Things have been hectic and unfortunately the frequency of blog entries has suffered as a result. The last few weeks have been great for Solmentum. We have seen more customers join the growing crowd of people who choose a better source for their electricity ever since the inception of our company. And that wasn’t the only good news in the residential solar industry. Google decided to put its powerful balance sheet to work and invested $280 million in SolarCity’s lease and PPA products. It’s the largest fund to date and beats SunRun’s $200 million fund announced just last month. Larger funds are being raised at an increasingly faster rate. And what’s even more remarkable is that Google is the first organization that is not a bank or a utility that decided to dive into the residential financing game at this scale. This will become more and more important especially as it looks like the cash grant will be discontinued at the end of the year and the residential solar industry will have to tap into tax equity to take advantage of the 30% ITC. For that it makes sense to work with cash-rich, profitable companies like Google.

So how much financing will the residential industry consume to support its growth? Here are some quick back-of-the-envelope calculations: assuming that an average system costs $35,000 in financing (this includes not just the installation cost but also the financing costs over the life of the contract discounted back), then $100 million only pays for roughly 3,000 residential installations. To put this into perspective, currently there are an estimated 150,000 residential installations in the US of which maybe 1/3 are financed. The share of financed installations amongst new stock, however, is much higher (50-70%?). When looking at these numbers it’s easy to see that the financing needs of the residential solar industry at the current growth rates will require not million but billion dollar funds very soon.

That might seem scary since it’s a lot of capital in an asset class that’s not well established. It’s a young asset class that does not have a lot of history under its belt. No one really knows what the long-term risk characteristics will look like. How high will the operating and maintenance costs really be? How high will default rates be? Do we really understand the risk of trees growing and potentially reducing the performance of the asset? (Just look at an aerial image of older neighborhoods and compare it to newer neighborhoods.) Sure, the terms and conditions of the financing contracts stipulate that the trees have to be trimmed but have you tried convincing your neighbor of that? And legal battles to get your neighbor’s trees cut are costly and take time. Another risk is a systematic drop in electricity rates that could lead to a lot of people deciding that they are better off not paying anymore. Their credit scores would take a hit but some might decide that they are better off that way.

Admittedly, these risks are not worse than those impacting other similar asset classes like mortgages or consumer loans. What is different, however, is that banks and companies like Google cannot possible fully understand (and therefore correctly price) the risks associated with solar energy assets. Not yet. Only time will allow them to learn and collect the necessary data. The result will be a very efficient market of different financing solutions that provides the most competitive terms to customers. It’s surely an exciting story to see unfold over the coming years.

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Running a small company in an regulated industry (and by small I mean any company that can't afford to spend tens of millions of dollars on influencing policy making), will make you feel like getting caught in an avalanche. You get tossed around and the only thing you can do is to keep swimming and keep your head up. Most of Solmentum's 1000+ customers are in PG&E's territory and we have a large sales force here in Northern California. It now looks like PG&E will change their rate structure. After years of exorbitant rate increases of the highest electricity rate tiers, PG&E has come under pressure to restructure their rates and get their revenues in other ways. The existing rate structure is favoring amongst others low income families, urban areas with smaller houses/apartments, energy savers and solar customers. Now new proposals are in front of the California Public Utility Commission (CPUC) that would redistribute PG&E's revenues away from the high energy consumers to low-usage customers. In May, the CPUC will decide which of the different proposal will be adopted. (In an unusual turn of events there are different proposals from CPUC's Administrative Law Judge Thomas Pulsifer and CPUC's President Michael Peevey on the table.). Now we are in a holding pattern until the lobbying efforts from all the different interests groups push the CPUC to a decision. What's the most frustrating about this process is not necessarily the end-result but the unpredictability and uncertainty it creates in the meantime.

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The internet is a powerful tool. And it can cut both ways. Last week we found out that someone who was unhappy with our interview process posted a nasty review on some complaint boards calling Solmentum a scam. What a kick in the face! After nearly 2 years of relentless efforts by some incredibly talented, and dedicated people, one unhappy voice can seriously tarnish the reputation of the business overnight. As always, Warren Buffet got it right: "It takes 20 years to build a reputation and five minutes to ruin it." We have been running the business in stealth mode until now to conserve cash and focus only on what's absolutely essential to growing the business. Now we got penalized for our frugality. To an outsider some actions can be seen critically (e.g. the fact that we are using shared office space in our Orange County office since we only need it for small team meetings). Most entrepreneurs would probably agree that it's a sensible way to run a nimble operation but to someone who never started a company having shared office space could be seen as a sign of a dodgy business.

The main takeaway is that we can't blame it on anyone but ourselves. It's time to step out of our shadows and communicate our story openly. Living and breathing Solmentum every day I know what the company stands for and how hard everyone works to build an awesome company with an outstanding reputation. But a bystander cannot see the inside of the company. We need to change that. We need to provide our customers and job candidates with an opportunity to get as excited about our organization as we are.

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Don't start a business if you don't have the resilience to work through the tough times. If you can't see an opportunity in every punch that's thrown at you, you'll probably quit before you ever had a chance to succeed.

(If you are not sure what I mean, make sure to read this great article on TechCrunch by Ben Horowitz:)

Anyone in the solar industry can tell a story or two about the nightmares of securing building permits for a solar system. On the surface, this appears to be an annoying nuisance that most people would like to brush away as something that just has to get done on the way to get the project completed. After all any major work on any building requires a building permit. But as the "hard" costs (panels, inverters, balance of system costs) have dropped significantly over the last couple of years, the soft costs like getting the permit have not moved much and are a significant barrier to making solar more affordable and competitive with non-renewable energy sources. This report by our partner company SunRun highlights these issues in more detail and estimates the cost to be about $0.50/W for a residential install. The biggest problem is not the actual cash expense of the permit (although some jurisdictions charge well over $500 which is astronomical given the actual work that is done on each permit), but the labor cost incurred in the process. One of the largest solar installers in California once told me that they employ 16 "permit runners". A permit runner's main responsibility is it to physically go to the building department for each permit. They either have to set appointments or just wait in line for hours to present plans in person. Sometimes they have to go back several times to get a simple residential project (under 10kW) approved.

A great example that just arrived in my inbox today comes from one of our installer partners . Here is the (very) abbreviated version of the story: " We had an appointment in the beginning of March to submit to review for permit. When our technician arrived, the officials had no record of there being an appointment. This is not the first time the building department has done this. We had no choice but to schedule another appointment, but the building department only takes appointments by phone and would not let our technician make one when he was there. He called when he left their office and could only leave a message. He called the next day and was able to speak with someone. They gave him their next available appointment for first thing Thursday morning, 3/31. It turned out that this day was available because it was Cesar Chavez Day and the office was closed that day. We had to reschedule again for an appointment this Thursday in the morning."

A good example of an inefficient bureaucracy that systematically wastes time and destroys value. Is there hope for these processes to improve and therefore reduce the costs for homeowners to get their energy for a better energy source? I am pretty pessimistic. Here are some hard numbers that make this game a difficult one to win. The main policy stakeholders that shape a local solar market are (1) the utility commissions, (2) the state legislatures, (3) the utilities, and (4) the building departments (officially called "Authority Having Jurisdictions" or AHJs). In the US there are 51 utility commissions, 51 legislatures and about 3,000 different utilities. And there are 18,000 AHJs. Each of these 18,000 AHJs have different approval processes, different permitting requirements and different software products they use (or none at all). Is it realistic that we can influence a majority of these AHJs to adopt certain permitting standards and use 20th century technology (e.g. allow customers to submit permits online)?