Tesla Motors shares began to slump after surging yesterday, carried higher by the news that U.S. lawmakers are close to extending the investment tax credit for green energy subsidies. On Wednesday, Tesla’s and SolarCity’s gains made Elon Musk an even wealthier man (on paper anyway), as he is the biggest shareholder of both companies. He’s Tesla’s CEO and SolarCity’s chairman, and regulatory filings reveal that just last week, he bought more SolarCity shares when they started pulling back.
Today SolarCity shares continued to ride high on the ITC news, but Tesla stock began to pull back, possibly as a result of news out of Denmark which suggests that the automaker could face problems selling its cars there. Denmark is one of Tesla’s largest markets, and raising taxes on EVs could be a huge setback.
As of this writing, shares of SolarCity were up 4.85% at $56.29 per share, while Tesla shares were down 1.06% at $232.02 per share.
How Tesla can benefit from the ITC tax
At first, Tesla may not seem to be ideally positioned to benefit from an extension on the ITC, but the company is taking orders for its solar energy storage systems, giving it some exposure to the tax credit. The tax credit is 30% for utility, commercial, and rooftop solar installations (benefiting SolarCity) and also stationary storage solutions like Tesla Energy.
In a report dated De. 17, Deutsche Bank analyst Rod Lache and his team explained why Tesla can benefit from an ITC extension. They estimate that the U.S. residential stationary storage market could surpassed 1 gigawatt per year within the next four years. Even if the market remains small and less than 5% of single family homes install solar panel systems, they estimate that the stationary storage market could present an annual opportunity of $285 million.
Further, they add that by 2017, the residential solar market is projected to reach 4 gigawatts in annual added capacity, and even if the ITC is allowed to expire, they expect this to keep growing. They also report that residential solar installations have been just about doubling every year over the last five to seven years.
Bernstein upgrades SolarCity
Based on the news about the ITC, Bernstein analyst Hugh Wynne and his team upgraded SolarCity to Outperform with a $69 per share price target. This may be the main reason the company is still getting mileage out of the news relating to the tax credit. Their previous price target was $36 per share. SunEdison shares, which also surged on the back of the ITC news, pulled back along with Tesla today, falling by as much as 3.86% to $5.97 per share.
Wynne’s other reason for upgrading SolarCity was the proposal from California’s Public Utility Commission to extend another taxpayer subsidy called net energy metering. This subsidy requires that utility companies pay the full retail price for electricity for distributed solar generation. That’s double the wholesale price of solar power, making it very attractive for homeowners to have a solar panel system installed. California is one of SolarCity’s biggest markets (if not the largest).
The Bernstein analyst said both taxpayer subsidies benefit SolarCity by making its installation values be far higher than the company’s installations cost. Also the firm will be able to get back its total upfront investment on projects in less than a year. He estimates SolarCity’s installation costs at about $2.80 per watt but the economic value created by the installations at about $4.30 per watt, with $1.40 of that value coming from the 30% ITC and an additional $1.35 coming from net metering in California.
He believes SolarCity will be able to monetize both tax incentives and raise $1.80 per watt. He also sees the potential for customer payments on leases and power purchase agreements through its asset-backed securities to raise an additional $1.15 per watt.