The vast majority of people want to do the right thing for the environment, but sometimes consumers and businesses are held back from going green by their concerns about cost and difficulty. People commonly think solar power is a great green move, but one that also costs a great deal. SolarCity (based in Foster City, California) is changing this, removing the barriers to going green by putting solar panels on rooftops with no upfront cost, helping residences and businesses save money from day one.
Most of us don’t really care if we own solar panels or not; it’s the electricity we want. For homes and businesses, putting their capital into solar panels can be hard to justify. The key is finding a way for customers to buy clean energy without the cost of buying solar panels. SolarCity has found a way. Like most solar power providers, SolarCity sells panels and installation services to homes or businesses, but it also offers an alternative to the cash purchase. With its residential lease option, SolarCity maintains ownership of the panels, but rents them to homeowners, who benefit from all the power they produce. For commercial customers, SolarCity also maintains ownership of the panels, and sells customers the power they produce on a per-kilowatt-hour basis in an arrangement called a power purchase agreement. In addition to installing the panels, SolarCity monitors and maintains the systems they install to ensure that they keep working. “If the panels don’t produce power, we don’t get paid,” said Lyndon Rive, founder and CEO of SolarCity, when I spoke with him recently. “We make our money from a system operating optimally.”
Their target business client is typically in owner-occupied buildings, with about 40% of business in the commercial side. “I personally feel there is a big need for small businesses to go solar,” said Rive. “This is a market that is underserved, and they see the value.” The clients SolarCity works with are not just green businesses; they include a broad spectrum of enterprises, as well as schools, churches, and other groups. “Often they are family-owned, successful businesses. They own their building, use a lot of power, and are looking for ways to save money.”
The power purchase agreements for businesses do not require any money upfront and can help businesses save some money immediately, and more money in the future. “The savings in commercial are not massive,” said Rive. “They are small savings, but if they have a choice of clean power versus dirty power, and save money as well, then people will sign up.” The locked-in rate can be lower than what customers pay their utility today, particularly in many states on the East Coast and California, and the utility rates are predicted to continue increasing 6% or more in the years ahead, while the rate with SolarCity increases only 3.5 or 3.9% annually, depending on the region. As time passes and the cost differential increases, the savings grow larger.
One of the challenges for installing photovoltaic systems and for making other green improvements in buildings where people rent is that the improvements to the building are typically attached to the building’s owner, the landlord, while the occupants pay the utility bill. Occupants can be reluctant to invest in energy efficiency or solar panels if the landlord will retain the improvements once they move on, while the owner may not have an incentive to invest in these measures if he is not paying for the power and not reaping the immediate benefits. With SolarCity’s power purchase agreement, one helpful measure is that the rate is paid with the utility is based on power consumed. If no tenant is in a building, and no power is consumed, the landlord can build a credit with the utility for those months. (One limitation to this, at least in California at present: the owner cannot over the course of a year get paid for a credit if more power is generated than used.) The market may ultimately provide one solution to this problem for green landlords and tenants. Green buildings command higher rent and have a lower vacancy rate, providing an economic incentive for landlords to green their buildings. “The way that you get landlords to invest in solar is that they do better at leasing if it’s a green building,” said Rive.
While the turmoil in the broader economy continues churning stomachs for many businesses, SolarCity is doing well. Very well. “We are still seeing strong demand,” said Rive. “Partially the reason is that solar is a true savings. Businesses look at this, and it might not be a lot of money now, but it’s a lot over time.” In addition to saving money, businesses are also looking at this arrangement as a way to reduce their risk, removing volatility for this component of their future expenses.
Such arrangements can also work out well for investors who supply capital for solar panels. There is a great deal of money sitting parked on the sidelines right now, with investors so spooked that they have at times recently bought government bonds for zero or even negative interest. By supplying capital for solar projects, investors can get a 10-15% after-tax rate of return, according to Rive, with a very low risk of investment; 60-80% of the return is subsidized by federal and local incentives. By investing in solar in this way investors can get the yield usually associated with medium or high risk investments, but with very low risk. This is an unparalleled investment opportunity. “We are reaching out to additional investors,” said Rive. “Most investors don’t even know about it, so it’s an educational process. Once they are educated the financial industry will see that this is a good investment for the money that is sitting on the sidelines.”
In addition to supplying solar panels, SolarCity is performing energy efficiency consulting. Solar power and energy efficiency are natural partners. If you are investing in clean energy from solar panels, it makes sense to take advantage of other opportunities to save money in your home such as weatherstripping, insulation, changing light bulbs, and fixing air ducts. These steps cost less than solar panels, and can provide a big money-savings bang for the investment made. In January SolarCity is launching a new kind of “power meter” to accompany its SolarGuard monitoring service, which will monitor hourly power consumption against production of power by their solar panels. Educating consumers with rapid feedback about consumption helps them to change behavior, use power more wisely (and ultimately, save more money). “It’s amazing what education can do,” said Rive. The power meter from SolarCity will have the ability to provide real time information about current consumption, and to compare usage patterns of similar periods in the previous week, month or year. SolarCity expects that this information combined with energy savings tips will help customers save between 5 – 15%.
Their business has been going so well that SolarCity is planning to expand significantly in 2009. Even with the economic situation weighing heavily on many businesses, SolarCity is expecting to double its business next year according to Rive. The $700 billion bailout bill passed in October included an 8 year extension of federal tax credits for investment in solar power installations and a removal of the $2000 cap for the tax credit on residential systems. “The East Coast is the area where we will expand next year,” said Rive, adding that three main factors they consider in making decisions about expansion are the cost of power in each area, the sun exposure, and the subsidies available beyond the federal level, which provide an extra financial boost in some states.
The success of SolarCity is another example of the power of green businesses even when things are tough, particularly when they help people go green and save money at the same time. Green businesses that can provide this winning combination should do well in any economy.