Despite Tax Credit Fears, SolarCity is a Good Buy
The declining cost of solar panels fueled scaling up of solar installations in the U.S., and this is expected to sustain through to 2016. The average cost of solar panels has declined 75% since the end of 2009. In 1Q2015, 51% of new electric generation capacity came from solar energy and the momentum is expected to sustain through to 2016. Annual solar installations will grow in 75% of states this year to 8,000 MW, and is expected to 11,900 MW by 2016.
However, solar installations are projected to drop 57% in 2017.
Racing against time
SolarCity’s (SCTY) business model revolves around contracted payments for leased/PPA systems and ITC. The king of roof-top installation is racing against time, trying to maximize investments for increasing the number of roof-top installations before the current investment tax credit of 30% expires.
This is paying off well as the company’s customer base has been growing historically at a rapid clip of 95% year-over-year. The roof-top solar installer needs to grow at 60% year-over-year to hit the target of 1 million customers by the middle of 2018. At the end of 1Q2015 nominal contracts stood at $6.1 billion, with over 217,000 customers as at the end of 1Q2015. However, the ploy of aggressive investment will impact the earnings in the near-term.
Domestic roof-top solar market potential is huge
The domestic market for roof-top solar is increasing at a hectic pace and by 2017 more than half the states could have roof-top solar that’s as cheap as utility grid power.
SolarCity currently serves 17 markets, and the company is confident of sustaining growth momentum for next ten years in the domestic market alone. This is because there are more than 40 million single-family homes in 17 states and 93M across the country, whereas SolarCity is just targeting 1 million by mid of 2018. So, SolarCity will just be scraping the total addressable market.
So, I don’t think SolarCity will expand to international market anytime soon, unless of course there are unfavorable policy changes that can hurt the viability of its current business model. In fact, during 1Q2015 conference call Lyndon Rive, CEO, said:
“I’ve said the statement a few time, we have been thinking about expanding internationally in the next year for the last eight years. And so we’ll probably expand internationally in the next year or two.”
So, I don’t think that SolarCity’s international expansion is going to happen anytime soon – and there’s absolutely no need – given the domestic market potential.
ITC solar-coaster ride
When ITC was to expire way back in 2008, President Bush pushed it to 2016 end. The big question that looms large is whether the same will be renewed again or allowed to expire? In fact, President Obama’s proposed budget aims to make solar and wind tax credits permanent.
The solar industry employs more people than Apple, Google, Facebook and Twitter Combined. The solar industry has generated jobs 10-times faster than the rest of the U.S. economy. Also, President Obama’s new solar initiative for the low-and-moderate-income Americans is also aimed at creating additional jobs in the industry over the next two years.
So, politics of jobs will find some meeting ground between President Obama’s proposal of indefinite extension and current scale down from 30% to 10% at the end of 2016. Three scenarios could arise:
- ITC gets extended for “X” number of years at the current level of 30%. The market will react positively to this.
- ITC gets stepped down in phase manner over next few years. In this case, it will not be 10% from 2017, but be anywhere in between 30% and 10%. If the step down is at the rate of 5% per year from 30% to 10%, this I am sure can be taken care of by cost reductions and solar panel efficiency improvement.
- ITC is made valid for all projects “started” until the end of 2016, instead of finished by 2016 end. In this case, I expect that SolarCity will further up its game in deploying capital during the back half of 2016 to start as many projects as it can to take benefit of 30% ITC.
Also, 2017 will not see a complete disappearance of market opportunities but projects a scale down to 57% over 2016 figures, as mentioned above. In preparation for this eventuality, SolarCity is already turning to the bond market. But, there will be retrenchments and layoffs that no politician would like.
So, in any of the three scenarios, SolarCity is here to stay.
The roof-top solar market is growing at a robust pace. SolarCity is nation’s largest roof-top installer by market share and is growing its customer base at a good rate of 95% historically. The company just needs to grow at a clip of 60% to hit a target of one million customers by the middle of 2018. Also, the company is creating a long-term hedge against bad policy outcomes through the possibility of adding a battery bank to residential systems down the line for offering off-grid systems.
ITC scaling down from 30% to 10% in 2017 can impact eh overall growth of solar industry so this is nothing that is going to impact SolarCity in particular. In fact, it is already turning to Bonds market in preparation, should the ITC be watered down. Given the impact that such a scaling down would have on solar industry job market, the politics of jobs will try and find a win-win situation.