SolarCity Corp (SCTY) Road To Six Feet Under [Webcast + Case Study]

SolarCity Corp (SCTY) Road To Six Feet Under [Webcast + Case Study]

See the Sears short case from the contest here.


Aalto University School of Business

David Einhorn At The 2021 Sohn Investment Conference: Buy These Copper Plays

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Oskari Fardig, Carolina Kansikas, Antti Niemi

Overview: The Photovoltaics Industry and SolarCity

The market for renewable solar energy, and its most widespread applications, photovoltaic panels (PV), has been experiencing steady growth in recent years. Installations have grown over 15 times from 2008, and the milestone of one million installations is to be reached in 2015.


Forecasts agree on the continuation of this record growth over the next two years.

However, not all players in this market are bound to survive. We believe that, beyond the current excitement affecting renewable energy valuations, SolarCity will be the next bankrupt company of the industry. Its unsustainable business model, poor positioning and high indebtedness combined with inflated expectations sold to investors pave the road for the company to the hands of its creditors.

Disadvantaged Positioning in a Market Oriented Towards Utility-Scale and Solar Farms

Solar energy can be provided either through utility-scale applications (already accounting for 60% of the U.S market), or through distributed, rooftop solar panels. The production of energy of distributed applications ranges from producing 8000 kW to 45000 kW of energy per year for residential panels and commercial or industry applications, respectively. However, due to the imperfect orientation of rooftops and the fixed costs to take into the equation, these distributed methods are more expensive than concentrated solar farms. Solar power generators’ efficiency grows as their size increases, and this also fuels up the economies of scale that impact strongly the production of solar energy.

The concrete proof for this trend is the construction of the Topaz Solar farm, the first of many similar massive projects in the U.S. The entirety of the farms under construction will be able to provide energy to nearly 2 million American homes at competitive costs: building large-scale utilities result in a cost of 1.68$ per Watt, compared to 2.27$ and 3.60$ per Watt for commercial and home systems, respectively. Regulation in some states already gives incentive to the mass production of solar energy, requiring, for example in California that utility companies produce at least 33% of their output from clean sources. Additionally, the offer for convenient net-metering contracts to home-panel owners is restricted. Utility companies have both regulation, negotiation power and economies of scale on their side, which gives grim perspectives for stable growth of residential systems in the long term. SolarCity has focused entirely its business on rooftop installations and is lagging behind its competitors in building larger scale plants.

While the correlation between falling brent and falling SolarCity stocks (from 65$ to 50$) might have generated misconceptions on the relationship, the two commodities are not substitutes for generation of electricity. Oil is mainly used for transportation fuel, not for electricity generation. As it is not the case for substitutes, demand for solar does not decrease as its price decreases and convergently decrease in brent prices do not affect solar demand.

Instead, companies such as SolarCity planning to build facilities in the U.S. should be aware of the surge in supply of shale gas, which concretely is a substitute – and a cost-efficient one. As the energy provided through solar panels is not differentiable, customers will prefer the cheaper source, threatening this way demand for SolarCity products.

Players in the PV market have to compete mainly with prices, business models and modular efficiency. As panels present few possibilities for customization, companies tend to offer additional services, as energy management software and power-leasing plans. SolarCity was a pioneer in developing the power-leasing service, however, at the moment use of similar contracts is widespread and does not offer any competitive edge. Fierce competition, along with concerns for overcapacity, have already made 112 companies go out of business, either for insolvency, bankruptcy, or acquisition in less than optimal conditions, and will spare only companies delivering the highest value to customers. This industry seems not to bear idle players. Solarcity’s foes Vivint Solar and SunPower are already grabbing the rooftop solar market share from SolarCity especially in the Southwestern U.S. In addition, SunEdison just reported its all time high quarter with 383MW completed, of which already 24MW residential. Moreover, barriers-to-entry to residential market are very low, resulting in a high threat for new micro-sized entrants, as panels can be acquired from manufacturer countries in emerging markets especially in China, where modular production is long developed and cost-efficient.

SolarCity seems to be substantially weaker than its competitors both from a technological advancement standpoint, and global facility positioning. For instance, the closest competitor SunPower benefits not only from a top-of-the industry technology, which integrates efficiency (23% vs 14-16% of competitors) and reliability (0.25% annual power degradation to 1.3%), but also has positive trends of decreasing costs per Watt as efficiency increases, not to mention it has already turned consistently profitable, and is continuously expanding its reach on China through joint ventures. SunEdison just announced its plan to build a joint project of $4B and 7.5GW mega factory in India, enabling the company to avoid tariffs and other sanctions placed for Chinese solar products imported to U.S. and Europe. According to plans, new panels should start rolling out of the factory to the solar panel hungry Asia in mid 2016.


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