According to Jason Stverak of the Hawaii Reporter, says that SolarCity Corp (NASDAQ:SCTY)’s business model is somewhere between questionable and a legal scam.

SolarCity SCTY

He points out that the up and coming solar energy firm collects tax subsidies intended for its consumers as part of its “solar lease” business model, a policy which maximizes SolarCity Corp (NASDAQ:SCTY)’s profits, but which leaves consumers vulnerable to sudden spikes in their utility bills.

“Worst type of cronyism”

Stverak pulls no punches in describing the unethical business model SolarCity is predicated upon. According to him, SolarCity Corp (NASDAQ:SCTY) is “one of many solar firms that relies almost entirely on government handouts and credits to generate profit–exploiting loopholes to pocket federal tax breaks intended for homeowners who install solar panels.”

He admits this business practice is not technically illegal, but he argues that “companies that employ business models of this nature engage in the worst type of cronyism, simultaneously pocketing taxpayer money while leaving their customers with needlessly high energy bills.”

SolarCity’s solar panel lease model

Stverak argues that SolarCity Corp (NASDAQ:SCTY) exploits the Solar Investment Tax Credit (ITC), a federal program that was expanded in 2008 allows homeowners who install solar panels a tax credit of 30% of the costs. He says that the solar ITC is “far from the best use of our tax dollars, but this program is at least defensible…presuming that the tax credit actually goes to the homeowner, who pays for and gets electricity from the panels.”

SolarCity Corp (NASDAQ:SCTY) offers consumers 20-year leases on solar panels instead of selling them. Leasing the solar panels to consumers means the firm retains ownership of the panels for the entire two decades, and means the firm can take advantage of a loophole in the ITC and take the consumers’ tax credits. Stverak says that given SolarCity takes the 30% tax break on every panel it installs, that means Elon Musk’s solar firm has “milked the federal government out of $411 million–on top of more than $10 million in funds from the stimulus, and untold state-level subsidies.”

Last but not least, Stverak points out SolarCity Corp (NASDAQ:SCTY) clients are locked into 20-year leases regardless of how well their solar panels work. He also points out given the fact that solar panels don’t always provide all of the promised energy savings, instead of lower utility bills, some California customers have seen a nearly 50% increase in their energy costs.