THE MOST VERTICALLY INTEGRATED SOLAR COMPANY

Few sectors in most economies generate both economic returns, as well as having a positive impact on society and the environment. In many industries these are mutually exclusive goals. However, in the solar industry, these interests are very much aligned. Solar impacts directly and positively on society and the environment. It provides clean energy, reduces water consumption, jobs are created and new electricity generation capacity is created from private investment. Solar is also rapidly becoming a mainstream source of electricity for homes and businesses. In 2006, only 100 MW (megawatt) of solar was installed across the entire United States (US). However, in 2015, SolarCity (the world's largest distributed solar energy provider) installed that amount in one quarter year of business alone. The distributed solar industry is growing at a rate of 50% on average per year and accounted in 2015 for one third of the new electricity generation capacity in the US. As a result of this shift, solar energy is becoming a central component in the nation's energy infrastructure. In terms of the solar landscape as a whole, SolarCity is not just participating in this shift. It is a central force in driving clean energy to a price lower than what local utilities can provide, whilst also overcoming the number one obstacle to adopting solar - the high upfront costs of installing solar.

The chief executive officer (CEO) of SolarCity, Lyndon Rive, envisions that solar will become the largest source of energy to meet the world's clean energy needs. To realise this vision, SolarCity is transforming how energy is delivered, through cleaner, more affordable, distributed solar generation. This vision is very different from the current electricity infrastructures that are built around a centralised power plant with costly transmission and distribution. Hence, the mission of SolarCity is to drive distributed solar from less than 1% to the largest source of electricity in the US, and ultimately the world.

To discover this distributed solar future will be complex and many barriers still need to be overcome; however, the value proposition made to customers is simple. Consumers are given the opportunity to buy clean electricity at a lower unit cost than offered by alternative fossil fuels, and customers need not make an initial large investment in installing solar. In 2015, 100 000 customers said yes to this proposition and SolarCity anticipated that 1 million installations would be completed by 2018. SolarCity's new installations are growing at a rate between 80% and 90% per year (above the average industry growth rate). It is anticipated that in the next 20 to 30 years, that $2.6 billion net present value (NPV is a measurement of profitability calculated by subtracting the present values of cash outflows from the present values of cash inflows over a specified period) will be retained from these installations.

The strategic goal of SolarCity is to replace fossil fuels, such as diesel, coal and gas, with solar. To achieve this strategic goal, SolarCity has chosen to vertically integrate the entire value chain. It will produce solar components, sell long-term energy contracts that are fed by installing new solar systems, as well as finance these installations. Furthermore, by vertically integrating, economies of scale advantages will be gained over time, and the cost to install and produce a unit of electricity will be lower as well. In contrast, it is anticipated that the unit cost to produce electricity for centralised power plants using fossil fuels will increase over the next 20 to 30 years. Hence, the CEO of SolarCity views the fundamentals on which the company's business model is based as sound.

To move closer to achieving their strategic goal, SolarCity has undertaken several initiatives. These include leasing solar power systems to customers that cost less than their utility accounts each month; investing in Zep, a company that invented a "snap together" solar panel system that reduces the installation time and eliminates the need for mounting on many types of roofs; the financing and installation of industrial large-scale solar (for example the British Motor Company consisting of 1 606 photovoltaic panels), and the installation of electric vehicle charging stations, in partnership with Rabobank. In the first quarter of 2016, the CEO of SolarCity, Lyndon Rive, reported to shareholders that targets for most initiatives have been exceeded. In terms of MW installed, the target has been exceeded by 19%, the revenue grew by 82% year on year, and $728 million in asset financing has been raised year on year. Furthermore, the CEO also reported on a milestone achieved: the opening of a 100 MW cell-producing plant that will produce cells that exceed the average efficiency by 20%. In addition, with the use of the Zep mounting system, the number of component parts needed to install a module has been reduced from eight to three, the installation time of 16 modules (4 KW) has been reduced to 20 minutes, and the risk of damaging roofs has been reduced as well.

To accomplish the mission of SolarCity, teams have to constantly work to enhance scale and efficiency, and tirelessly tear down external barriers to solar. SolarCity has been structured to functionally focus on overcoming each potential barrier in the path of higher penetration of distributed solar: the sales/operations focus is on lowering the upfront costs of solar; the finance teams focus on reducing the cost of capital; research and development (R&D) focus on developing new technology that reduces costs; and the government affairs team works to promote a regulatory policy that supports distributed solar. Policy is the most important initiative to drive higher distributed solar, and small wins have been achieved on the policy front despite the efforts of utility groups to undermine the economics of solar. These wins include energy regulators rejecting fixed charges that penalise distributed solar customers in Mexico, Colorado, Minnesota and Kansas (US).

In order to meet the long-term projections, SolarCity has to expand its workforce, increase installation efficiency and exceed the current rate of growth in MW installed. However, there are implementation risks that may lead to a difference between what is projected and actually realised. These risks include: the future level of demand for their solar systems; the availability and timely supply of cost-effective solar panels; the ability to integrate new businesses acquired into existing operations; the effect of changes in rebates/taxes; changes in strategic planning decisions; and the reallocation of internal resources.

Overall, solar at the scale envisioned by SolarCity will lead to more competition, as opposed to protecting monopolies, and innovative solutions to meet the world's clean energy needs.

Question 1

Comment on how changes in macro-environment forces affected and influenced SolarCity's decision making in the organisation.