Transforming the Utility Industry One Rooftop at a Time
Brothers Lyndon and Peter Rive founded SolarCity in 2006 after their cousin, billionaire entrepreneur Elon Musk, suggested an idea for a solar company as they were driving to the annual Burning Man festival in Nevada together. By selling customers affordable, clean electricity instead of expensive solar panels, SolarCity has grown to be the largest residential solar installation company in the country by far. The company’s focus on service-based solutions and innovative financing models has allowed it to scale solar so fast that utility companies have taken notice — and fought back. We spoke with Lyndon, SolarCity’s CEO, about the secrets to SolarCity’s success and his vision for the future of the electric power industry.
What has been the most critical component to SolarCity’s growth since its inception?
Lyndon Rive: We’ve roughly doubled every year for the last nine years — it’s been incredible growth. We’ve grown from two employees to 15,000 employees, and expanded from one warehouse to about 80 locations in 19 states now. The reason for our rapid growth has been the high demand for solar. Of course, you need demand in order to have growth. Consumers want to use clean energy and they want to have control over their own energy costs. There’s high demand for solar — people like the product. And referrals are one of our largest sources of new customers. But when you look at the energy sector, it’s massive. Even with all of our growth, even with the entire solar industry’s growth, solar still has less than 1 percent penetration. But it’s the biggest trend in the market.
SolarCity is the number one installer of residential solar systems in the US. What do you believe is the most important aspect of SolarCity’s business model?
LR: Early on, we decided to vertically integrate, which means that we provide all the services ourselves. Most of the solar industry has multiple companies working with one customer. You’ll have the company that does the sales, and you’ll have another company that does the financing, and you may even have another company that does the installation. It ranges from two companies to four companies that a customer has to deal with, depending on which company they go with. There are very few companies where you only deal with one company,
and I think that has made such a big difference for us. We can provide the highest level of support, highest quality of installation, really control the experience, and really invest in our team. I think that is what has enabled us to become the leader in our industry for the country.
Why do you think other solar companies haven’t vertically integrated? Is it cost-prohibitive?
LR: It’s really hard. Initially, it’s capital intensive and you have to roll out all of the infrastructure. It’s a little easier to outsource a lot of the work and have somebody else own some of the responsibility and leverage the existing infrastructure that is already in place. There are a lot of solar companies out there — over 5,000 — and it’s a lot easier to use their infrastructure as opposed to building it out yourself. But the downfall of that is that you have limited control of their infrastructure, so you can’t control the customer experience fully. But if you look at our top competitors, they are now starting to vertically integrate because they realize that it is ultimately the best solution for the customer.
To maintain the gap with our competitors, we’ve gone even further with vertical integration. We’ve acquired a company [Zep Solar] that builds unique solar installation equipment that makes our solar system aesthetically look better than any other system out there. So now we have another differentiation that makes it easy to identify our solar systems versus other systems when you’re driving around on the street — we just have a unique look that’s much better than our competitors’.
Another differentiator is SolarCity’s innovative financing model. Can you explain the financing model to us and discuss how these financial tools have supported SolarCity’s growth and ability to scale?
LR: The way we describe it is that we are an energy company and we sell you energy. We install the equipment for free, the equipment itself is free, and the service is free. What you pay for is the electricity — we only charge you for the electricity, and we charge you less than what you would pay to the utility. If you paid 20 cents per kilowatt-hour from the utility, you can buy electricity from us for 15 cents per kilowatt-hour. So we’re roughly 15 to 20 percent cheaper than the utility’s prices. If you have the choice of paying more for dirty energy, or less for clean energy, which one would you pick? Even a 5-year-old should be able to answer that question.
What is your vision for the future of the electric power industry in the United States?
LR: To me, there’s no doubt in my mind that there’s a transformation happening — it’s not even up for debate; it is happening. We’re going to toss all of our fossil fuel-based energy infrastructure for renewable energy infrastructure. That’s going to happen. The nice thing is, the train is already moving in that direction, and another thing is, we have no choice. There are two options, and the correct choice is very clear.
Just look at the rate of new solar being adopted in the country — this is a really important statistic. You have to compare new solar to other types of new energy being deployed today, not to total energy, because it took us 80 years to build up the existing energy infrastructure, so it’s not fair to compare solar to 80 years’ worth of fossil fuel investment. In 2009, solar was only 2 percent of all new energy being deployed in the country. In 2014, solar was over 30 percent of all new energy being deployed in the country. Now, in 2015, it’s the largest single source of new energy in the country. It has overtaken wind, it has overtaken natural gas, and it has overtaken coal.
It is very clear that the transformation is happening. Solar is still only a little less than 1 percent of the total energy in the country, but if we maintain that rate, it won’t be long before it becomes 50 percent. Eventually, as the existing infrastructure phases out, the majority of all new energy being deployed in our electrical infrastructure will be solar.
The way I see the future, we’ll have centralized generation and we’ll also have local generation where energy is created at the place where it’s needed; we’ll have both. I think most people will prefer to consume their own energy on-site, and so I think we’re going to have a highly distributed infrastructure — no different from computers. Back in the old days, you used to have one big mainframe computer. And then we decentralized into thousands of little computers and found that things worked better that way. That way, there’s redundancy, there’s no single point of failure, and the turnaround speed and the processing speed are way faster. The same thing applies to solar; if you have millions of little power plants all over the place, then there’s nothing that can take down the grid. Even if a bad storm comes, it can still work.
Do you have any projections as to when solar will overtake natural gas and coal as the cheapest source of electricity?
LR: It has already, today. This is something that people always overlook. When people look at the cost of producing electricity with natural gas or coal, they look at the wholesale number, which is around 3 or 4 cents per kilowatt-hour. But then you have to transport that energy for hundreds of miles through an expensive transmission and distribution infrastructure to get the energy to the place where it’s needed. That cost needs to be included when you’re comparing solar to natural gas and coal, and that cost is included in the retail rate that you pay. So, when we sell energy, we compete against the retail rate [rather than the wholesale rate]. The relevant question is how much does it cost to deliver energy to the location where it is used? Today, solar is cheaper than coal and natural gas in 19 states. We can provide energy at a lower rate than you can buy it from your utility.
What do you think are the biggest obstacles to reaching a future where solar is the most prevalent source of energy?
LR: The biggest obstacle is dealing with the incumbents, the utilities. The utilities don’t want to change their business model. Their business model is a cost-plus-based model. There is no competition, so the business model doesn’t require any innovation. The number one driving factor for innovation for any product is competition. If there were only one cellphone in the entire country, how good would that cellphone be? If there were only one car in the country, how good would that car be?
"Competition drives you to be more innovative, to think outside the box, to really start to make a product. Utilities have no competition, and they haven’t had competition since the industry started over 100 years ago."
So, the biggest obstacle that we face is getting the monopolies to change their business model and accept that solar is a challenger. They don’t want to give consumers the right to choose because then it will start creating competition, and the last thing they want to see is competition. Instead of competing, the way they’re fighting us is by lobbying and leveraging their political influence to try to prevent solar from stealing market share and to stop the adoption of solar. So those are the fights that we’ve had. We’ve had over 44 public fights between the solar industry and the utility industry. We’ve won 42 out of those 44. It is clear that consumers want choice, it is clear that they want to control their own energy, and it is clear that they want to use clean energy. But whenever you’re dealing with a monopoly, it’s going to be difficult to get them to change.
Tell us about your vision for SolarCity and the next five to ten years. What’s next for SolarCity?
LR: I feel that in the next five years the battles between the solar industry and the utilities will be settling down. There will still be this disruption, but people will start learning how to work together. I see a future where the solar industry tends to have two customers. One customer will be the homeowner or business owner who we’re selling energy to. The other customer will be the utility, who we’ll sell grid-related services to. The future of solar-plus-batteries will be important to this business model. If you have solar, plus a smart inverter and a battery, you can provide tremendous grid services to the utility — you can help with voltage control, you can help with reactive power, and you can help with demand response and load shifting.
These grid services are really important to the utility. Normally, the utility has to spend money to build infrastructure that can provide these services. Today, the rule is that the utilities have to deploy infrastructure to make money and it is a cost-plus- based system, so the more money they spend, the more money they make. What I see happening in the future is the utility’s business model changing and the rules changing so that they will be able to make money using somebody else’s infrastructure — other people will spend the money and they’re just going to subscribe to their services. But the utility will be able to make money off these services because they will be the facilitator and because they provide the connection to all the homes and businesses through the grid.
So what I see happening in the future is mass-scale deployment of distributed solar; that is, rooftop solar on businesses and residential homes combined with storage that can provide grid services to the utility, which is one customer, and straightforward electricity to homeowners and business owners, who will be our other customers.