Is Tesla’s Elon Musk Throwing A Hail Mary For The SolarCity Deal?

Tesla’s Elon Musk tweeted on Friday that he would pay SolarCity’s debt if it came to that. It was in response to a tweet from David Tayar asking about Tesla assuming SolarCity’s obligations after the presentation on the SolarCity acquisition on November 1. There are major concerns about the merger due to SolarCity’s negative (and increasing) cash flows and therefore its ability to service its debt (and then becoming an obligation to Tesla).

This is compounded by the concern that Tesla may not be legally obligated to pay for the debt (even though Musk says they will be one company) since there is language in at least one of Tesla’s filings with the SEC that “the Company and its Subsidiaries shall not guarantee or otherwise become directly liable for any Indebtedness of SolarCity and (b) the Company and its Subsidiaries shall not permit SolarCity to guarantee or otherwise become directly liable for the Indebtedness of the Company or its Subsidiaries.” This is from an 8-K filing on August 1 and you have to go to the EX-10.1 portion to find it.

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Elon Musk’s House of Gigacards

“Master plan part deux” relies on a bold new sales and marketing strategy as well. Rather than continue hiring thousands of door-to-door and telephone reps to sell solar panels, Tesla intends to push SolarCity’s business through its rapidly growing chain of retail stores by converting them into one-stop shops for environmentally conscious consumers. Instead of buying an electric car only to have it use electricity from a far-off coal plant, a customer would be able to lease or buy solar panels as well as Tesla Powerwall storage units so power is available on cloudy days and at night—or to sell back into the grid. Musk hasn’t provided details on what such a package would cost, but Shah, the Generate Capital executive, thinks Tesla could charge $900 a month on a 20-year contract to get a Tesla, a solar roof, a storage unit, and the right to upgrade to a newer-model Tesla twice during the life of the contract.

Like so much else with Elon Musk, the vision is elegant and ripe with potential. So far, only around one million of the world’s 2.5 billion cars are electric, and only 1 percent of U.S. homes have gone solar. Sales of the Powerwall and a higher-capacity version designed for businesses have been disappointing. Tesla says production problems are to blame, though it’s not clear that fixing those issues will be enough make the Powerwall a cost-effective way to run a home entirely on solar power. But if consumers do decide to buy these soup-to-nuts renewable-power setups, and if solar penetration rises to 15 percent, as it has in Australia in recent years, the overall market opportunity just in the U.S. will be $470 billion, says Shah. And Tesla is also hoping to become a leading provider of equipment and services to large utilities. The company recently announced a deal to provide 20 megawatts of power storage to Southern California Edison for the “largest lithium-ion battery storage project in the world.”

That said, Tesla has yet to show it can build a world-class industrial sales organization. And how many people are really going to go to their local Tesla store and buy in to Musk’s dream? Even Tesla’s affluent true believers might balk, says Gerber. “Elon seems to think that green-minded rich guys like me will decide to put solar on my house, and buy a car or two while they’re at it,” he says. “That’s not how people think.” What’s more, 63 percent of homes in the U.S. are not owned by the resident but by landlords or condo associations, according to the National Multifamily Housing Council. These owners have little incentive to invest in solar and storage.

Possibly the biggest risk is that Musk loses credibility by taking on so many huge challenges at once. While he’s delivered on many bold product promises in the past, his luster could fade with a few well-publicized misses. Tesla is facing criticism for the aggressive way it marketed its Autopilot feature, leading some people to believe they could leave the driving to the car. “They’re pushing hard to be seen as being on the leading edge, and I’m not sure safety is their number-one priority,” says Fisher of Consumer Reports. After a Florida man was killed in May, Tesla updated the cars’ software so that drivers who ignore too many warnings to keep their hands on the wheel won’t be able to reactivate Autopilot for the rest of the trip.

Just how safe Tesla investors are is another matter, judging from the daunting degree of difficulty facing Musk. Many investors think Tesla was assuming appropriate levels of risk with its crisp plan to take on Detroit. Others believe the company’s best opportunity is to become the leading maker of batteries for storing solar power and powering multiple manufacturers’ electric cars. That could be lucrative even if Musk can’t dominate the electric-car or solar-installation businesses. But unless shareholders shoot down the SolarCity merger, Tesla investors will not be taking one of those routes.

Instead, Musk will ask them to go along with something far bolder. His record as an innovator and visionary is beyond question. But the next year or two will determine whether he can do what ­Edison failed to do: translate his sweeping vision into historic business success.

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Elon Musk is pushing the Tesla-SolarCity merger through despite naysayers and lawsuits

In an SEC form filed on Oct. 7, Elon Musk indicated that the company “is currently planning to raise additional funds by the end of this year, including through potential equity or debt offerings, subject to market conditions and recognizing that Tesla cannot be certain that additional funds would be available to it on favorable terms or at all.”

But in a tweet on Sunday, Musk walked back that statement and said neither SolarCity nor Tesla will have to raise equity or debt in either the end of this year or in the first quarter of 2017. In a revised form, filed on Oct. 11, the company changed the language to “Tesla may raise funds in the future, including through potential equity or debt offering.”

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Elon Musk’s Subsidy Aggregation

Elon Musk didn’t become a billionaire without brass, and this week he floated one of his most outrageous bets: an offer by his taxpayer-subsidized Tesla Motors to buy his taxpayer-subsidized SolarCity. Tesla shareholders and Wall Street analysts are howling, but didn’t they always know they were buying a business model that depended on the kindness of politicians?

The electric-car maker offered to acquire the solar panel company at a more than 20% premium over SolarCity’s previous share price in an all-stock transaction. “Tesla customers can drive clean cars and they can use our battery packs to help consume energy more efficiently,” the company said in a blog post, “but they still need access to the most sustainable energy source that’s available: the sun.”

The ostensible plan is to set up a one-stop shop so folks buying $85,000 Teslas don’t have to walk across the street to buy solar panels, among other “synergies.” Mr. Musk predicted, with his typically modest ambition, that the merger will lead to a Tesla valuation of $1 trillion, or about 34 times what it was Wednesday.

He may need one of his SpaceX rockets to get there. Tesla shares fell 10% Wednesday, or more than the $2.8 billion value of SolarCity, as investors asked why one money-losing company would be better off buying another money-losing company. SolarCity was once a darling of the green energy set, but its shares have fallen more than 50% in the past year as its political advantage ebbs.

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The High Cost of Rooftop Solar Subsidies

Section VII: Conclusion

Current solar subsidies and net metering schemes through U.S. states continue to draw capital away from its most efficient use, often at the benefit of U.S. solar panel producers and installation companies, such as SolarCity, but at the expense of electricity consumers.

The costs associated with facilitating these distortions are numerous. Given that solar customers are often paid the retail rate for excess electricity produced, and do not share the burden of maintenance costs, electrical grids are finding they cannot keep up with the current dichotomy they are facing of rising costs and a decreasing customer base. Thus, many studies conducted by states have found evidence of cross-subsidization between non-solar customers, who are often less-affluent, and solar customers, who are often more-affluent.

Proponents of government assistance of solar energy have attempted to highlight job growth as a means to justify the immense support needed by the solar industry in order to stay afloat. These job growth estimates not only employ skewed survey data, but also fail to take into account many of the dynamic effects that result from the government’s intervention, such as the consequences of draining tax revenues and foregone investments, increased cost of energy utilizing a greater share of consumers’ budgets, jobs foregone by investing in solar energy production, and jobs created in the base case scenario if solar energy were not subsidized in its current form.

States should seek to restructure their net metering schemes and subsidies in order to promote the most efficient use of taxpayer dollars and normalize investments based on the fundamentals of different electricity generating methods. While utility-scale solar has proven more efficient than residential solar installations, both continue to lag behind traditional electricity generation methods that are able to generate greater output per dollar.

Any future technological development of solar energy alternatives relies heavily on whether the government will be able to take a step back and allow the market to distribute capital efficiently, thereby allowing the most competitive electricity options to survive and facilitate effective progress of solar power and other electricity options.

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The high cost of rooftop solar subsidies

Renewable energy like wind and solar has become politically popular in recent years. So much so that Hillary Clinton is proposing to install half a billion solar panels if she is elected president. Yet her plan for “a solar panel on every roof” doesn’t reconcile with her stated concern for lower-income Americans. A new study shows that solar energy is driven by subsidies that increase electricity rates of poorer Americans and send that money to richer Americans.

One of the most significant solar subsidies is called net metering. Net metering is a program through which home and business owners with solar panels are credited for the excess energy they send to the electric grid. A new study by Arduin, Laffer & Moore Econometrics, commissioned by my organization, the Institute for Energy Research, shows that the default pricing structure and the intermittent nature of solar energy make these programs a bad deal.

The biggest flaw with net metering is the price paid to customers with solar panels. The default is to pay customers with solar panels the retail rate instead of the wholesale rate for the electricity they produce. This causes huge distortions in the way we all pay for the power grid.

The net metering subsidy creates a strong incentive for building owners to enter the solar market and indeed states have been flooded with applications to join net metering programs, which is why many states are now capping or reforming their net metering programs. In other words, many property owners are eager to be on the winning side of the cost shift.

The problems with net metering go beyond the wholesale vs. retail price. As the technology stands today, electricity at utility scale cannot be stored in batteries in a cost-effective way. That means grid operators must be on the ready 24/7 to increase or reduce the amount of energy flowing onto the system in response to electricity demand. Too much or too little at any given time can lead to power outages and the inconveniences and productivity slowdowns they entail. This recently happened in South Australia when wind power fell very quickly and the region was hit with a blackout.

It doesn’t take a degree in photovoltaics to recognize how solar energy exacerbates this issue. Solar energy is only accessible when the sun is shining, which means even on the sunniest days of the year there is a strong mid-day peak preceded and followed by hours-long valleys. Unfortunately, electricity demand is frequently highest in the early evening when the sun is setting.

This means grid operators have to accommodate for massive influxes of solar energy for a few hours each sunny day, but then need to ramp up the delivery of other energy sources when high demand hits later on. This ramping up and down taxes the system more than simply matching demand with electricity supplied from traditional power plants. The result is that net metering customers are actually making the grid more difficult and costly to operate. Much worse, these costs are transferred to the rest of the utility’s customers, who face higher utility bills as a result.

Arizona’s largest utility, Arizona Public Service, found that a net metering customer avoids around $1,000 annually in costs they impose on the electric grid, which results in the rest of their customers being on the hook for $16.80 more. This may not seem like much, but as the pool of net metering customers grows, so too does the cost for non-solar customers.

When we look closer at the breakdown of net metering customers and regular customers, the policy is downright regressive. According to the California Public Utilities Commission, the average net metering customer in California has an annual income that is over one and a half times that of California’s average annual income. The expenses involved in installing a solar energy system on a home make the prospect cost-prohibitive for all but the upper echelon of income earners which means that net metering is essentially welfare for wealthy people.

As the Arduin, Laffer & Moore Econometrics study clarifies, our public utility policies don’t reflect the costs that net metering imposes. It’s time to reform net metering policies so that the general public no longer subsidizes those wealthy enough to afford solar panels. The sun, it seems, is not free after all.

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