SolarCity Corp’s (NSDQ: SCTY) shares have plummeted by more than 60 percent since March 2015, when we warned investors to stay away from this overhyped name. (See SolarCity Corp: Sun-Dazed Investors Get Burned.)
The company’s fourth-quarter and full-year results don’t hold out much hope for a recovery.
SolarCity grew its sales by 57 percent last year, but its loss on each dollar of revenue increased to $1.92 from $1.47 in 2014 and less than $0.90 in 2012. The company even lost $10 million reselling solar-power equipment to customers. All told, the firm bled about $790 million in cash from operations.
These losses are especially astounding when you consider that the cost of solar-power components has declined dramatically over the past five years.
How has the SolarCity stayed afloat? Founder Elon Musk, who owns 22 percent of the company, is a charismatic pitchman and has leveraged his reputation as an innovator and entrepreneur to convince investors and governments alike to throw money at the firm. For example, New York state put up a $225 million guarantee to fund SolarCity’s planned manufacturing facility in Buffalo.
However, the stock’s dramatic underperformance over the past 12 months and sharp downdraft this year suggests that investors have started to see the light—bad news for a company with $1.02 billion in debt maturing over the next few years.
Although the sun has started to set on SolarCity’s overhyped growth story, electric utilities find themselves in pole position to benefit from growing adoption of renewable energy.
The prevailing narrative had called for rooftop solar power to undermine electric utilities’ business model, sending the industry into a death spiral. However, investment in solar power has emerged as an important catalyst for earnings growth for many power companies.
For example, Southern Company (NYSE: SO), which historically has generated much of its electricity from nuclear power plants and coal-fired facilities, established a partnership with Canadian Solar (NSDQ: CSIQ) to build 550 megawatts of utility-scale solar-power installations in California and Texas. This capacity will complement the 1,800 megawatts of green energy that the utility already operates.
NextEra Energy (NYSE: NEE), which owns Florida Power & Light, takes the crown as the leading US producer of wind and solar power. The company added 1,200 megawatts of clean energy to its portfolio last year, increasing its total capacity to 11.4 gigawatts. And the utility plans to as much as double its investment in renewable energy to take advantage of recently renewed federal tax credits.
Utilities can turn a profit from solar power because they tend to focus on large-scale projects that generate up to three times as much electricity as an equivalent investment in systems installed on residential rooftops. Support from state regulators also enables electric utilities to recover these capital expenditures in their rate base, ensuring a fair return on investment.
As incumbents, electric utilities also enjoy superior economics on their residential rooftop systems because of their lower cost of capital and existing relationships with potential customers, which reduces marketing costs.
Now that investors have soured on the yieldcos created by solar-power developers such as SunEdison (NYSE: SUNE) and SunPower Corp (NSDQ: SPWR), utilities enjoy vastly superior costs of capital.
The yieldco model seeks to take advantage of the premium that investors place on distributed (as opposed to retained) cash flow, enabling the sponsor to drop down renewable-energy capacity operating under long-term contracts at lofty multiples. Solar-power developers would then deploy the proceeds into new growth projects.
But yieldcos’ share prices have collapsed over the past year, sending their cost of equity capital to the moon and pausing this virtuous cycle of capital recycling—and putting financial weaklings such as SunEdison on the ropes.
As a result, SunEdison, SunPower, First Solar (NSDQ: FSLR) and other leading developers of solar power have opted to partner with utilities instead of competing with them. SunPower’s co-sponsorship of the Edison Electric Institute’s annual financial conference last year—the most important event for utility investors—underscores this point. (Conrad’s Utility Investor subscribers can find my takeaways and best ideas from this event here.)
These relationships will probably deepen in coming years as utilities take advantage of Congress’ extension of tax credits on wind and solar power into the next decade.
SunPower, for example, last month announced a partnership with Dominion Resources (NYSE: D) and Consolidated Edison (NYSE: ED) in New York, New Jersey and Texas. These efforts will complete with the likes of SolarCity, ratcheting up the pressure on the struggling company.
Meanwhile, the US Supreme Court’s recent decision to place a stay on the Environmental Protection Agency’s Clean Power Plan could deliver the coup de grace to SolarCity and other upstarts. However, this announcement doesn’t change regulated electric utilities’ economics at all; these companies will continue to recover their investments in their rate base.
Delaying and possibly derailing federal mandates that would phase out coal-fired power plants will increase electric utilities’ financial flexibility. But even without government intervention, the transition from coal to lower-cost, cleaner-burning natural gas will still take place, albeit over a longer time frame.
What level of growth should investors expect for solar power? The US Energy Information Administration’s most recent baseline projections call for solar-power capacity to double from 2014 levels by 2017, including an 80 percent increase in utility-scale installations.
These estimates came after Congress extended the tax credits for wind and solar power and before the Supreme Court’s ruling on the Clean Power Plan. But the Energy Information Administration did not include the Clean Power Plan in its base case because of political uncertainty.
Subscribers can learn more about my favorite renewable-energy plays in Renewable Energy: How to Make Green and Avoid Red.