Google & SolarCity partner on $750M fund for rooftop solar

Solar installer and financier SolarCity announced on Thursday that it plans to raise a $750 million fund to invest in installing solar panels on the rooftops of home owners, and $300 million of that fund will come from tech giant Google. While Google has put over $1 billion into clean energy projects over the years, the commitment to the SolarCity fund is Google’s largest to date, and the entire fund will be the largest one ever created for residential solar projects.

The deal shows the momentum behind the booming solar panel industry in the U.S. Solar energy represented over a third of all new electricity in the U.S. in 2014, and that could grow to 40 percent in 2015, which would be a new record. The solar industry is now a major U.S. employer, employing twice as many workers as the coal industry; SolarCity employs more workers in California than the state’s three large utilities combined, said SolarCity CEO Lyndon Rive at the ARPA-E Summit earlier this month.

This isn’t the first time that Google has put money into a SolarCity fund. In the Summer of 2011, Google committed $280 million into a similar solar installation fund created by SolarCity. That collaboration was one of the first examples of a corporate entity (and not a bank) agreeing to invest in solar projects. Usually SolarCity works with banks like Citi, U.S. Bancorp, or Goldman Sachs to raise these types of funds.

SolarCity NASDAQ

The remaining $450 million of the $750 million fund will come from debt financing, says a SolarCity spokesperson. The entire fund will cover the upfront costs of installing solar panels on the roofs of “thousands” of homes across 15 states.

SolarCity’s business was built around creating solar-as-a-service deals where it can offer a homeowner the installation of solar panels and the accompanying solar energy in exchange for a monthly fee over several years (say, 20 to 25 years). That monthly fee is usually less than the homeowner would pay for their monthly utility bill. Thus the homeowner can buy solar energy without having to pay for the high upfront cost of the installation of the solar panels.

SolarCity panels on a Walmart, courtesy of SolarCity.

SolarCity panels on a Walmart, courtesy of SolarCity.

This type of solar-as-service deal has transformed the solar energy industry and opened up solar energy for tens of thousands of people that wouldn’t previously have been able to afford it. By the end of 2014 SolarCity, the largest installer in the U.S., had installed a cumulative 1 GW of solar panels on its customers rooftops, and the company plans to install another 1 GW within 2015. A gigawatt is the size of a large natural gas, coal or nuclear plant.

Google wants to invest money into funds like SolarCity’s because it can provide a return (8 to 12 percent) on the investment. The deals with homeowners tend to generate pretty reliable revenue over time because homeowners — particularly the kind getting solar installed — tend to pay their utilities. But because these financing deals are becoming more mainstream as solar becomes more of a commodity, the returns have been slipping in recent years.

Why Chile has emerged as a big solar market

It might surprise you to learn that Latin America — including Mexico, South America, Central America, and the Caribbean — was the region that showed the fastest growth in history for solar panel projects last year, according to a recent report from GTM Research. While the area’s 625 MW worth of solar panels installed in 2014 might look small compared to the estimated 6.5 GW installed in the U.S. during the same time (1000 MW = 1 GW), the annual growth rate for Latin America was a staggering 370 percent between 2013 and 2014, while the U.S. was just 36 percent.

Why did that happen? Well, more than three quarters of that growth in Latin America came from the quick emergence of solar panel projects being installed in Chile — in particular, in the high, hot, flat, barren desert lands of Northern Chile. The Atacama Desert has some of the world’s most intense sunlight and an area of 40,000 square miles.

For example, just two weeks ago a 70 MW solar panel farm — one of the largest in the world built to sell power on the wholesale market — was completed by SunPower in El Salvador in the Atacama Desert. The site uses 160,000 solar panels on single-axis trackers built on 328 acres leased from the Chilean government. The solar system can provide the equivalent electricity for 70,000 Chilean homes.

First Solar is building what could be the largest solar project in Latin America, a 141 MW solar panel farm called the Luz del Norte Solar Power Plant, north of the city of Copiapó, Chile. That site is expected to be finished by the end of 2015, will use 1.7 million of First Solar’s solar modules, and will produce enough electricity for over 173,962 homes.

The Topaz solar panel farm, that uses First Solar panels in CA.

The Topaz solar panel farm that uses First Solar panels.

Because of the unique geography of northern Chile, it’s one of the most productive solar regions in the world. And there’s also a growing desire for power in the area, from mining and other industries that are ready to buy up as much solar power as the local utilities and power markets are willing to generate.

All of this means that Chile has emerged as one of the areas in the world where solar panels are truly competitive economically, even without subsidies. In the U.S., the federal investment tax credit and loan guarantee programs, as well as state mandates like California’s renewable portfolio standard, have largely pushed the solar market. While Chile does have some solar incentives, the economics are good before they kick in.

In Chile, financial institutions are eager to back projects and new business models around solar projects have emerged. The U.S. government’s development finance institution, the Overseas Private Investment Corporation (OPIC), financed 70 percent of the $200 million El Salvador project through long-term non-recourse project debt.

Despite the fast growth rate, it will take several more years for the Chilean solar market to grow to muliple gigawatts. Chile is expected to have another solar boom in 2015.

A huge floating solar farm will be built on a reservoir in Japan

Japan has been aggressively building solar projects — close to 11 GW in two years — in the wake of the decision to dismantle its nuclear plants following the Fukushima disaster. Now the country is even looking beyond land for places to install solar panels.

A new large floating solar panel farm — supposedly the world’s largest in terms of capacity — will be built on top of the Yamakura Dam reservoir in Chiba prefecture in Japan (see map below). The 13.4 MW solar system will be built by a joint venture created by Japanese electronics giant Kyocera and financing company Century Tokyo Leasing, called Kyocera TCL Solar, and the plant is supposed to be in operation by March of 2016.

Floating solar panels, a project similar to the one that will be built by Kyocera.

Floating solar panels, a project similar to the one that will be built by Kyocera.

The electricity from the project, which will be produced by 50,000 Kyocera solar modules over a 180,000 square meter stretch of water, will be sold to Tokyo Electric Power Company. The modules will be installed on a floating platform.

The marker in the lower right hand corner is the Chiba reservoir.

The marker in the lower right hand corner is the Chiba reservoir, to the east of Tokyo Bay.

Japan has over 71 GW of clean energy projects approved, and 96 percent of those are solar, according to Bloomberg. The country already had a long history in the solar industry before the Fukushima disaster and the implementation of its clean energy incentive program. Japan is home to some of the largest solar panel makers in the world, including Panasonic, Sharp and Solar Frontier (part of Showa Shell). Here’s a list of some of the other solar projects that have been built in Japan in recent years.

The booming rooftop solar industry

Remember a few years ago when Solyndra went under, solar manufacturers in Europe were tanking and complaints about China dumping their excess panels on the U.S. market were the shape of the news. What a difference a few years make.

Now the conversation is squarely focused on real business competitive questions, namely how to lower supply chain and operational costs amid a booming market where the company that lowers costs the quickest wins.

SolarCity is dominating the rooftop market. And when it turned in its most recent quarter, which saw both revenue and losses grow as the company invests heavily to lock up the market, we got a pretty good picture of the cost breakdown for the company.

Ucilia Wang writes:

SolarCity’s chief operating officer, Tanguy Serra, gave a breakdown of three major areas of cost — installation, sales and administration/overhead — during an earnings call with analysts on Thursday.

The total cost that combined all three areas reached $3.03 per watt during the second quarter, with installation accounting for $2.29 per watt.

The sales costs were $0.48 per watt during the second quarter while the overhead was $0.26 per watt. Serra didn’t give a comparison to previous costs for these three areas except that the installation cost was $3.16 per watt when the company went public.

What’s interesting to me about those figures is that sales costs still remain high at almost 16 percent of costs. SolarCity is working on lowering that and acquired Paramount Solar last August for $120 million.  The idea was to bring on a virtual sales organization to try and lower those costs. There may well be an incremental benefit of bringing in house that type of sales and marketing arm.

And that lowering of costs is important in squaring off against privately held competitors, Vivint and Verengo (Reuters has reported that Vivint filed confidentially to go public). But in terms of competition with utility scale solar, the funny thing is that utility solar should have much lower sales costs because it doesn’t have to deal with marketing to consumers yet rooftop solar remains competitive and is getting ever more competitive.

Utility solar should theoretically offer more price competitive solar if it could actually sell a differentiated product to interested consumers. Like if a utility customer you could easily get solar power guaranteed at a specific rate. Environmentally conscious businesses are increasingly becoming a utility customer that may want to know where it’s power is sourced.

But the reality is that utility electricity rates remain higher than rooftop solar in most markets that SolarCity is targeting, places like Hawaii, Arizona, California and Nevada where sunshine is abundant and retail electricity rates are relatively high. The reasons for utility rates being high are many but have to do with everything from unions to infrastructure costs related to managing distribution and transmission.

And even if sales/marketing costs remain stubbornly high, SolarCity is doing what it can to lower installation costs. It acquired solar panel startup Silevo and is planning a solar panel factory in New York to further drive the margins of solar panel makers out of the value chain. The high solar conversion rates of Silevo were also likely attractive to SolarCity as it tries to differentiate itself in the rooftop market.

Going forward, SolarCity in modeling over 500 megawatts of installed solar next year and almost a gigawatt in 2015. The rooftop solar market is booming, having grown 60 percent last year, and traditional energy players like NRG Energy have taken notice, eager to enter the market.  Utilities entering the rooftop market hasn’t been ruled out either, as some innovative utilities consider that it may be better to join them than to fight them.

Still, from where I sit, SolarCity is still way out ahead. Utilities and energy companies may have access to capital and engineering expertise, but SolarCity still has a significant head start and is getting increasingly efficient at using acquisitions to focus on driving down costs. That makes for a difficult competitor.

One month with the Chevy Volt; so far, so very, very good

Has it really been four weeks since we bought a Chevy Volt to supplement our 41 solar panels? Indeed it has and after topping 1,300 miles we’re about to fill the gas tank for the very first time. Here’s how the initial month of driving went.