Reasons to Not Invest In Solar Payoff – And Qualifications

Industry Profits Hard To Find. No established “rooftop” solar company has a sustained history of significant profits, after the industry has been around long enough to think steady, even robust profits might have emerged.

“Rooftop” is a subsector of “distributed generation” which itself is differentiated from centralized, utility-scale solar. In “rooftop,” Sungevity, one of the more prominent firms with a business model that seemed defensible bankrupted unexpectedly this year. A second, Solar City, the reputed industry leader with 35% of market share (as recently measured by Greentech Media), sold itself to its parent company Tesla, never having turned a profit according to most sources. Word on the street is that the red ink persists under the Tesla umbrella, negatively impacting its bottom line. But problems with profits is widespread in the industry. Spruce Financing which sprang from Clean Power Financing, one of the early leaders in consumer solar finance modeling, is rumored to be failing.

Most industry insiders feel that Sungevity’s failure can mostly be explained by mismanagement. But Solar City’s long history of poor results is more problematic. Solar City’s lack of solid returns generally mirrors outcomes in other lease-centered, solar apex companies. It seems obvious that Solar City, SunRun, and Vivent, along with a few other lease apex companies are spending significant amounts of money on marketing as they compete among themselves to increase market share. The impact on current earnings obviously hasn’t been positive. This is not inconsistent with building out these businesses and intensifying the adoption of solar, as long as their investors remain patient.

However, there are other, more serious problems with the lease powerhouses’ business model. Although it is difficult to be entirely sure what’s going on without having actually studied the books, there is a solid argument to make that the math behind the solar leasing business model doesn’t shake out. One major problem stands out. To raise capital, the lease companies sell off the returns from the 30% federal investment tax credits and from the 5- year MACRS depreciation. The amount of money paid tax equity investors, rumored on the order of 12-15% on their investment, arouses suspicions that these financing strategies haven’t panned out.

Then there is the question, Who is getting paid to do what? Is there just too much slosh in relatively young firms playing with VC endowments. How is it that you lose money – or, worse, bankrupt – while still charging $/watt-DC prices much higher than smaller, independent contractors are charging? Currently lease jobs are being booked north of $4/watt-DC, even as high as $5/watt-DC when independent contractors are selling jobs at or just south of $3/watt-DC. The actual cost of installation is hidden in a 20 year lease which beats but not by much utility pricing. How does that work? Where is all the money going in these larger lease houses? Somewhat a mystery, even to industry insiders. But that something is cockeyed with the current business model of these solar lease houses should be obvious.

At the same time, while still representing only slightly more than 1% of the electricity generated in this country, solar was the fastest growing segment of generation in the U.S. in 2016 at 39% and grew in megawatts installed year over year by more than double. This was in part due to the extension of the 30% investment tax credit towards the end of 2015 which led to the rapid implementation of previously stalled utility-scale solar plants in 2016. But residential solar also increased robustly in that time frame at something close to 25% year over year. 2017 Q1 saw a slight slowdown as the industry settled back to normal growth. Even at elevated pricing, the solar lease value proposition to the consumer beats what the utility’s price electricity from the grid. As Solar Payoff’s website stresses, leasing remains much less attractive than outright ownership, even loan-to-own.

Long-term, solar panel prices are expected to continue to drop to natural (meaning unsubsidized) grid parity, comparable in price with all forms of energy produced from fossil fuels, including fracked natural gas. This would be without counting as one always should the significant externalities involved with carbon-based fuels. There is considerable disagreement currently about how the industry should deal with the Chinese-government-subsidized over-supply of solar panels which has prematurely created an artificial approximation of grid parity. The trendline for solar panel pricing has been downward over the last decade. This is expected to continue.

Lastly, Solar Payoff should not be judged by the experience of the lease houses with their “something for nothing” call-center-based hustles. Nothing the lease houses have done should be confused with a low overhead online marketplace demonstrating clearly the own-solar value proposition where cost control is driven by smaller middle-class contractors competing for jobs and where salaries everywhere are reasonable. The cost to a consumer for leasing a system is exorbitant compared to ownership and ownership can be finance much more cheaply than a leased system – either the opportunity cost of adopter cash or a short- to medium-term bank loan. This will be especially true if we can help consumers finance installations with auto-like bank loans. This is the Solar Payoff business model.

The Utilities’ Counter-Offensive. After looking the other way for many years – unperturbed by what they initially viewed as a relatively harmless intrusion – utilities in the U.S. have finally taken up arms against distributed generation and specifically residential netmetering retail pricing. They’ve also demanded that solar adopter pay an grid access fee for the right to feed the grid and effectively use it as storage. As it has grown, distributed generation, for the most part “rooftop solar,” has upset the utilities central power plant and transmission business model, while also imposing unanticipated grid O&M costs. The latter has occurred to a large extent because substations were never designed for significant generation on the local distribution grid behind their transformers. So substations need redesigning to implement a truly modern grid.

These regulated monopolies have immense lobbying power at the state level everywhere. The revolving-door continues to create regulators only too willing to listen to counter-factual utility corporate distortions. These regulators also mostly remain unwilling to encourage, much less compel the utilities to re-think their business model to become more amenable to increased distributed generation. Where this will go in the end, we can’t be sure although there is some evidence that the utilities’ counteroffensive will lose force sooner rather than later. Certainly in the short-run, however, there is increasing uncertainty (also see Trump-Truitt Phenomenon below, in that regard).

The strongest argument for continued resistance and then eventual defeat of utility pushback against DG solar is that awareness of climate change continues to grow in spite of rearguard exertions of climate deniers. Even the conservative political tide which has marginalized the Democratic Party nationally and strengthened the Republican, respectively pro- and anti-environmental, generally speaking, hasn’t managed to quiet widespread anxiety about climate change. And, in fact, the pendulum at the state level has swung in the utilities favor and then back again as policies favoring or harming rooftop solar were implemented and then soon reversed, mostly by repricing netmetering. The history of Nevada would be a case in point. First the utility-influenced commission priced netmetering out of existence, retroactively, while also charging a prohibitive grid access fee. Then, a year or so later, the state legislature under intense pressure re-wrote the law to re-instate a gradually diminishing netmetering retail rate while re-setting the grid access fees to reasonably reflect the cost to the system of permitting solar users to use the grid as a battery.

A major attempt to reprice netmetering in California failed to significantly impact the compensation for installing solar. Netmetered solar priced at retail long ago – or anything close to retail (but not the market price referent) – beat utility pricing to consumers on the grid, even without dumped Chinese panels. Moreover, the real (meaning, un-dumped) market price of solar has fallen precipitously and is expected to continue to fall as innovation asserts itself.

The attacks of the utilities on distributed generation have been and will continue to take place state by state. One can expect some reversals. At the same time, rooftop solar has planted its flag almost everywhere. As grid prices rise, as inexorably they will, and as solar prices continue to fall, one can expect that an educated consumer public will demand reasonable solar pricing, as they clearly did in Nevada after the utility-influenced Public Utilities Commission and also in California. Investors will require more than typical patience. At the same time, those become distracted by these short-term ebbs and flows will risk missing the inevitable historical sweep of an inevitable clean energy transformation if they withdraw from the market now.

The Trump-Pruitt Phenomenon. No one reading this can have missed the fact that the unexpected arrival of Donald Trump brought with it his appointment of Scott Pruitt, former attorney of the State of Oklahoma, to head the Environmental Protection Agency. Pruitt in his former position was a truculent opponent of all things EPA, including anything that stands in the way of a full-blown carbon fuel economy. By all reports he’s hard at work reversing any executive order that might have hurt the carbon energy economy and/or supported cleaner forms. Whether Trump stays or goes prematurely, it’s almost a given that we will have to deal with Pruitt for at least three and a half more years. The only positive thing that can be said about Pruitt is that his machinations will impact utility-scale much more than Solar Payoff’s subsector, distributed generation.

Management Experience. I might look like a lone wolf with no management experience to an outsider but I put myself through graduate school running a contracting business and left graduate school with no debt. I also stopped and started the business for over ten years, making the management effort all the more challenging. I did my fieldwork in Mexico four-to six month every year and then restarted the business each year when I returned to Berkeley. Verifiable accomplishment. Nothing that we’re looking at with Solar Payoff compares straight on with running a contracting business earlier, although the business model does propose to serve as the hub of a small contractor network where I know the ropes. Managing a web business with professional staff is new and different experience. I understand that. Most people thought what I accomplished in my Berkeley years proved I could organize complex tasks well, delegate while keeping my eyes on the important details. Having said that, questioning my managerial competence is fair game for an investor. I would if I were in an investor’s shoes. Something to discuss.

Think About It – The Inevitability of Solar Energy.   A long-term horizon on the order of decades isn’t normally associated with start-up investing. Investors should understand the economics of solar before throwing money at it. On the other hand, the rise to dominance of solar energy is as inevitable as the sun in the morning. The continued fall of the price of renewable energy of all forms and the fact that fossil fuels will increasingly threaten us environmentally and therefore economically makes continued growth of solar inevitable. One might debate how much of this will fall to what solar grand subsector, distributed or centralized distribution. But that solar of all forms will continue to grow one should not doubt. The only question is how fast and with what distribution across subsectors.

The likelihood for solar is steady, sustained growth of both distributed and centralized generation, perhaps favoring the latter in the near term. But a more draconian environmental future and accelerated expansion of solar shouldn’t be dismissed out of hand. Long before we actually see the direst effects of climate change on human populations, it is not at all unlikely, even probable, that the rise of the oceans will create momentous economic havoc. The vulnerabilities to slippage of land-based ice from Greenland and Antarctica constitute a peril that goes largely unappreciated. But even with just planet-warming melting, no catastrophic slippages, ocean-sitting metropolises will find it harder and harder to withstand the pressure. Eventually, these will have to be protected at enormous cost or abandoned at even greater.

No one should invest in solar simply because they are green. On the other hand, patience will be rewarded because the externalities of energy produced with fossil fuel, if they are not already obvious, will become increasingly impossible to miss. Solar and other forms of renewables will replace fossil fuels much sooner than many think because the unsustainability of the alternative is baked into the effects of carbon energy. Also, natural gas, often touted as clean energy is not even close to clean, still half as dirty as very dirty coal. The much touted move to natural gas from coal at best mitigates human-driven global warming.

The “Protective” Tariff Quandary. Utility-scale solar prices have fallen to grid parity with combined cycle natural gas, not counting externalities. Unfortunately, this is largely due to Chinese dumping which anyone in favor of resurrecting American manufacturing should oppose, in spite of efforts by the Solar Industries Association of America and Greentech Media to oppose anti-dumping legislation before Congress. One can argue about the specifics of the bill before Congress, especially where minimum import price should be set and the size of the tariff imposed. But the distorted Chinese price for panels that U.S. solar has ridden is not a market price and shouldn’t be confused with one. On the other hand, increased automation and economies of scale in module manufacture and, more importantly, continued innovation in cell science and manufacture will push U.S. solar to and beyond grid parity in no time flat, without dumping. But continued research and development is crucial as would be clearly pricing in externalities when utilities pay for fossil fuel energy. The industry would be wise to focus on the latter and stay away from supporting dumped Chinese product.

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