SolarCity Is Out to Change the Face of Your Roof

Unique Financial Model and Standardization Drive Expansion

Gary M. Kaye July 21, 2008 – New York - In the field, the first thing you notice is the company’s fleet of cleanly designed green trucks. In person, you notice that the two brothers at the head of the company, Chief Executive Officer Lyndon Rive, and Chief Operating Officer Peter Rive, originally South Africans, are both passionate about bringing solar power to the masses. And they are building a transformative model to reach their goal.

In a business dominated by mom and pop services, SolarCity, has set out to create a brand name for solar installation. The company began operating in sun rich California and in recent weeks has moved into neighboring Arizona. Come November, Peter Rive says the company will move into neighboring Oregon, a state without the abundant sunshine of California, but with substantial incentives to put solar on rooftops. By early 2009, SolarCity hopes to begin moving into energy- starved New England, where almost five dollar a gallon home heating oil is making solar and other alternative energy sources look more attractive by the day.

Peter Rive says the company weighs a number of factors in determining expansion plans. Is there abundant sunshine? Is electricity cheap or expensive? And finally, what are the tax and investment incentives available for solar installations? So, for example, California has the ideal combination of sun, high electric costs and governmental incentives. In neighboring Oregon however, there is cheap electricity and limited sunshine, negative factors Peter Rive feels are offset by substantial subsidies for solar investment.

Building a Brand

Lyndon Rive says his first major challenge was to create a brand. His goal “to do whatever is possible to make sure everyone adopts clean power….
People will not adopt clean power if it’s expensive or if they don’t trust people doing installation.”

To help build the brand, the Rive brothers are focused on standardization. SolarCity installers work from a detailed guide. They begin with a detailed analysis of the home, including opportunities to improve energy efficiency in insulation, electrical use, passive solar elements, and more. In each market where they operate, the company has a list of trusted third party vendors who can do any recommended retrofitting work beyond the solar panel installations. The team also photographs each site to provide visual documentation of the work being done.

SolarCity has created what is almost an installer’s bible, describing in great detail how to install panels on any kind of roof. At each stage, the installation work is checked by a supervisor who is not part of the installation team. Finally, each installation is equipped with a system they call Solar Guard, made by ZigBee. This unit is powered by the solar power inverter, and plugs into a router in the home to report the performance of the solar panels back to SolarCity via the Internet for the life of installation. This monitoring service, included in the price of installation, goes another long step to distinguish SolarCity from its mom and pop competitors.

All the solar panels SolarCity installs are made in North America, though not all by American companies. Lyndon Rive says for now he uses products from Evergreen Solar, Kyocera, and BP. He says that because of the high demand for PV there is very little discounting in the industry, which means that Soar City does not enjoy the kinds of economies of scale, at least in product purchases that one might expect in comparable businesses. He expects that as the industry ramps up and resolves the issue of silicon supply, that prices will eventually start to follow suit.

A New Financing Model

Creating a brand for SolarCity is only the beginning. Peter Rive says the biggest challenge facing homeowners once they decide to move ahead with a solar retrofit is the upfront cost. Potential clients found it costly and difficult to finance using home equity loans. So SolarCity came up with a unique financing partnership with investment bank Morgan Stanley. Morgan Stanley provides long term lease financing for the solar panels. This reduces the upfront cost to the homeowner to a pittance. For its part, Morgan Stanley retains ownership of the tax credits, Renewable Energy Credits, and future carbon credits for the panels. In the area of tax credits, the aggregation by Morgan Stanley means it qualifies for the unlimited commercial tax credit instead of the tightly capped residential tax credit. Peter Rive says that at the moment, the issue of renewable energy credits varies from state to state. In some places the utility holds onto the RECS in exchange for solar rebates. In other instances, the owner of the panels gets the RECS. As for carbon credits, Peter Rive says that so far that market really doesn’t exist yet, but that could change. The attraction of an investment group like Morgan Stanley is that if the carbon credits market does come to pass, it will have in its portfolio thousands of home installations which it should be able to monetize.
Just this week, the company announced a targeted financing program for the City of San Francisco. Under the program, part of the city’s aggressive plan called GoSolarSF, SolarCity can provide 2.4 kilowatt systems for monthly lease payments starting at $25 per month for eligible San Francisco installations on approved credit. A 2.4 kilowatt system can typically reduce a $100 monthly electricity bill to $40 in San Francisco.

Mostly Retrofits

Lyndon Rive estimates that 98% of SolarCity’s installations are on existing homes. That makes the finance deal with Morgan Stanley even more important. Buyers of new homes who install photovoltaics have the opportunity to roll the upfront costs right into their mortgage. That’s an option not available to retrofitters. The mitigation of the upfront cost has become a major incentive for most of SolarCity‘s customers.
The Rive brothers are also interested in working with builders of new homes. But given the state of the homebuilding market, that’s a goal that may simply have to wait for an upturn in the economy.

Green Fleet

The Rive brothers try to be environmentally correct about everything they do, from minimizing construction wastes to their fleet vehicles. All members of the sales team drive the Toyota Prius. The company runs a fleet of diesel powered Sprinter vans, a product designed by Mercedes and built in the U.S. by Chrysler. A small portion of the fleet is powered by bio-diesel, Peter Rive says he hopes that within five to eight years, all electric technology will find its way into work fleets.

CEO Lyndon Rive spent nine years running an enterprise software company along with his brother before making the jump into alternative energy. He admits that when he got started, installation was not top of mind. But he said that after a careful analysis of the entire chain that brings alternative energy into the home, he concluded that installation, and the associated costs, were the biggest obstacles to adoption of solar. This month SolarCity marks its second anniversary. In those two years it has grown from two employees to three hundred. And the brothers Rive see nothing but sunny skies ahead.