Give Solar a Break


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? …..

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5 thoughts on “Give Solar a Break

  1. I think you raise some very good points Brady. I can see how there is general complaint about the way that people’s taxes are used to give credits to SolarCity is a problem. If we were to blame somebody for this it would have to be the government; however, they use a very similar approach with Tesla when they give subsidies out to them that allow exponentially more people to afford their cars. Government seems to be helping in many of Elon Musks conceptions. However, as you said, I wonder how well SolarCity and Musk’s companies are going to do once they have to afford all expenses in industries they have limited expertise in.

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  2. It might be going a little far to say that Elon Must doesn’t have expertise in solar technology. He also owns a space company and an electric car company…it might be safe to say that his technological expertise is edging on pretty reliable.
    I also agree with Brady. I’m a big fan of Elon Musk’s and love that he takes big risks with emerging technologies, even if that means at the cost of investors or taxpayers.

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  3. I agree with many of the points that both of you raised. As West mentions, SolarCity is uniquely tied to Elon Musk; I dont think its too absurd of a statement to suggest that it wouldnt be nearly as popular as it is today if Musk wasnt involved with the company. With that being said, part of what makes Musk so revolutionary and innovative is his ability to think outside of the box and focus on long term objectives. Maybe we shouldnt focus as much on SolarCity’s short term stock price and profit, but rather their future oriented goals of growth and commitment to cleaner, more sustainable energy. This is how i think Musk would respond to the various critics mentioned in the post.

    Also, I dont think its a bad thing that the government is subsidizing renewable sources of energy. Im novclimate change fanatic, but its hard to deny the positive effects that energy sources such as wind, solar, biofuels, etc. can provide over the long term. But are they finically viable options? It seems as the though the answer is increasingly becoming “yes”

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  4. Brady, this is a great follow-up to my previous blog. You definitely pointed out some of the holes in SolarCity’s claim to tax credits but I agree that they are fully justified in their “fair market value” defense. SolarCity is definitely having a rough time from a financial perspective as JP Morgan analysts downgraded the firm just this morning. It is hard to say how much longer the company will last when noting their share prices was over $50 just a few months ago and now sits just shy of $20.

    Many people, including governments, are critical of SolarCity for its initiatives to not only change the way we source energy but also change the way that we use solar power specifically. As the only solar company that creates its own installations, they are meant to operate as a monopoly who has control of all the means of production, however, solar is a very competitive market and cheaper panels from other firms is detrimental to their bottom line.

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  5. I think a main reason why lawmakers, and the general public are making such a fuss about SolarCity is because of the companies that are backing them. Specifically, Goldman Sachs who has always had a terrible public perception. Also, as Brady brought up, many of the opponents are republicans who are against the funding of alternative energy. The alternate motives of lawmakers are extremely evident. I would be interested to see what a person who supports renewable energy would say. They would only care about the profits and loopholes that the company is abusing.

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