SolarCity scores first utility deal, and why that’s important

SolarCity, which started as a residential solar installer and is planning a $201 million IPO, has now jumped into building solar power plants for utilities. The company announced on Thursday a deal to build a 12 MW(ac) project for Hawaiian utility Kaua’i Island Utility Cooperative.

The $40 million project is unusual because SolarCity, founded in 2006, has spent most of its resources building up an installation and financing business for residential and business customers (including schools and public agencies). This business has positioned the company as an electric retail service provider who competes with utilities. The Kauai project is the first announced project by SolarCity to build a solar farm for a utility, said Jonathan Bass, SolarCity’s spokesman. (The company previously also lined up a fund from Pacific Gas & Electric‘s investment arm to market solar panels and leasing products to home and business owners).

The engineering and construction contract on Kauai will give SolarCity the experience of working with a new class of customers. More utilities across the country are interested in building their own solar energy projects in order to meet regulatory mandates or because they see them as a good investment opportunities to bet on renewable energy. We have noted in previous posts that SolarCity was going after larger and larger projects, and that placed the company in direct competition with more established players in that segment, such as SunEdison, SunPower (s SPWR) and First Solar(s FSLR).

The utility solar market is growing faster than the residential and commercial segments primarily because the projects involved tend to be larger, in tens or hundreds of megawatts, and potentially more lucrative. And many utilities in large states, such as California, need to serve an increasing amount of renewable energy to their customers. Some of the overhead costs also could be lower when it comes to utility-scale projects: you don’t need to send out an army of marketing and sales people to sell consumers systems that are kilowatts in size.

If SolarCity has any ambition to expand beyond the U.S. market, it would do well to gain an expertise in developing and installing utility projects. In many markets overseas, the biggest opportunities lie with working with utilities to boost the amount of renewable energy they serve and taking advantage of government subsidies for that type of projects.

SolarCity is among the first to offer homeowners leases so that they don’t have to pay a high upfront cost of installing solar panels. Instead, homeowners pay a monthly fee via long-term contracts for the electricity from the panels, which are owned by the investors, typically banks, that have set up funds for SolarCity to install and manage the equipment. Solar leases have become popular and are offered by many more companies now, and they accounted for over half of the residential installations in California, the country’s largest solar market. Part of the sales pitch for the leases is a promise  — or at least a strong suggestion – that consumers will end up paying lower electric rates over time than they would with their local utilities.

The California company also has lined up some big-name business customers, including Walmart, eBay and Intel. Nearly a year ago, SolarCity said it had secured a loan to install 300 MW of solar panels in military housing communities across the country.

In recent years, SolarCity entered other types of energy service businesses. It began to offer energy audits and home-improvement services to help homeowners save electricity use and cost. It also now offer energy storage using lithium-ion battery packs from Tesla Motors and install solar powered charging stations for electric cars (such as Tesla’s cars).

For the Kauai project, SolarCity intends to install solar panel on 67 acres that are part of a former sugar plantation. The utility and SolarCity still need to secure local and state permits, but the plan is to start construction in July 2013 and switch on the solar farm in 2014. Electricity from the solar farm will be enough to serve about 6 percent of Kauai’s daily energy demand, the companies said.

Kauai is one of the Hawaiian islands and is home to nearly 68,000 residents. It’s set a goal of generating renewable energy to meet 50 percent of its needs by2023. The project announced Thursday is one of the three solar farms, totaling 30 MW(ac), that are being developed by the Kauai utility.