In the previous blog, Zach raised some interesting points, which created some skepticism about how SolarCity, the American solar panel company run by Elon Musk and his two cousins, operates. Specifically, these concerns regarded tax credits that SolarCity receives from the government, which equal 30% of the “fair market value,” or the price that the consumer pays for the solar system. This, coupled with the fact that SolarCity is not currently turning a profit and is backed my many large, well-known creditors (e.g. Google, Honda, Goldman Sachs), has angered critics arguing that SolarCity is reaping benefits at the hands of the American taxpayer.
The root of suck skepticism was a 2013 Barron’s report entitled, “Dark Clouds over Solar City.” The report states, “The government asks solar-system owners to estimate the cost, or ‘fair market value’ of their systems, on which tax credits are based. SolarCity appears to use a more complex measurement than some other solar installers. While analysts estimate that SolarCity’s costs are about $4 per watt, the company’s reported fair market value often exceeds $6. The higher the ‘fair value,’ the larger the tax credit.” This report would eventually spark congressional action, as senator Jeff Sessions (R-Alabama) wrote a letter to the Treasury Department, criticizing SolarCity’s alleged abuse of these tax incentives. In his critique, he warns that “over-inflating the cost of solar products is not only detrimental to the government, but to investors as well.” So too, he warns, SolarCity could fearfully become the next Solyndra, a infamous solar company that went bankrupt in 2011. Session’s letter of dissent was backed by a number of Republican senators supporting Summers, including John McCain (AZ) and Pat Toomey (PA).
SolarCity disputes these claims in its published response to the Barron’s report, “Burying a Dark Horse,” noting that this interpretation of fair market value is flawed; fair market value does not refer to cost, but rather to price the system is sold for, which is understandably higher than the cost of production. Furthermore, Solarcity suggests these higher costs in comparison to various competitors are justified due to their unique business model whereby they are responsible for the maintenance, finance, installation, and servicing of their solar panel systems. This innovative, vertically integrated business model is one of the primary reasons for inconsistency in Barron’s data, argues SolarCity. Furthermore, Solarcity pushed back against claims of its profitability, suggesting that like many new companies, it is continuing to focus on growth, new investments, etc. Also, their unique finance options require no upfront costs, meaning that much of their gains are realized over longer periods of time.
So, what is to be made of this tax loophole that SolarCity is supposedly exposing? Personally, I do not think that there is anything wrong with what they are doing. As someone who knows quite a bit about how SolarCity works compared to competitors, I find their arguments legitimate. Also, it’s important to note that they are not the only solar company accused of abusing these tax incentives. Yet, Solarcity is America’s largest, so I suppose it makes sense for critics to start at the top. Also noteworthy is the fact that Republicans, who are generally opposed to renewable energy source incentives by the government, engineered all legislative action against SolarCity. SolarCity is quick to note that many similar incentives do nevertheless exist for oil and gas companies. The current tax incentives are set to expire in 2017, so maybe SolarCity was smart to take advantage of them while they were available. Who is at fault—SolarCity? Its high-profile investors? The government? …..