Don't bet against SolarCity

By Jeff Siegel

DISCLOSURE: Long SCTY.

It wasn't an April Fool's Day gag when I said it was time to buy SolarCity Corp. (NASDAQ: SCTY) at the beginning of the month.

After a brief standstill, the company's battery-backed solar projects have begun to move forward again. The State of California Public Utilities Commission has added an important item to its May 15 agenda that will make a huge difference for SolarCity. Utility companies may finally be blocked from imposing big fees on battery-backed solar systems.

For more than a year, California's largest utilities companies demanded that battery-solar systems undergo costly and time-consuming inspections to prevent them from “laundering” power they pulled off the grid. Non-battery solar systems were not a concern for the utility companies, because that energy could be unquestionably verified as solar in origin as it was fed back into the grid. Battery systems did not provide an equal degree of certainty.

Each new battery-backed PV user had to submit an application to connect to the grid that cost $800 and required additional meters and hardware that cost as much as $3,700. Only a dozen of SolarCity's customers completed the application and approval process out of the more than 500 customers who had signed up.

In March, SolarCity had had enough. It halted its applications for interconnections to Southern California Edison, Pacific Gas and Electric, and San Diego Gas and Electric. Now, the Public Utilities Commission seeks to exempt battery solar installations from these huge fees, so these customers can get their systems. SolarCity has resumed filing applications.

The Threat to Utilities

Energy companies expressed concern that solar batteries could store power from the grid rather than from solar panels, and feed it back into the grid for net metering billing reductions. Net metering is a system that allows residential solar users to send their unused solar energy back into the grid and roll their traditional electric bills backwards. With this type of system in place, people can install solar panels on their home and not really rely on them to power anything except the grid.

Since solar batteries allow customers to store the power they generate, this means they can save their energy to use on themselves and not even have to participate in net metering if they don't want to. It essentially rearranges residential power priorities into a pyramid with solar on the top, solar battery as the backup, and traditional grid as the backup to the backup.

Solar battery systems, therefore, threaten to slash customer reliance upon local power monopolies. SolarCity, however, isn't positioning itself as a threat. It wants to work with the power companies. In a blog posting entitled “Put Battery Storage in the Hands of Grid Operators,” SolarCity Co-founder and CTO Peter Rive said:
“While cutting the cord enables one household to be 100% renewable and self-sufficient, it limits what these technologies can do. In short, the grid is a network, and where there are networks, there are network effects. When batteries are optimized across the grid, they can direct clean solar electricity where (and when) it is needed most, lowering costs for utilities and for all ratepayers. This is true of homeowners’ behind-the-meter storage units, and it’s also true of larger commercial and utility-scale units.” Despite SolarCity's apparent goodwill toward power companies, the threat this technology poses to power companies is still strong.

All in the Family

SolarCity was co-founded by brothers Peter and Lyndon Rive, and they have a very important cousin: Elon Musk, CEO of Tesla Motors (NASDAQ: TSLA). Together, the family is pushing for a battery-powered future.

In the automotive sector, batteries mean drivers do not have to rely upon costly gasoline to get around, and in the residential power sector, it means users don't have to rely upon energy monopolies.

The combined effect of two battery-crazy companies in different sectors is a massive economy of scale.

Tesla's so-called “gigafactory” is going to produce enough lithium-ion batteries at such a high volume that prices will drop. Both Tesla and SolarCity will reap the rewards. The Gigafactory is not expected to be built until early 2017, and production ramping will not begin until 2020. It may be a long way off, but think of what can be done in the meantime.

SolarCity has only existed for eight years, and it has grown in explosions. In the third quarter of 2013, it grabbed a 32 percent share of the solar installation market, and it expected to grow its number of installations by more than 80 percent in 2014. This means it could deploy upwards of 525 Megawatts of photovoltaic cells this year alone.

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