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The State of Solar California - Outliers and Oddities - Galkos Construction and SolarCity

09/06/11

  11:00:00 am, by Jim Jenal - Founder & CEO   , 1922 words  
Categories: Solar Economics, Solar Tax Incentives, SEIA, SCE, Residential Solar, 2011

The State of Solar California - Outliers and Oddities - UPDATED x2!

UPDATE x2 11/8 - Solar City’s Jonathan Bass adds his perspective on our reporting about Solar City - see his response in the comments.

UPDATE  9/30 - We just heard from Jonathan Bass at SolarCity.  Details at the end.
(Still no word from Galkos!)


Editor’s Note: We have now done an updated analysis showing the same data from 2012.  You can read our 2012 Outliers & Oddities here.


In the first two installments in this series (Part 1 and Part 2) we looked at the most recent data from the California Solar Initiative (CSI) covering the first half of 2011 in SCE’s service area. Using that data we identified trends in cost, equipment and system efficiency.  Along the way, we stumbled upon some Outliers and Oddities in the data that left us puzzled and disturbed.  In this post we name names, specifically Galkos Construction (aka GCI Energy) and SolarCity.

Before we explain to you why they are featured in this post, we would remind our readers of the Solar Bill of Rights created by the Solar Energy Industry Association (SEIA) in the Fall of 2009.  We wrote at some length about the Bill of Rights when it was introduced, but we want to highlight now what then we termed to be, “the most important right of all:”

8. Americans have the right, and should expect, the highest ethical treatment from the solar industry.

Beyond a shadow of a doubt, this is the most important Solar Right of all if we are to build an industry that is respected and trusted by consumers throughout this country. This should almost go without saying - and yet, saying it, and living it, is extremely important.

In our view, if we become aware of situations that don’t live up to that Right, we have an obligation to point them out so that our potential clients can make the most informed decisions possible. 
In honor of that principle we present today’s post.

Outliers: Galkos Construction

In looking at the data, from time-to-time a data point would jump right off the screen.  For example, examining all of the residential projects in our data - both “completed” and “pending” but excluding “delisted” - we find that the average installation cost in CSI Rating AC Watts is $8.43/Watt (in DC or nameplate Watts that average becomes $6.99).  As we noted in Part 1, that number has decreased over time and also decreases as system size increases.  Still, given that the residential sector (as designated in the CSI data) only consists of systems between 1 and 10 kW, you wouldn’t really expect significant price variation between installers over a six month period.

But you would be wrong.

Who Charges What?

Here is a chart of the Cost per Watt for the largest installation companies in the SCE service area (you can click on the chart to see it full size):

First, let us give credit where it is due.  The low end outlier is HelioPower, Inc., at $6.56/Watt, and they did it with an efficiency factor of 87% - second best of anyone on that chart. Nice.

But who is that way off in left field?  Coming in at a staggering $13.32/Watt - a full $1.40 higher than their nearest competitor and more than twice what HelioPower is charging - is Galkos Construction, Inc., also known as GCI Energy, out of Huntington Beach.  For that money, they must surely be offering only the most efficient and sophisticated technology, right?  Not so much.  To the contrary, the average installation efficiency for Galkos is only 84.9% - the second worst on the chart and well below the average of 86.11%.  In fact, 99% of the time Galkos appears to use Sharp panels - not exactly an exotic solar panel brand - and in particular the Sharp ND-224UC1 panel (66.5%). A quick Google search reveals that the Sharp ND-224UC1 can be purchased, at retail, for $2.65/Watt or less.  Given that Galkos handled 400 projects in this data set, it is hard to believe that their price for all of their equipment, particularly the Sharp panels, would not be heavily discounted.

Quality Counts

Quality, of course, is important, and the data does not reveal - though the Internet hints at - the quality of installations from Galkos.  Here is how the company describes its own product offerings (from the “Services” page of their website):

Solar by GCI [Galkos Construction, Inc.] Energy
GCI Energy is the largest solar company in Southern California with over 30,000 customers. So you get the most knowledgeable professionals, excellent customer service and a better price.

GCI Energy solar offers the highest efficiency solar panels on the market - those manufactured by Sharp. With Sharp Solar Panels, GCI Energy can tailor a solar panel installation to your specific needs and lifestyle, so you get maximum performance without a maximum investment.
(Emphasis added.)

Does Galkos actually have 30,000 solar customers?  Certainly not (nobody does).  Are they providing “a better price"?  It is not clear what their standard of comparison might be - but their price is not better than any of their major competitors in that chart.  And of course, the statement does not define what they mean by “the highest efficiency solar panels on the market,” but it seems unlikely that Sharp would make that claim.  Here’s one chart that concludes that they couldn’t (note the efficiency of the SunPower and Sanyo panels first, then search for Sharp).

All we can say in response is, caveat emptor.

Oddities - SolarCity

Now we turn to the Oddities section of this post.  Unlike the outliers, which were always of interest to us, we were not looking for the oddity we report here - it literally just jumped out at us.

Sold versus Leased

Question: What is the difference in reported cost between systems sold directly to the end customer and those that are leased (i.e., have a third-party owner in CSI parlance)?

The initial difference that we stumbled upon was so startling that we knew we needed to narrow our focus and control for as many variables as possible to isolate that one factor.  To achieve that end we restricted the data to those residential systems (i.e., between 1 and 10 kW) that were “pending” in the CSI/SCE data (thus, the newest proposed systems in the data which, based on our Part 1 analysis should mean the lowest cost systems). That way our project sample would be as homogenous as possible, eliminating cost variations based on system size and timing.

Given those restrictions, the top 5 installation companies in which the system is owned by a third party are: Verengo (482 systems), SolarCity (468), American Solar Direct (124), Sungevity (99), and HelioPower (63).  Of those five, only two also have direct sales projects pending: Verengo (7) and SolarCity (9).  Let’s see how they compare:

Lease impact on costs - SolarCity vs Verengo

What is going on here?  For Verengo, as the number of systems increases - which it does in going from sold systems to leased systems - their cost per Watt decreases - which is what we would expect.  But not so for SolarCity - even though they are leasing 50 times as many systems as they are selling, their cost for the leased systems went up - way up - as in up by $3.12/Watt!

(One possible explanation for this discrepancy would be that SolarCity uses much more expensive equipment in their leased systems than they do in the ones that are sold.  But they don’t.  On their sold systems, SolarCity always selected a Fronius inverter and their panel choices were split among Yingli (56%), Kyocera (33%) and Sharp (11%).  On their leased systems, SolarCity selected Fronius inverters 98% of the time and again split their panel choices among Yingli (68%), Kyocera (28%), and BP (3%)  with the remaining 1% scattered among Suntech, Sharp and Sanyo.  In other words, there is no significant difference in SolarCity’s equipment choices between sold and leased systems.)

Why Does this Matter?

Why does this significant cost differential matter, you might ask?  After all, customers aren’t paying that price - they are paying on a lease so the “cost” of the system doesn’t matter to them, all they care about are their lease payments.  True enough - unlike the case with our Outlier above, the end customer is not the victim here.

Recall, however, that for systems that are leased, the third-party owner - presumably SolarCity and its investors in this case - receives both the rebates and the tax benefits associated with the installation.  While the rebates are independent of the system cost (they are paid based on CSI Watts), not so for the tax benefits.  Commercial operators   (even though these are residential installations they are treated as commercial projects for tax purposes) are entitled to both a 30% tax credit as well as accelerated depreciation based on the cost of the system.

For the 468 systems that SolarCity is leasing, their total cost is $24,261,735 to install 2,412 kW.  If those installations were billed out at the $6.94/Watt they are charging for their sold systems, the installed cost would be $16,739,280 - a difference of $7,524,037.  At 30% for the federal tax credit, taxpayers are giving SolarCity an extra $2,257,211 - just from six months worth of installs in only the SCE service area.

Wow!

In the words of the 70’s pop song, How long has this been going on?

How Long Indeed

We decided to find out.

Although all of our analyses up until now in this series have been restricted to the first half of 2011, the actual data set contains entries from the inception of the CSI program.  Thus we can look at all of SolarCity’s installs going back to 2007 and compare them as we did for the 1H2011 pending installs above.  We will use the First Completed date to group these by year and analyze only “installed” - and not “pending” applications.  Here’s the data:

SolarCity Installed cost 2007-2011 - sold vs leased systems

The answer would appear to be, almost from the beginning!  Back in 2007, Solar city sold ten times as many systems as it leased.  By 2008 the ratio was down to 4-1 and ever since then leasing has been SolarCity’s predominant business strategy with the ratio of leased to sold now standing at nearly 16-1 in 2011.

Bottom Line

What, then, is the cumulative impact to SolarCity’s bottom line from this trend throughout California?  We aren’t in a position to calculate the depreciation benefits (since that is a function of the system owner’s tax bracket) but we can readily calculate the added value derived from the 30% federal tax credit due to this increased cost per Watt.

Here is our plot of the cumulative effect of those year-by-year increases:

SolarCity additional federal tax credits year-by-year and cumulative

After a slow start in 2007-08, SolarCity’s “model” really took off and has garnered the company an extra $3,000,000+ each year since 2009 (and, of course, 2011 is not yet over) for a total excess accumulation of $10,619,000.  Depending on the investors’ tax bracket, the depreciation could be worth nearly as much as the tax credit.

Double Wow!

UPDATE 9/30 - We have now heard from SolarCity

We just heard from Jonathan Bass, Director of Communications at SolarCity who took exception with our report, although he did concede that he could see how we could have reached the conclusions we published in light of the CSI data.  We encouraged him to please send us a written response in as much detail as he chose and we would publish it in its entirety.  While he agreed that SolarCity would be publishing its response, he did not commit to publishing the information here.

In any event, when we hear more we will update this post again.

What’s Next?

No doubt there is more that we could do with these revelations - but wouldn’t it be better for those with actual oversight obligations to examine this data as closely as we have and to take appropriate action?

As always, we welcome your comments - and if we hear from any of the folks named in this series we will be sure to update the appropriate post.

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Comment from: stephanie [Member]  
5 stars
stephanieA great deal of research, Jim, with significant revelations. Verbum sapienti sat set? We shall see!
09/06/11 @ 11:31
Comment from: Christof [Visitor]
ChristofThanks for another excellent post - it definitely sheds important light on the great variability among solar installer costs, a variability that I have to believe, at its upper end, can’t be helping the solar industry and solar in general in the U.S.
09/06/11 @ 12:47
Comment from: Jim Jenal - Founder & CEO [Member]  
Stephanie & Christof - thanks for the kind words. A word to the wise should suffice - if the wise are listening! I entirely agree that folks charging well beyond the norm for “average” installations do harm the industry as a whole. Maybe this will help consumers become better informed purchasers. Caveat emptor indeed!
09/06/11 @ 12:54
Comment from: Jen [Visitor]
JenThanks for this post. Anyway, how do you identify Leased Systems from Sold Systems in the CSI data set?
11/02/11 @ 16:13
Comment from: Jim Jenal - Founder & CEO [Member]  
Hi Jen - Leased systems can be identified in the CSI data as being “third-party owned.” Regards… Jim
11/02/11 @ 16:36
Comment from: Derek Girling [Visitor]
4 stars
Derek GirlingGreat article. However, one point that should be made is that, while there are definitely comapnies at the top of the $/Watt chart that are using questionable tactics to sign up customers i.e. Galkos, some of the companies at the bottom, which deliver a great value to their customers, are spending virtually no money on advertising or marketing. The early adopters are gone, and the market cannot continue to grow without advertising. Companies like Verengo that appear in the middle of the $/Watt range write significantly more contracts than those at the bottom. They need to recoup those costs and ulitmately they are doing more to bring solar to the masses than the boutique, low cost installers that rely primarily on referrals for growing their business.
11/07/11 @ 11:35
Comment from: Jim Jenal - Founder & CEO [Member]  
Hi Derek - Your point about advertising is a good one. As a small company, our advertising budget is also small - but still a significant expenditure for us. I don’t think any installer can get by on referrals alone any more, at least not in this market. Jim
11/07/11 @ 12:01
Comment from: Jonathan Bass (SolarCity) [Visitor]  
Jonathan Bass (SolarCity)Jim – apologies for the delayed response. As we discussed, the CSI database reports the installer’s price, and is not set up to reflect the cost structures of 3rd party financing. 3rd party financiers incur substantial costs to create lease and PPA options that are not included in CSI installation prices. 3rd party financing companies (SunRun, Clean Power Finance, Suncap, SunEdison, etc.) buy solar power systems from installer partners at the price reported in CSI, and then incorporate their cost and profit margin and sell to the financing partner (which is not recorded in the CSI data). In the case of installers that use 3rd parties for leases and PPAs, the price that appears in CSI is the system installation price that the 3rd party paid to the installer. In the specific examples you cite, Verengo is selling the systems in question to SunRun at the price listed, and SunRun is transferring them to a financing partner at a higher price, after incorporating its cost and profit margin and contemplating the fair market value. In this example, the ITC is based on the transfer price of the system between SunRun and its financing partners, not the price that Verengo is selling to SunRun that is recorded in the CSI database. SolarCity incurs similar developer costs to create lease/PPA options, and includes those costs in its price to financing partners. SolarCity is unique in that it is both the developer/financing company and installer of its projects, while the vast majority of the other installers offering leases and PPAs use a 3rd party for financing. Pricing for these two models are reported differently in CSI and that is why SolarCity’s lease/PPA pricing appears to be higher than Verengo’s. We are working with the Public Utilities Commission to report our costs on lease/PPA systems in the same way that non-integrated installers report to eliminate this confusion, and allow for apples to apples comparisons among installers. The other mistaken assumption in this post is that a higher ITC for lease or PPA projects means a higher cost to the taxpayer. Lease and PPA payments are taxable as income, so they can generate a return to the taxpayer on the ITC that cash sales do not.
11/08/11 @ 12:33
Comment from: Jim Jenal - Founder & CEO [Member]  
Jonathan - thank you for taking the time to provide us with Solar City’s take on all of this. We agree completely that Solar City should be able to report its costs more specifically in the CSI data. We would be happy to lend our support to any request to the PUC for greater clarity in how this data is reported. In fact, we would like to see reporting for both installers and financial operations so that we could make more accurate assessments of ALL of the costs associated with solar installations. As for your second point - the question is whether the taxes paid on lease and PPA payments exceed the benefits derived under the ITC when the market value claimed is substantially greater than what is claimed under a cash purchase. That may or may not be the case but we would need lots more data to answer that question. Regards… Jim
11/08/11 @ 13:48
Comment from: Manny [Visitor]
5 stars
MannyExcellent Article! I must say that I do not agree with Jonathan 100% I do know first hand that many of the “lessors” will provide all major components to the “installers” system (ie: Modules, Racking, Inverters) and the installer provides the balance of the system plus a discounted rate to install the system. So many “lessors” do not purchase the system from the installer at the rate shown on the CSI site, thus they do not have a large capital outlay. Plus many lessors over the years have realized that they can actually control and lower their investment by providing the major components. Also from my experience companies like Solar City purchase modules, inverters, etc in large qty allowing for some pretty attractive discounts however in my opinion they over price the customer upfront (in this economy) and pocket the discounts. In this economy module prices have in my opinion hit record lows compared to 2007-2008 yet many companies are still charging customers in excess of $8.00 per watt which is not fair. I guess people will have to do more research and more important read the fine print.
12/09/11 @ 21:58
Comment from: jeff spies [Visitor]
5 stars
jeff spiesIn my opinion, a 4 KW system that is leased or purchased should get the same incentive. I dont believe it is fair to allow leasing companies to make more dollars to lease a system than what a homeowner gets for purchasing it. I realize there are costs to lease, but the taxpayer gets alot less solar bang for the buck with leasing. Seems very unfair to me as a solar advocate and a taxpayer.
04/15/12 @ 21:59
Comment from: Ucci [Visitor]  
5 stars
UcciWow, I’m researching Solar City as it preps for IPO and I can’t imagine a better free analysis / conversation. I really appreciate the “just the facts” approach and hope the profile of this conversation is raised as Solar City enters the public markets.
05/03/12 @ 11:22
Comment from: Jim Jenal - Founder & CEO [Member]  
Thanks very much for your comment. I think a number of us who have been looking at this issue are *very* eager to see SolarCity’s SEC filing! Jim
05/03/12 @ 16:00
Comment from: Dave [Visitor]  
4 stars
DaveExcellent article! It looks like we’ll have to wait to see the data from SolarCity’s SEC filing due to the JOBS Act, which allows companies that have less than $1 billion in revenue to file non-public drafts with the U.S. Securities and Exchange Commission. Most likely we’ll get a peek a few weeks before the IPO. Given the confidentiality of the JOBS Act filing, I’m willing to bet SolarCity is no were near profitability based on GAAP.
05/25/12 @ 10:00
Comment from: Jim Jenal - Founder & CEO [Member]  
Dave - Thanks for the kind words. I made that very point about the JOBS Act in another post - check it out: http://runonsun.com/~runons5/blogs/blog1.php/solecon/public-solar-enphase-solarcity Jim
05/25/12 @ 12:02
Comment from: mike [Member]  
3 stars
mikeI’m curious as to price variation considering tax credits, rebates etc. When doing a lease, if you check the REAL price you paid and the end of the lease, the price per watt argument is out the window. Leasees are paying double what it would be to purchase it at the end, and the lessor kept the tax credit AND rebate. Buying it, at lets say $12 a watt would turn out to be under 8$ a watt after credits and rebates, which the purchaser keeps. And considering the fact that 90% of California contractors are out of business in 5 years to shady business and under capitalization, the price per watt takes on a different face. Price is far from everything. Thank you for the great info
01/16/13 @ 15:16
Jim Jenal is the Founder & CEO of Run on Sun, Pasadena's premier installer and integrator of top-of-the-line solar power installations.
In addition, Run on Sun offers solar consulting services, working with consumers, utilities and municipalities to help them make solar power affordable and reliable.

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