SolarCity: More Pain Ahead?

SolarCity’s (SCTY) shares have crashed significantly ever since the company released terrible earnings report. The company massively underperformed in the previous quarter as it missed the EPS estimate by 46 cents.

Following the recent crash, Elon Musk has bought more shares of SolarCity. However, I don’t think investors should follow Musk as I think the stock has more downside to offer.

Net Metering Policy’s adverse effects

One of the most significant things in the solar sector is the effect of policy on making solar energy feasible in the electric grid.
Companies such as Sunrun and SolarCity wouldn’t even exist without the policies like net metering.

In Hawaii, supervisors recently introduced various solar tariff plans comprising of a grid-supply option and a self-supply option. Self-supply option removes the facility to supply solar energy back to the grid, as its main purpose is to store energy for self-consumption. Whereas, the grid-supply option delivers energy at wholesale energy rate, that means clients choosing this option have to pay wholesale energy rate instead of net energy rate, or approximately $0.15 per kWh from about $0.30.

Considering both the above cases, it will not be much profitable for the company to setup solar in Hawaii than it was before because that’s a great decline in the value company offers to property holder.

Recently, California is discussing about net energy metering 2.0, which will alter how much proprietors are compensated for solar energy. With these solar will become less efficient as it could consist of fixed rates, lower tariff charges, and other fees. It is very much understood that solar energy has the highest dispersion, there are going to be fluctuations that will be turn solar in to a less striking deal to clients in the nearby prospect.

In addition to that, the investment tax credit for residential and commercial sector is expected to expire by the end of 2016. The ITC for residential and commercial solar stands at 30% and 10% respectively and the expiry will further hold back the adaptation of solar panels.

The only good for the SolarCity is that any modifications to net metering will probably be virtuous for energy storing and to offer wide range of energy facilities. The company is investing comprehensively in these new wider offerings, which will provide company an opportunity to take benefit of varying charges or the necessity for self-consumption.

Although this is a step in the right direction, the company faces many headwinds going forward. In addition, SolarCity is not profitable and that isn’t expected to change anytime soon. SolarCity is highly leveraged and is losing money, which makes the scenario of more downside very probable. Hence, I would suggest investors to stay on the sidelines.

Published on Dec 4, 2015
By Vinay Singh

Copyrighted 2020. Content published with author's permission.

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