.

Before I explain, I should disclose that I am biased in favor of solar power. I think solar power is responsible and sustainable. I also think it helps lower energy costs, displaces air pollution and reduces constraints on transmission lines.

I also like the fact that SolarCity is socializing solar power with small consumers. I admire how they provide opportunities for small consumers to participate in solar energy.

However, from the point of view of the homeowner, I do not like SolarCity's deal. Let me explain.

First, do you remember 20 years or so ago when your parents got their first cell phone? It was either a brick or it might have been hard wired into their car. The purchase price was huge and monthly bills were outrageously high. At the time, the few users who could afford cellular service thought they could justify the heavy costs. Their contracts were short term. Every few years the technology improved. Prices fell. Low cost upgrades became widely available. Now, smart phones cost about 80% less than the original brick and they are everywhere.

Solar panels are like cell phones. Homeowners installing solar panels on their roof today believe they are making smart decisions, they think they are using their resources productively and some think they are contributing to reducing pollution. At least for today, most homeowners who install solar panels on their roof are happy for their decision.

The difference between the SolarCity's deal and the cell phone is the contract. If a homeowner bought SolarCity's deal today, 20 years from now, they will have five more years to go. If they want to get rid of the old technology bolted on their roof, they will be stuck.

Like the proverbial frog in the pot, it enters the water not knowing the temperature is rising and will ultimately boil the hapless frog. Now, hand the frog a brick to hold. That no-money-down solar panel gradually transforms into a brick. Of course, money solves problems and it might help rid the house of an ugly brick. However, money is a primary reason why many homeowners took the deal in the first place. 

It turns out SolarCity's deal saves homeowners little money. In fact, most savings produced by their solar energy system goes to SolarCity and their bankers. The homeowner sees very little savings.

Standard & Poor's published their analysis of SolarCity's Series 2013-1 asset-backed notes. For the average homeowner, SolarCity's deal looks ugly.

We knew the 5,033 customers in Series 2013-1 notes committed to very long-term contracts. It turns out they also committed to buy SolarCity's electricity at 15 cents a kilowatt-hour.

To provide context, the average utility in most states will sell homeowners all the electricity they need for less. As illustrated in the graph, many utilities will sell it for a lot less:

Source: EIA/Willliams

Here is another reference. Just last month, city-owned Austin Energy signed a 25-year agreement with SunEdison (SUNE) for 150 megawatts of solar power. The price was not 15 cents. It was less than 5 cents per kilowatt-hour. However, in Austin's case, not just a few homeowners benefitted. This deal helped everyone.

It is not just the price. SolarCity's customers also agreed to a price escalator.  According to S&P, the weighted average for Series 2013-1 was 2.07%. Say goodbye to locked-in savings.

Finally, there is another requirement. SolarCity will only deal with preferred customers who hold high credit scores. The average customer in SolarCity's Series 2013-1 package had 720 FICO scores. If customers have marginal credit, SolarCity is not interested in them, their home or their business.

SolarCity's customers could have taken out a second mortgage, hired a contractor and built a solar system on their own. They would have saved a lot of money. They also would not have a forced marriage with SolarCity for the next 20 or 30 years.

Had they built their own systems, the homeowners would have banked a 30% investment tax credit offered by the U.S. Treasury. They, not SolarCity, would have harvested state benefits, including cash from any state-sponsored renewable energy credit program. Finally, they would have retained most of the savings solar power normally offers.

It appears SolarCity's Series 2013-1 customers gave away about 80% of system savings. Worse, many locked down that giveaway for 20 years.

Unlike the boiled frog parable, SolarCity's customers may want to jump out of the pot before they are completely cooked. That jump could be expensive for SolarCity's customers or for SolarCity itself. In either case, the banker will be paid.

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