Just two years ago, SolarCity and other rooftop solar providers were Wall Street darlings, and prospects for growth were flying high as enthusiasm for solar power was seemingly boundless.
After all, they had built a better mousetrap, allowing the masses to install environmentally minded solar power systems at little or no cost to them and to reduce their electricity bills at the same time.
But in two years, the landscape has drastically shifted.
Nevada recently rolled back the generous support it gave rooftop solar systems; 20 other states are rethinking their policies, as well. And despite the extension of a federal tax credit last year, losses by rooftop solar companies have accelerated.
SolarCity, the nation’s largest provider of rooftop systems, is the most visible of a cluster of companies, built with the aid of government subsidies and utility incentives, now facing deep uncertainties, despite unflagging consumer interest and surging growth in renewable energy.
Once nearly $86 a share, Solar- City’s stock price has gone in mostly one direction, down, as investors have cast increasing doubts on its business model.
Even Lyndon Rive, SolarCity’s brash, optimistic chief executive, concedes that the company faces challenges, like the recent decision in Nevada to apply a less generous rate system to exist- ing and future solar customers.
The company and other industry leaders like Vivint and Sunrun are so vulnerable to regu- latory shifts that they all respond- ed by abandoning the state.
“I don’t think anyone forecast-ed this risk,” Rive said. Referring to the potential to gain new cus-tomers in Nevada, he said, “It’s impossible for anyone to do it — it makes no financial sense for a consumer.”
Pain in the industry has been widely felt. Last year, two prominent companies, SunEdison and NRG, alarmed investors with ambitious forays into the rooftop solar business, leading to reorganization, belt-tightening and, in the case of NRG, the departure of CEO David Crane.
Solar panels have been around for decades, but the businesses and methods that have propelled their fast spread across rooftops in the last five or six years are still new and untested.
Many of the assumptions that underpin the financial models are far from certain, analysts and experts say, and as market conditions, public policies and technologies evolve, the risks are becoming more evident. Cheap natural gas doesn’t help, making it harder for rooftop solar energy to compete in markets with low electric rates.
SolarCity’s troubles have attracted strong interest from short-sellers, who make money by wagering that a stock price will fall. Prominent among them is James S. Chanos, the hedge fund manager who more than a decade ago was one of the first to question Enron and make millions betting against it.
“A lot more risk has been introduced into the model,” said Paul Strigler of Esplanade Capital in Boston, which focuses on solar energy. “I would call it an almost impossible segment of the market to even value.”
Some things, though, have gone the company’s way of late, including the extension of a federal tax credit — worth 30 per-cent of a system’s cost — and a $113 million investment in its debt led by the clean-energy arm of Silver Lake and Rive along with his cousin, the solar company’s enigmatic chairman, Elon Musk.
But it is not clear that those triumphs can offset the mounting losses and increasing competition that led SolarCity to cut its growth rate in half last fall.
“SolarCity has been way more aggressive than anybody in its marketing,” Chanos said in December. “They should be making huge amounts of money right now and they’re not.”
One way to make money is to look for new investors.
More so than any of its kind, SolarCity has been at the forefront of engineering ways to raise money to finance its opera- tions, including its innovation of selling bonds backed by bundles of customer agreements.
Those agreements, which gen- erate the bulk of the company’s revenue, are based on SolarCity’s fundamental pitch: Customers, with little or even no up- front payments, generally commit to 20-year leases to install rooftop solar systems on their homes and buy the electricity they produce for less than what they would pay utilities.
In addition to the federal tax break and state and local incen- tives, the credits that utilities give customers for excess electricity sent back to the grid — known as net metering — are a potent part of making the deals economically attractive all around.
Over the last couple of years, thanks to these generous, overlapping incentives, SolarCity’s revenue growth has been robust. But it is expensive to build out these systems.
SolarCity’s revenue last year grew nearly 60 percent to $400 million from the year before. But its costs grew at a much faster rate, leaving the company with an operating loss of $648 million for the year.
SolarCity announced a shift in its strategy last fall. It hopes to become profitable by cutting its growth rate from 85 percent a year to about 40 percent. It plans to sell the cash flows from its customer agreements.
Though SolarCity’s debt levels are soaring as cash levels shrink. executives express faith in their business model.
As governments around the world look to increase their share of solar power, Rive said, customers will continue to want a product that saves them money and offers a clean alternative to utility power.
But it is local rate policies, like a sharp cut in net metering, that poses a threat.