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SolarCity Corp (SCTY): My Pick in the Energy Sector

SolarCity Corp (NASDAQ:SCTY)A couple months back, I was looking to add a solar-power company to my portfolio. In my decision making process I wanted to limit my exposure to the price of solar panels and to the constraints of net metering. With those two conditions in mind, I choose SolarCity Corp (NASDAQ:SCTY).

SolarCity Corp (NASDAQ:SCTY) is the leading solar provider in the US for homeowners, businesses and government organizations. It provides full-service solar power system design, financing, installation and monitoring services.

No manufacturing

The company designs, sets up, finances and manages the systems, but it does not actually manufacture the panels. It allows for some flexibility for certain projects and gives a definitive edge logistically. It is always an advantage when a company is not competing against China’s manufacturing power.

Most of SolarCity Corp (NASDAQ:SCTY)’s competitors farm out the installation and the maintenance of the electric systems. SolarCity Corp (NASDAQ:SCTY) took a different approach, leaving the manufacture aside to concentrate on in-house sales, installation, engineering and maintenance.

First Solar, Inc. (NASDAQ:FSLR) has been particularly affected by a market that’s been flooded with low-cost solar panels from China. It lost 90% of its value in the past five years. Although, in the past year, the stock seems to have stabilized.

First Solar, Inc. (NASDAQ:FSLR) is still a huge player in the international market for solar panels with impressive market shares in Germany and France. At its current 1.1 price/book ratio, it could be an interesting candidate to add to your portfolio if you have a positive outlook on the economic recovery in Europe.

Net metering

Net metering is an energy policy for consumers who own renewable energy facilities, and allows them to use generation whenever needed instead of just when generated.

Diagram from Everblue

Solar companies have managed to achieve profitability with net metering, but it presents some challenges and uncertainties:

  • The rules vary by state and province.
  • Most laws involve a monthly connection fee and/or an annual settlement of residual credit.
  • Important exposure to future changes in the laws.
  • Unwanted partnerships with utility firms.

I find difficult to recommend investing into a company that relies on its own competitors in order to provide a service, but this is where SolarCity Corp (NASDAQ:SCTY) stands out. It recently unveiled a home energy storage system in partnership with Tesla Motors Inc (NASDAQ:TSLA).

Partnership with Tesla

I think this is where there is an interesting upside for both Tesla Motors Inc (NASDAQ:TSLA)’s investors and SolarCity’s. Solar-power systems need to be self-sufficient, so unless the sun starts shinning 24/7, the future of solar power lies in energy storage.

The partnership is simple:  Tesla Motors Inc (NASDAQ:TSLA) provides battery units for SolarCity to mount on the wall near the electrical panel in order to store the energy created by the solar panels instead of sending it into the grid for credit.

It creates an interesting new source of revenue for Tesla and it allows SolarCity Corp (NASDAQ:SCTY) to propose an alternative to the net metering system. It is currently only available in selected markets in California (Tesla and SolarCity’s home state), but they hope to offer the service nationwide after the trial period.

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