SolarCity: Why all the buzz behind cleantech's latest IPO?

SolarCity, a San Mateo, California-based solar energy company, calmed anxious investors last week when its discounted IPO surged on Wall Street. In a telephone interview with The Christian Science Monitor, SolarCity CEO Lyndon Rive outlined the company's holistic approach to solar power, to which he attributes the success. Though it's often depicted as a solar installer, SolarCity is just like any other energy company, Mr. Rive said – except the power plant is on your roof:

Question: After a rocky start last week, SolarCity shares soared 50 percent in its Wall Street debut. To what do you attribute the turnaround? 

Answer: It just comes down to the fundamentals of the business. The product is super simplistic. It’s just cheaper, cleaner electricity ... Most people when given the option of paying more for dirty power or less for clean power will take paying less for clean power. There was tremendous headwind against the solar industry. I personally underestimated how deep the scars go and the amount of money the investors have lost ... In order to get the interest level to the high demand we had, we had to give a significant discount so that the investors knew there was no risk. 

The energy industry has been around for a very long time of course, but it’s all centralized creation of energy. You create the energy at a centralized location and then you use transmission and distribution to get it to your house. Never before has there been an energy company that creates energy at the place where it’s needed. So these two concepts are disparate and haven’t been seen by investors.

There were good arguments on both sides to pull the IPO because the $8 number was just too low. But then Elon Musk, our chairman, reached out to a few of the institutional investors and started discussing the options with them. If the closest category is so new and no one has done this, you need to build the investor confidence. 

Q: Since SolarCity does not manufacture solar panels, it benefits from the flood of inexpensive solar panels from China. Are you confident prices will continue to drop or is there any concern about the era of cheap solar panels coming to an end?

A: We expect most of our cost optimization to come from economies of scale. We think that the equipment manufacturers have come close to pretty much bottom. There will be additional decreases but nothing as significant as it was in the past.

People often write that SolarCity is the country’s largest solar installer. I grind my teeth every time I see that. Or the other thing people write is that SolarCity is a solar leasing company. I grind my teeth when I see that too. We are an energy company. In order to provide the energy we need to install it via systems. It’s no different than your current utility provider. Most utilities have people out there that install the wires, maintain the infrastructure and then they finance all that and then they charge the customer a cost per kilowatt hour and no one looks at a utility going, “Oh, that is a power installtion company or a financing company.” No, they are an energy company.

It’s no different than what we do. We are building thousands of little power plants on peoples’ roofs that we manage remotely. It’s the exact same thing that a power company does except they do it on a central model and we do it on a distributed model.

Q: How crucial is continued federal support to solar’s growth? Can the industry survive without the current Investment Tax Credit?

A: It’s absolutely a critical point. SolarCity’s target is to reduce our costs by 5 percent a year over the next four years. If we’re able to reduce our costs by 5 percent a year and retail rates continue to increase the way they have, then when the tax credit goes down to 10 percent from 30 percent, we’ll still have a strong business. And just when it goes from 30 percent down to 10 percent, it falls into the tax credit category of every energy generation source. The 5 percent reduction of cost year over year plan is to push more volume through our fixed overhead costs which will help us reduce the allocated costs per system.

Q: SolarCity was involved in the Solar Sandy Project, which offered victims of Hurricane Sandy a chance to charge phones, heat food and run other equipment using mobile solar generators. What did you learn about the role solar can play in disaster relief?

A: When we talk about energy, it is not like software or technology where you can have something that’s disruptive and get significant economies of scale over a two or three year period. Energy is actual infrastructure. So you have to take a twenty or thirty year look at energy before you can really start moving the needle and making change. When you look at the grid today, the grid is built on an old design where you create energy at a centralized location and then you transport it hundreds of miles to the place where it’s needed. That needs to change or at least needs to be supplemented with distributed energy, and creating electricity at the place where it’s needed.

When a severe storm occurs and the grid gets knocked out, even your local generation gets knocked out. The way to solve this problem is with local storage. Then when your grid goes out, your solar system is still producing electricity and feeding into your local storage system and the storage system provides electricity at night. The grid needs to evolve to that point. Storage is too expensive today, but, just like solar was eight years ago, I see storage being that next technology that’s going to reduce its costs significantly over the next 10 years ...

If you combine distributed generation with large deployment of storage and you empower the utility to help manage the storage devices, then you start getting a smart grid. The vision is not just backup for the home. The vision would be that the grid administrators, the persons responsible for stabilizing grid, have access to that storage device and can discharge it and feed your neighbor if needed. Then, you get into a true smart grid infrastructure.

Right now the definition of smart grid is retrofitting and knowing where the power lines go out. I don’t call that "smarter;" I call that "barely reading." It's year four in a child’s development. We’ve been stuck at year two for a very long time – for 100 years – so hopefully we'll go from year four to a young teenager and it won't take us 100 years. Maybe it only takes us 20 years to do that.