It's always nice when a business gamble turns into a sure thing. That former gamble — SolarCity's massive solar module giga-factory — is taking shape in Buffalo, New York.
In 2014 when SolarCity bought Silveo, the giga-fatory's future tenant and maker of advanced, highly efficient solar modules, Elon Musk, the company chairman, and Lyndon Rive, his cousin and CTO, predicted a tidal surge in residential solar installations (certainly not a consensus view at the time). They were also trying to finesse the end of the US government's 30% investment tax credit (ITC), slated to disappear for residential solar after 2016.
After all, many analysts had predicted that the change could devastate the industry. And it would torpedo SolarCity just as the Buffalo factory got up to speed.
Musk and Rive wrote on the company blog that they were betting the house:
Without decisive action to lay the groundwork today, the massive volume of affordable, high-efficiency panels needed for unsubsidized solar power to outcompete fossil fuel grid power simply will not be there when it is needed.
Before the Silveo acquisition, the company’s business had been built around marketing, financing, and installing solar systems. It still buys the solar panels, mostly from Chinese manufacturers. The Buffalo giga-factory changes that, although at the time, no one could have guaranteed that SolarCity would survive - even with its new modules.
SolarCity is still unprofitable, even as its innovative financing ignited strong demand for residential rooftop panels, where homeowners lease the systems for 20 years, and SolarCity, which owns the panels, banks money from the ITC. As the company blanketed more and more rooftops, revenues doubled from 2012 to 2014 — especially in sweet spots like California, with its high utility rates and constant sunshine.
Congressional horse-trading
There may be no direct cause and effect, but it seems like SolarCity's fortunes started to change with the culmination of the Paris climate talks. Although Elon Musk was spotted far across town giving a lecture at the Sorbonne, he could only lend moral support to the successful vote for a new global accord.
Afterwards, as politicians and policy wonks jetted back to their home countries to start working out the nitty gritty details, that Paris momentum rippled all the way to Washington, DC. Members of the US Congress immediately began horse-trading as they worked out the details of a $1.1 trillion spending measure to avert a new federal government shutdown.
Surprising Musk and most of the renewable industry, in exchange for ending 40 years of US crude oil export limits for the GOP the democrats wanted to extend solar and wind subsidies for another five years. After years of bickering over both proposals, the two sides of the aisle quickly agreed, and SolarCity's ITC had been not only saved but extended.
President Barack Obama signed the landmark legislation on December 18th, giving a huge boost to the renewable industry.
A close call
Before the Congressional deal, there must have been a lot of angst in the SolarCity boardroom, because in the last week of October, just before the unexpected legislative gift, SolarCity announced it would replace its successful growth model, which allowed it to dominate the market, with enough cost-cutting to turn cash flow positive by 2017, according to PV Magazine.
The company was preparing for the worst. Although SolarCity had installed 69% more residential solar in 2015 than the same period the previous year, Rive said the company would target only 40% growth in 2016, working hard to lower the current installed cost of $2.84/watt to below $2.50 by 2017. That strategy would help it weather the storm when the ITC reverted to its pre-2006 levels — 10% for commercial solar investors and nothing for residential solar investors.
“The last nine years it's all been about growth,” Rive explained to PV Magazine. “When you are growing at 80%, you have to make big, big investments, but you are only going to see the results of these investments 2-3 quarters later.”
An innovative business model looked like it was about to disappear, and the company's shares plunged 21%.
As growth investors headed for the doors, SolarCity, still wildly unprofitable, got a $113 cash infusion from Silver Lake Kraftwerk, while Musk and Rive contributed $10 million and $3 million.
Boom times
Everyone should be getting their money back soon because the new bill should completely transform the clean-energy sector.
With help from the earlier federal tax credits, right now solar power is booming. In 2008, the nation had about 1.1 gigawatts of photovoltaic power; by the end of 2014 it had 18.3 gigawatts. Last year, homeowners, businesses, and energy companies added about 6.2 gigawatts, and they'll install eight more this year. Almost a third of new electricity generation capacity added last year in the US was solar, second only to natural-gas.
This extension will add an extra 20 gigawatts of solar power, which is more than every panel ever installed in the US prior to 2015, according to Bloomberg New Energy Finance (BNEF). This deal is like adding another America of solar power.
The wind credit will contribute another 19 gigawatts over five years. Combined, the extensions will add more than $73 billion of investment and supply electricity to power 8 million U.S. homes, according to BNEF.
This is exactly what the renewable industry needed, because although the costs of installing wind and solar power have dropped more than 90 percent since the original tax credits took effect, in most places coal and natural gas are still cheaper than unsubsidized renewables. But, according to Bloomberg, by the time the new tax credit expires, solar and wind will be the cheapest forms of new electricity in many states across the U.S.
"This is massive," said Ethan Zindler, head of U.S. policy analysis at BNEF. In the short term, the deal will speed up the shift from fossil fuels more than the global climate deal struck this month in Paris and more than Barack Obama's Clean Power Plan that regulates coal plants, Zindler said.
The only question remaining is, when will Elon Musk and SolarCity get naming rights to the Buffalo Bills' football stadium?