Is SolarCity gearing up for the next subprime meltdown?

Posted on December 23, 2013

Homeowners investing in real estate with nothing down. Builders’ stock prices take off. High pressure salesmen tout big savings and profits in the real estate market. Government programs incentivize people to take on long term obligations. Business reporters post stories about the new paradigm and ignore warning signs.

Sound familiar? If it sounds like the housing bubble in 2005, think again. It’s the growing market for rooftop solar.

Solar, you said? Isn’t that like motherhood and apple pie? What could possibly be wrong with free power from the sun? Isn’t it the holy grail? The pot of gold? The brass ring? A free lunch?

That might be the case if solar were, in fact, free. But while it is affordable – in fact, it is an incredible investment – it is not free. Not any more than houses in Las Vegas being purchased for nothing down in 2007 … and under water today.

There are two basic ways for homeowners to enjoy the benefits of rooftop solar: Buy it or lease it.

Buying a solar system usually requires forking over a deposit. That may seem like a headache but the returns are enormous. The federal government offers a tax credit equal to 30% of the cost of the system – a dollar-for-dollar credit, not just a deduction. From then on the savings from solar are terrific, and go directly to pay off the homeowners’ financing charges or directly into their pocket.

You can buy a solar system from many local contractors. They size up the project, order the equipment, and install it in as little as a day and a half.

Alternatively, you can lease your solar system. This usually requires nothing down. A third party owns the solar panels on your roof and charges you for the electricity that the panels generate.

Several companies will lease you rooftop solar for nothing down. The most notable are SolarCity, SunRun, and Sungevity, as well as numerous installers that use the larger companies for financing.

Over 70% of all new solar systems are leased. On the face of it leasing sounds like a good deal. Solar for 20 years with nothing down.

But the devil is in the details. And with leasing there are two devils lurking in the background.

The first devil: You may end up paying more for your solar than you would pay to your local utility for the same amount of electricity! Most contracts with companies like SolarCity let you pay less than the local utility price in the first year. Thereafter, your costs escalate, often as much as 4% a year.

If utility prices escalate more than 4% you win. But if they do not escalate that fast you lose.

Not surprisingly, high pressure salesmen from SolarCity and other companies claim utility prices have been increasing for over 20 years at 6% or more. Many of their websites make the same claim. Not so.

Since 2008 utility prices throughout the country have dropped dramatically. Cheap natural gas produced from shale has driven down the price of electricity, most of which is generated from gas.

If utility prices rise slowly, your solar may cost more.  Not the slam dunk savings you’ve been promised.  And if that happens what do you think will happen to the price of your house if you want to sell it?  How willing will buyers be to take on higher operating costs than they would pay the local utility?

And most importantly, will homeowners continue to pay their bills if solar is higher than the local utility’s price?  Or will buyers default, like they did on subprime loans?

Of course, the leasing companies will argue that it’s not all about price.  After all,  your solar panels come maintenance free.  Somebody else owns them.  But the fact is that solar maintenance is negligible.  There are no moving parts.  And most panels carry warranties for 20 years or more.

They will also say that you can prepay your lease and avoid the escalator.  But price up a prepay and you’ll find it’s about the same as buying it outright…without having the risk that 20 years from now you have to pay to remove the panels from your roof.

The second devil: You may end up paying twice; first as a homeowner leasing rooftop solar panels, and then as a taxpayer. That is because the third party owners of most rooftop solar – companies like Google, Goldman Sachs, and Bank America – take advantage of the investment tax credits and depreciation allowance that such systems receive from the federal government.

In order to calculate tax credits and depreciation the companies must place a value on the solar system. The higher value, the more the credits and depreciation allowance available to the owners of the panels.  These credits and allowances reduce their taxes, thereby increasing what the rest of us taxpayers pay.

Trouble is that the costs can be easily inflated. And it looks like they have been.  Congress plans hearings on SolarCity’s claims. The Inspector General of the IRS is inspecting the whole industry.

A casual look at reports to Connecticut and Massachusetts regulators, not to mention reports from Arizona and California, appear to raise legitimate questions. If it costs $3.50/watt on average to build a solar system in Connecticut that somebody buys, how can make sense that it costs $4.90-$5.10 to build a solar system in the same state that somebody leases?

The answer is that it can’t. Unless you are claiming a 30% tax credit based on the higher number.

Like the housing bubble, third party solar is hot. Homeowners are snapping up the offers. The stock of SolarCity is soaring. Some call it the Tesla effect, after Elon Musk, the genius behind the electric car and a major stockholder of SolarCity. Reporters are in love with the stock.  Analysts tout it.  The green media swoon over it.

But it may be time to start looking under the hood. Sometimes when a deal is too good to be true … it’s not.

As with subprime mortgages, it is not only homeowners that may be affected. Taxpayers, too, may pay the price. And if the solar industry gets a bad name, perfectly legitimate solar deals may be shelved.

SolarCity and the companies financing third party solar are enjoying free power from the sun. The question is whether their customers – and the rest of us — will get burned.

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