Dark times for SolarCity could leave New York out in the cold
What happens if shareholders of Tesla balk at bailing out the company that Cuomo and Buffalo are counting on?
By Paul Alexander
New York government officials are gambling Buffalo’s long-hoped-for economic recovery on SolarCity, the nation’s largest rooftop solar panel installation company whose chairman is tech guru and Tesla Motors co-founder Elon Musk. The state of New York has provided $750 million in cash and tax breaks to build a solar panel manufacturing megafactory on the site of an abandoned steel mill in South Buffalo, hoping SolarCity can create 5,000 new jobs and help reverse the city’s 40-year economic decline. “On the grave site of the old economy,” Gov. Andrew Cuomo has said, “where Republic Steel once stood, now rises a beautiful monument to Buffalo’s future.”
Cuomo should be proud of the nearly-completed 1.2-million-square-foot structure, the largest of its type in the Western Hemisphere, because New York actually owns it. The state will also own the equipment to be installed inside. Under a 10-year deal, SolarCity will lease the structure and equipment from New York, which will require the company to meet a timetable of job-creation quotas. Failure to comply will result in hefty penalties.
But have state officials set up Buffalo for yet another disappointment, risking the city’s financial fate—and hundreds of millions of taxpayer dollars—on a company with an uncertain future?
At Musk’s suggestion, SolarCity was founded in 2006 by his cousins Peter and Lyndon Rive. The company’s business plan called for homeowners to lease the solar panels, which allowed SolarCity to collect lucrative government incentives worth billions. Early on, SolarCity boomed. In February 2014, its stock price hit $85 a share, an impressive gain from its initial public offering of $8 a share just 14 months earlier. That summer, New York announced the construction of the Buffalo plant.
Then fortunes changed. In late 2015, the Nevada Public Utility Commission ended net metering, a practice that allowed a homeowner with solar panels to sell unused electricity back to the power company. The decision made owning solar panels unprofitable for homeowners. Concerns grew that other states would follow suit.
More troubling, throughout 2015, as lenders and investors became averse to energy-sector business models requiring high capital investments, SolarCity—which finances its solar panel installations in order to make a profit on a lease that can be as long as 30 years—found it increasingly difficult to secure debt.
In the first quarter of 2016, SolarCity posted a $251 million loss. Its second-quarter loss was $230 million. By June, after the company’s stock price had plunged more than 60% from its peak, Musk had to stop the bleeding. He announced that Tesla Motors would purchase SolarCity. (Musk owns more than 20% of each company.) On Aug. 1, the merger was approved by both boards of directors in a $2.6 billion all-stock deal.
While Musk praised the deal, promising the combined companies would help revolutionize the solar industry, critics claimed it was little more than a bailout of a failing company that could no longer secure financing. Musk raised more questions when he disclosed that, now that the megafactory was almost finished, SolarCity no longer intended to manufacture solar panels but would instead produce complete solar roofs, a venture Dow Chemical recently abandoned after five years because it could not find a way to make a profit on the technology.
Shareholders of both companies must approve the merger, which creates an interesting situation. Will the shareholders of Tesla Motors, a company generally viewed as having a stellar future, placate Musk and take on the troubled SolarCity? If they balk, there could be far-ranging implications for SolarCity, New York taxpayers and the government officials responsible for spending their tax dollars, not to mention for the beleaguered citizens of Buffalo.
Paul Alexander has written eight books and his work has appeared in New York, Rolling Stone, The New York Times and The New York Times Magazine.