What I Learned About SolarCity's Business Model by Becoming a Customer

My house is fully electric, heat, hot water, the works. My bill averages out to be $406 per month and spikes to $900 in January and February. Literally, I'm throwing money out the window and I'm not doing the environment any favors. Why would this matter to you? Because you might be in the same boat. 

So last Thursday, I invited a SolarCity  Energy Consultant into my home. The technology is incredible and it was clear that SolarCity could help me. But what amazed me the most were the options. If you're not familiar with its Power Purchase Agreements, or PPA plans, stay tuned. I've got a lot to share.

Once I showed the SolarCity rep my electric usage for the past 15 months, we were off and running. My consultant came prepared with her laptop and some cool software (licensed from Google) that showed a satellite image of my house. She then began virtually placing panels on the side of my roof that gets most of the sun. No ladders were required!

Source: An aerial view of my house from my SolarCity proposal. First image has the virtual panels placed on my roof, second image (with red shading) shows where the highest level of production would be.

With a click of a button, I knew the size of my proposed system was going to be 6.25 kW DC and it was going to produce 8,025 kilowatt hours, or kWh, annually. For those who aren't familiar with the lingo, kWh measures your energy consumption. SolarCity says, "One kilowatt hour is defined as the amount of energy consumed by a 1,000-watt appliance running continuously for one hour." Your kWh is important because it's how your electric company figures your bill.

When all was said and done, I had enough space on my roof to offset 31% of my electric bill. It will also reduce my carbon footprint by 247,214 pounds of CO2. Does that sound like a lot? Over a 20-year period that's equivalent to driving a car 265,511 miles, or the amount of carbon dioxide that can be absorbed by 134 trees, or 61,237 gallons of water used to produce the same amount of electricity.

PPAs for days 
The main reason SolarCity owns its market (its share is equal to its next 14 competitors combined)  is its various Power Purchase Agreement plans. I asked my consultant: Who came up with this great idea? She says it came from Elon Musk. I'm sure you've heard of him, he has some pretty cool ideas for batteries, electric cars, and space.

The first option was the "Pay as you go" plan. This plan is popular because it requires no money down and would reduce the price of my energy by about 41.5%. My new estimated average electric bill would be about $50 less per month and I would save nearly $24,000 over 20 years. Obviously, with no upfront costs, I would be cash flow positive from day one.

The second option was the "Pay only for what you produce" plan. This required a $3,125 investment, but cut the price of my energy by 51%. Over 20 years, I would have saved nearly $29,000 and I would have gotten my money back by the fourth year.

But in my opinion, the smartest way to go is the "Full pre-pay plan." In this scenario, you pay for the amount of power your system will produce up front. It would have cost me only $0.066 per kWh, compared to the $0.188 I currently pay my electric company. That's a savings of 66% and I would save about $125 per month. My initial investment of $10,000 would be recovered by year six, and over 20 years, I will have saved more than $36,000.

Source: SolarCity.com.

The benefits of PPAs 
So why wouldn't I want to buy my system outright? It's not a terrible idea -- after a $9,000 fed tax credit, I would only be on the hook for $15,000. But I won't break even until my ninth year and I'll only save $31,000 over the life of the system.

The reason it doesn't benefit me to own the panels is that I can't depreciate them, but if SolarCity retains ownership, it can. The company then passes on some of the savings to its customers. In this scenario everyone wins, the customer gets the benefit of low upfront costs and SolarCity gets 20 years of steady cash flows.

With PPA's like the "Full pre-pay plan," I think SolarCity has created a revolutionary method to get solar systems to its customers. In my opinion, this is the only way to sidestep sizable upfront costs, which have historically slowed solar adoption. Its competition has yet to catch on and market these types of hybrid payment plans, and in time, I think you'll see others trying to copy that model. But right now, SolarCity has a huge head start and is aggressively building its business. 

Foolish final words
SolarCity has a stated goal of 1 million customers, or a 70% compounded annual growth rate, by 2018. With the experience I had, I believe this to be a low hurdle to hop. The numbers could get silly if we start mapping out its growth rate over a 10-year period. 

The only problem SolarCity may end up having is if it tries to focus too much on profitability, gets away from fanatical customer service, and installs underperforming systems. But from what I've seen, that is highly unlikely. The Rive brothers and Elon Musk don't seem like the type of entrepreneurs to mess up a good thing. 

As you can see, I'm a big fan of SolarCity and it's an exciting time to be a customer. If you live in one of the 14 states it services, I would strongly recommend giving the company a try. It might just be the best business decision, you'll ever make.

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The article What I Learned About SolarCity's Business Model by Becoming a Customer originally appeared on Fool.com.

Wade Michels has no position in any stocks mentioned. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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