This New Proposal Could Kill SolarCity (SCTY)

For fans of solar energy, the New Year may bring some pretty nasty storm clouds.

This New Proposal Could Kill SolarCity (SCTY)This pending storm could darken the potential for residential rooftop installers such as SolarCity (SCTY). With one simple vote, regulators in sunny Nevada have put the kibosh on a very lucrative practice and subsidy called net metering.

While most investors in SCTY are blissfully unaware of net metering and what it actually means, the decision to end the practice could have wide sweeping consequences for SolarCity and other residential installers.

Especially if it catches on.

Without net metering, residential and small-scale projects could be on the chopping block and stocks like SCTY could be D.O.A. from here on out.

A Big Benefit for SCTY

Throughout its history, solar power has thrived on various tax-breaks, subsidies and grants to make it profitable and attainable for consumers.

As costs have slid downward, solar has reached the scale needed to actually compete with many fossil fuels. That fact has many regulators dialing back the lucrative subsidies in the upcoming year.

One of the biggest has been net metering.

Many roof-top solar arrays make more energy than a home or business can consume. They are able to sell that extra energy back to the grid — which a utility can then use. Basically, net metering compensates roof-top solar generators for that ability. The rub is that homeowners with SCTY panels stuck on their roofs are receiving the retail rather than wholesale rates, which are received by grid-scale solar farms.

That retail rate is often two to three times higher per kilowatt as it includes items such as transmission, delivery and grid maintenance costs. A homeowner doesn’t actually eat those costs — the utility does.

Non-solar users of the utility essentially pay for the net metering subsidy via higher rates and bills. Currently, there are more than 40 states that have a net metering payment system in place.

Net metering been a boon for solar installers like SCTY, SunRun (RUN) and Vivint (VSLR). SolarCity and its rivals tend to offer “no money down” programs or financing to get homeowners into their panels.

Typically, this is done via a power purchasing agreements. That allows homeowners the ability to buy power from the panels on their roof — which they don’t own. SCTY and others get to pocket additional energy and net metering bonuses from that agreement. Newer solar-backed loans also factor in certain net-metering provisions with regard to ability to pay and qualify.

Nevada Throws SCTY for a Loop

The problem is that in many high sun areas, people are going gaga for solar. Perhaps too many. And the strain of having non-solar customers cover solar customers grid and distribution costs is getting out of hand. To that end, pro-solar Nevada has taken the first steps to kill net metering.

At the end of December, the Nevada Public Utilities Commission voted to end net metering in the state. The decision to move solar customers to the wholesale rate, as well as boosting service charges as much as 40%, eliminates much of the savings — and free ride, as some would argue — that comes with buying SCTY’s solar panels.

Nevada isn’t alone in ending or changing net metering. Hawaii, which is one of the most renewable energy friendly states, has ended the practice. Arizona has begun the process of “compromising” on new lower net metering subsides, while some states like Mississippi and Louisiana have added new net metering programs at significantly lower than average rates. Heck, even California’s latest rulings on net metering included provisions that charge solar operators various time of use rates/fees.

And with more studies coming out saying that net metering is bad, more states could follow suite and end their programs when their current subsidy schemes expire.

A Big Deal for SCTY

Just how big of a deal is net-metering to SCTY’s bottom line and future? When Nevada made the announcement, SolarCity decided to back completely out of the state and “cease sales and installation operations in Nevada.”

With prices for roof-top solar and traditional electricity now basically the same in the state, SCTY won’t be able to truly turn a profit, sell enough units or make a business of it.

Perhaps even more worrisome is that Nevada didn’t include any sort of grandfathering provision for people with panels already tied to their homes. That means that defaults could rise as consumers realize that the savings promised from systems isn’t going to be there. That’ll affect issuance of new solar bonds or potentially cause SCTY to jack-up rates for new customers to help keep that cash flowing to its lease sponsors/investors.

And while Nevada is relatively small potatoes to SolarCity’s current profile, it does highlight how big of a deal net-metering really is for the solar stock. In fact, buried in its latest 10-Q, SCTY basically spells out that it is screwed with the end of net-metering.

With solar finally being able to stand on its own two feet, while begin dialing back their support for the renewable energy type. That’s going to hit SolarCity right where it hurts.

Ultimately, it may not be able to carry on as currently projected. Considering that it’s a growth stock and many investors are paying a hefty price for that growth potential, SCTY may come crashing down.

Nevada’s decision to kill net-metering is just the beginning and a serious blow to roof-top solar installers like SCTY, VSLR and Real Goods Solar (RGSE). As more states follow their lead, investors may want to consider looking for brighter sun rays elsewhere.

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