Goldman Sachs (NYSE: GS) Funds SolarCity (NASDAQ: SCTY)

Brian Hicks

Written By Brian Hicks

Posted May 17, 2013

Elon Musk’s profile just keeps rising. First, the Tesla Model S hit the news for its continued successes, and Tesla (NASDAQ: TSLA) just recently saw its stock shoot up.

Now, Goldman Sachs has given SolarCity Corp. (NASDAQ: SCTY), the solar developer that Musk chairs, financing worth a bit more than $500 million. The agreement in question began brewing sometime last year, and the amount of funding was increased this April.

Bloomberg reports that the lease-financing agreement means SolarCity will be able to develop some 110 megawatts of solar systems, without homeowners and businesses incurring much upfront costs. Investors should pay attention to this deal because it involves a major financing institution, as well as because it’s the biggest single financing deal for rooftop solar systems in the U.S. ever.

Undoubtedly, public awareness of the rooftop solar sector will increase as a result of this high-profile deal. Most importantly, it could lead to widening acceptance of solar power as a viable option.

It looks like SolarCity’s business has been doing rather well. For Q1, the company indicated investments worth $138.2 million in solar systems, riding on booming demand from both individual and business customers.

Meanwhile, Goldman Sachs benefits from this arrangement, too, as it will help the banking giant inch closer to its target of $40 billion in renewable energy financing within the next ten years. At the same time, SolarCity will likely become a bit more flexible in terms of to whom it can extend credits with regards to its deals.

Bloomberg quotes CEO of SolarCity Lyndon Rive:

“When we started you needed a FICO score of 720 or higher. Now it’s more like 680 and I suspect in the near term we’ll be at 650.”

Installations Growing

Goldman Sachs’ financing will help SolarCity carry out its installations across Arizona, California, and other states where the company operates. The company’s leasing model has proven to be a successful one in a time when solar companies continue to consolidate under pressure from the remnants of last year’s solar-panel glut worldwide.

Initial costs to buy a full solar-panel system are high, which often poses a formidable barrier to entry for would-be adopters.

SolarCity allows customers to enter into a long-term contract whereby they purchase the electricity generated by the installed panels, while SolarCity shoulders the bulk of the cost. Under this model, customers end up paying about 10-15 percent less for energy.

Meanwhile, Fox Business cites a report that suggests investor funding for residential rooftop solar installations (on an annual basis) is likely to reach $5.7 billion by 2016. As of last year, this was $1.3 billion.

SolarCity has received funding from some high-profile institutions like U.S. Bancorp (NYSE: USB), Google (NASDAQ: GOOG), and even Honda Motor Co. (NYSE: HMC). In total, SolarCity expects to install up to 158 megawatts, relying on funding from these sources.

Meanwhile, as Reuters reports, the companies investing in SolarCity benefit too; they can claim federal tax credits for almost 30 percent of the total value of the installed solar system.


Solar Industry

Meanwhile, what of the solar sector? The Solar Energy ETF (NYSE: KWT) and the Guggenheim Solar ETF (NYSE: TAN) have both gained about 20 percent thus far in 2013.

However, the hangover from the solar panel production glut hasn’t quite gone away yet. Most cell and module manufacturers continue to operate on slim margins, and SolarCity’s leasing model is something other operators are observing closely (and in many cases emulating).

Over in China, with the government pulling back on its subsidies, numerous solar firms have filed or are in the process of filing for bankruptcy. In general, though, the solar sector is certainly on a growth track. Both China and the U.S. continue to see increasing activity as far as solar installations are concerned.

For the present, the installations and leasing model (i.e., the SolarCity model) appears to be your best bet as an investor. The sector is going to go through some upheavals as it settles down, and until then, the safest route lies toward investing with solar installations and leasing companies. 


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