Solar industry rollercoaster offers a bumpy ride

Companies led by Elon Musk’s SolarCity struggle to generate positive cash flow.

They call it the solarcoaster. Since the first silicon photovoltaic cells were developed in the 1950s, the solar power industry has been on a switchback of highs and lows, driven by shifts in energy markets and government policy.

In the US, the rooftop solar market has conformed to that pattern. Shares in Vivint Solar, Sunrun and Elon Musk’s SolarCity have slumped over the past year, even though installations of new solar panels on homes are on course to be about 20 per cent higher this year than in 2015.

Panels are appearing on the roofs of homes all over the US, and about 1m now have solar systems. But the industry is another victim of the perennial curse of renewable energy: although the market is growing fast, it is proving hard for companies to find a reliable way to make a profit.

“Especially in the early days of the growth, you would expect to see a lot of growth, but big book losses,” says Shayle Kann of GTM Research. “The question is whether that’s sustainable.”

This wild ride in US solar power was supposed to come to a halt this year. A budget deal agreed by US lawmakers last December included a commitment to keep the investment tax credit for solar power for six years, phasing it out in stages between 2019 and 2021. News of the deal sent the share prices of SolarCity and Sunrun soaring.

Any hoped-for stability, however, has proved elusive. Sunrun’s shares are down 54 per cent since the start of the year, while Vivint, the second-largest residential solar company in the US, is down 67 per cent.

Shares in SolarCity, the largest US supplier for residential solar systems, dropped about 60 per cent between the start of the year and June, when the electric carmaker Tesla announced plans to buy it in an all-share deal worth about $2.3bn. Shareholders of the two companies will vote on the takeover on November 18.

Mr Musk is chairman of SolarCity and chief executive of Tesla, owning 22 per cent of the former company and 21 per cent of the latter. To some investors, the deal looked like a way for one of his businesses to bail out the other.

Lyndon Rive, SolarCity’s chief executive, rejects that suggestion, and stresses the benefits of integrating Tesla’s electric cars and batteries with SolarCity’s panels and systems to provide better products.

On Friday evening, Mr Musk gave one of his characteristically enticing presentations, demonstrating new solar roofs that look like traditional tiles, and an upgraded battery for power storage at home.

But earnings reports from SolarCity and other residential solar companies this year have made it clear that they are facing more difficult times. The market is still expanding, but by an expected 20-21 per cent this year instead of the 59-70 per cent annual growth rates in each of the past four years, according to GTM Research, and the companies’ cash outflows have been increasing.

Sunrun reported a $159m cash outflow from operations in the first half of this year, compared with a $105m deficit for the whole of 2015. SolarCity’s outflow rose from $790m last year to $867m in the first half of 2016.

Cash deficits are not necessarily disastrous for fast-growing companies that are building assets. SolarCity estimates that the panels it has installed on customers’ roofs will bring in $8bn over the lives of the systems. Cash outflows become a problem, though, if they cannot be financed, and in the spring SolarCity showed signs that it could be heading towards that threat.

In May, the company scaled back its projected growth in installations for the year, and revealed that its cost per watt installed, which had been declining reliably, had turned up. Its shares and bonds both slumped.

The prospect of Tesla’s protective embrace — and faith in the vision of Mr Musk, who is Mr Rive’s cousin — have eased investors’ fears. Mr Rive argues that the problems were only temporary: costs per watt rose because installation slowed, which was in turn caused by customers’ nervousness following an adverse regulatory decision in Nevada.

There, the state’s public utilities commission decided to stop “net metering”, allowing solar households to sell any excess power they generate to the grid at the same price they pay for their own supplies, for existing as well as new customers, imposing losses on many.

Nevada’s governor last month softened this ruling to protect the rights of existing solar households, and growth was already picking up, but the shock hit the entire US market for a time.

Meanwhile, says Mr Rive, SolarCity’s cash position was affected by investors in the company’s bundles of rooftop systems, which are its principal source of long-term financing, needing to go through additional procedural formalities after the Tesla deal was announced in June. Now they have completed those steps, he adds, investors have put in more than $1bn more to finance solar installations since July.

Other rooftop solar companies are also working to strengthen their cash positions. David Bywater, interim chief executive of Vivint, told analysts in August his first priority was to create a “sustainable business that funds its own growth”.

Solar power still has enormous momentum. The price of panels has fallen by about 25 per cent in the past year to 55 cents per watt, according to Bloomberg New Energy Finance. Next year, it is expected to drop below 50 cents and in some cases below 40 cents per watt, as a result of overcapacity in manufacturing, particularly in China.

The cost of battery storage, making it possible to use solar power at night, is also falling fast, and the market is becoming increasingly competitive.

Last week, LG Chem of South Korea launched a battery for the US home storage market, to take on Tesla’s Powerwall.

In a volatile and fast-moving industry, market leadership is still up for grabs. As the bigger names grapple with their financial problems, smaller companies are hoping for a shakeout that will open the way for them.

John Berger of Sunnova Energy, a private equity-backed residential solar company, says that people have been misled into thinking that the businesses are like Amazon or Facebook, when in reality they are more like gas pipeline operators, – inform

“The companies that are just fleet-footed are going to be like fireflies: shooting stars that burn brightly and then crash to earth,” he says. “Eventually everybody has to make money.”

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Providers of solar systems increase focus on cash sales

For rooftop solar companies, one of the most effective responses to the financial squeeze they have faced has been to sell more systems for cash or with loan financing.

Until now, the most popular sales models for residential solar have involved customers leasing a system or having a power purchase agreement, which mean they do not have to pay anything up front, and can cover the cost of the equipment over its 20-year life. That advantage for customers, however, is also a downside for providers. Many have been shifting to more cash sales, which customers often finance with their own loans, to bring in money for the provider at the start of the contract.

Both Lyndon Rive of SolarCity and David Bywater of Vivint stressed in August how they were stepping up their cash sales. About 30 per cent of SolarCity’s sales were cash or loan-financed in September, compared to just 6 per cent last year.

Across the industry, about 72 per cent of solar capacity was sold with leases or PPAs in 2014, but by 2016 that has dropped to 55 per cent, according to GTM Research. Jim Nelson of Sunworks, another rooftop solar company, says: “Anyone who wants to be successful [in solar] has to go from leasing or PPAs to ownership.”

Ed Fenster, chief executive of Sunrun, claims “companies that are strapped for cash have been pushing cash sales and loans.” But Mr Rive rejects the criticism. SolarCity is selling more systems with loans, he says, because it replaced a complex product with one that has fixed payments.

Owning a system outright is always the most cost-effective option for people who have cash or a good enough credit rating, and can benefit from the tax credit for solar power.

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