SolarCity Corp. (NASDAQ:SCTY) of San Mateo, CA, provides consumers with energy services and is especially involved in the design, financing and installation of solar power systems. The company has a very close connection to famed businessman and engineer Elon Musk who serves the company as chairman of the board and principal shareholder; he’s also the cousin of both SolarCity co-founders, Lyndon and Peter Rive. Musk may not hold SolarCity’s reins in the same way that he does at Tesla Motors (NASDAQ:TSLA) or SpaceX but his name still looms large.
Recent months have not been the best of times for SolarCity. During the year’s first quarter, SolarCity’s stock received downgraded stock projections from major financial services firms Barclays (NYSE:BCS) and JPMorgan Chase (NYSE:JPM) because of trouble that SolarCity is experiencing in attracting new investors. SolarCity’s financial filings with the U.S. Securities and Exchange Commission even presage some of these problems. In its earnings report for the third quarter of 2013, SolarCity noted that its business model was particularly on financing structures enabled through benefits from the U.S. Treasury: “Our ability to provide solar energy systems to customers on an economically viable basis depends on our ability to finance these systems with fund investors who require particular tax and other benefits.”
That same SEC filing from SolarCity supports the notion that the company is built upon a less stable foundation than it appears. In Buffalo, NY, ground has already broken on a SolarCity project which New York State Governor Andrew Cuomo called the largest such solar panel manufacturing facility in the Western Hemisphere. Cuomo boasted that 3,000 jobs would be created in Western New York, and 5,000 across the state, because of the facility, which he supported with $750 million in state funding.
SolarCity was a little more muted on the topic of how many jobs it would create in Buffalo, and yet those promises are still being broken. News reports from the area pinned a definitive number on exactly how many jobs the Buffalo plant will create: 1,460. This included, according to news reports, at least 1,000 production jobs to create shifts of 300 to 400 workers which could operate the plant around the clock. A reported 400 jobs would be for engineers and require at least a bachelor’s degree. Residents of the city (including this writer) can tell you that, although the city has shown signs of pulling itself out of a decades-long depression, many hopes involving Buffalo’s immediate economic futures have been pinned on SolarCity, and the state has backed that hope up to the tune of $750 million. This represents most of the cash set aside for Cuomo’s Buffalo Billion initiative which is currently under heavy investigation by U.S. Attorney Preet Bharara based on a series of subpoenas issued by federal prosecutors over the past year.
Recent months have seen SolarCity back off from its initial promises on jobs and production timelines. In February of this year, The Buffalo News reported comments from SolarCity CEO Lyndon Rive indicating that full production at Buffalo’s solar panel plant would be delayed for up to six months compared to the initial timeline. Elsewhere, the Western New York reporting center Investigative Post noted that recent SEC filings show SolarCity cutting its jobs commitment down to a third of what was initially promised. SolarCity’s earnings report for 2015’s third quarter notes that, to meet the obligations of its agreement to build the manufacturing facility, the company must “employ at least 1,460 jobs in Western New York, with 500 of those jobs for the manufacturing operation at the [Buffalo Riverbend] Manufacturing Facility”; the filing does reiterate a commitment to employing 5,000 people across the state within ten years of completing construction. This is a notable change from just a year earlier. In its earnings report for the third quarter of 2014, SolarCity noted that its Buffalo facility obligations required it to “employ 1,460 high-tech jobs for the manufacturing operation at the Manufacturing Facility for five years after the Manufacturing Facility completion.” The penalty for an inability to meet this or other commitments would result in SolarCity handing over $41.2 million as a “program payment” to the Research Foundation for the State University of New York (SUNY) in any year over the course of ten years, so if SolarCity were to fail entirely, New York State would get a little more than half of its initial investment back.
Calls for comments by Investigative Post led to comments from a SolarCity communications director that automation in manufacturing processes led to the reduced jobs commitment; jobs that would have been manufacturing positions will now be project development, sales or other positions. SUNY’s Research Foundation agreed to the change in an October 2015 amendment to its research & development alliance with Silevo, the SolarCity subsidiary which had first signed the commitment for the Buffalo plant before SolarCity acquired Silevo in 2014. Yet as late as August 2015, Governor Cuomo was banging the drum on the “1,460 direct manufacturing jobs at the new facility.”
It’s not readily apparent that major rules have been broken, but there are troubling aspects of this story to point out. The first thing to note is that promises of large numbers of clean energy jobs do not tend to pan out the way they’re sold by politicians and business executives. Last August, the Los Angeles Daily News reported on the low number of jobs created by the state’s Clean Energy Jobs Act, approved by voters in 2012 to generate 11,000 clean energy-related jobs each year. Three years later, only 1,700 jobs have been created and poor project management is cited as a reason why about half of the initiative’s earmarked $297 million has been spent on consultants and auditors.
On a national level, the same story plays out. A piece published in October 2012 by Bloomberg found that billions of dollars of federal funding into clean energy only created or saved a total of 28,854 jobs, based on analysis of U.S. Department of Energy publications. That’s in stark contrast to the 5 million jobs that President Barack Obama said that the clean energy sector would create when he ran for office in 2008. No matter how public officials try and try, no matter the billions they spend, the economics which would lead to high levels of new jobs from the clean energy sector is just not lining up.
Even more troubling in SolarCity’s specific case is that its business model is threatened by a lack of differentiation in the industry. The Motley Fool has reported on issues with the business model of SolarCity and other major solar panel production firms, namely involving the power purchase agreements (PPA) which these firms sign with consumers, effectively leasing the equipment to them. Lowered production costs could give consumers more leverage to take on the financing burden themselves or through a third-party financial institution, leaving SolarCity out of the financing part of the business. If SolarCity is reducing its Buffalo jobs commitment because of automation, it’s reasonable to assume that production costs are coming down through automation.
There’s also been a looming battle over net metering, a billing system which credits solar panel owners for the electricity they generate but don’t use and instead send to the public grid. In January, the MIT Technology Review reported that SolarCity was pulling out of the state of Nevada entirely after the state’s utility commission ended net metering; opponents claimed that the system unfairly transferred costs to utility providers and non-solar consumers. SolarCity’s fortunes in that state were crushed by that news and a company press release issued after the decision quoted CEO Rive as saying that “If the Nevada Public Utilities Commission’s proposed decision is accepted tomorrow it will destroy the rooftop solar industry in one of the states with the most sunshine.” Almost every state has some form of net metering, which began implementation during the 1980s, the NC Clean Energy Technology Center noted that 16 states saw proposed or enacted changes to net metering during 2015’s second quarter, those changes being legislative or regulatory in nature. Although not a net metering issue, the Residential Renewable Energy Tax Credit, which offers taxpayers the ability to claim a 30 percent tax credit on installation costs, will be phased out for electricity and water heating systems using solar energy by the 2020s as per language found within the language of H.R.2029, the 2016 omnibus spending bill for the federal government. As SolarCity has repeatedly expressed in its financial filings, it needs such tax credits to remain economically viable, at least for right now.
But with Musk on your side, who can be against? Last March, Elon helped reinvigorate SolarCity by snapping up $90 million worth of bonds offered by SolarCity, bonds tied to payments coming in from rooftop solar power systems. That’s the vast majority of the $93 million in bonds which SolarCity was offering. That $90 million is exactly Musk’s own spending cash, however; the bonds are owned in the name of SpaceX, according to Bloomberg. The Wall Street Journal recently reported on another $90 million in SolarCity bonds snapped up this year by SpaceX. SpaceX is a private company and it’s not beholden to the same financial reporting news as publicly traded companies, but SpaceX earns billions of dollars from NASA contracts and it’s not impossible that funds from federal contracts were used in these transactions. That’s about as legal a form of nepotism as you’re going to find. Last November, Reuters reported on other risky business moves Musk makes, including using company shares as collateral for personal loans. Companies which receive a great deal of their business from government agencies. As we’ve already reported on this website last June, more than half of Musk’s net worth comes through government subsidy. There is a very advanced calculus being employed here by Musk and if you’re starting to see a mental picture of a snake eating its own tail, you wouldn’t be alone.
Elon Musk is a great pitchman, and the state of New York bought it. And it’ll probably end up paying for it, too.