It’s hard to argue against Elon Musk being one of the greatest entrepreneurs of our era, responsible for bringing to market such innovative companies as PayPal, SpaceX and Tesla Motors. But it’s his role as chairman and primary shareholder in SolarCity — a solar energy company run by his cousins — that’s getting a lot of attention these days. SolarCity went public in 2012 at $8 a share and now trades at close to $70. That’s nearly a 10x investment in just two years. (Just look at that beautiful chart)
So what does Elon Musk know about solar that the rest of us don’t?
1. Solar energy is inherently an exponential technology.
If there’s one thing Wall Street loves, it’s a good growth story, and that’s something that SolarCity has been careful to cultivate. The company already has 80,000 paying customers and expects to sign up 1 million customers within the next four years. That means the company will need to literally double in size every few months. Think about that for a minute: 1 million customers over four years means 250,000 new customers in 2014, or approximately 20,000 new customers each month. So the company will have doubled in size — from 80,000 to 160,000 customers — by Memorial Day weekend.
And then the company will double again, from 160,000 to 320,000; and then from 320,000 to 640,000; all the way to 4 million. That requires exponential growth to make possible in such a short time frame, so it’s no wonder that the godfather of exponential technological growth, Ray Kurzweil, has been quick to point out the remarkable growth that’s possible with solar technology. Just as computers benefit from the ability to cram a growing number of transistors on a chip (Moore’s Law), solar panels also benefit from being able to cram an ever-growing number of photovoltaic cells on them. According to Kurzweil’s calculations, we can expect to be energy independent within the next 20 years.
2. Solar is a brand, not a utility.
Elon Musk thinks about solar energy the same way he thinks about electric cars — it’s easier to sell if it’s backed by a highly-recognizable brand such as Tesla. As a result, SolarCity feels more like a traditional consumer brand, less like a faceless utility. Think about it — there are Yelp reviews for SolarCity. The company has 30,000 fans on Facebook. That doesn’t sound like a utility. This is perhaps the most innovative part of what SolarCity is doing – it’s transforming a sleepy old utility business run by legacy companies into a new kind of energy start-up that has attracted the support of companies such as Google.
And once the customer begins to think of your company as a brand, it makes it easier to grab and maintain market share. While SolarCity may control nearly 25 percent of the U.S. solar energy market, that’s not to say there aren’t a lot of competitors. Going forward, dealing with competitors such as Sungevity or SunPower will be difficult, so having customers view you as the premier solar energy brand matters. That means continuing to innovate and bringing new products to market.
3. Solar is the rare business that can profit from cheap Chinese imports.
Most companies are running scared of China these days, thanks to the ability of the Chinese to out-compete on price on just about everything. The demise of any company usually contains a nightmare scenario of cheap Chinese imports or cheap Chinese labor. So Elon Musk figured out a way to make the Chinese threat work for him, not against him. He got SolarCity out of the business of just selling and installing solar panels, and into the business of selling long-term lease contracts.
Think about the role played by the cost of solar panels. If you’re just manufacturing, selling and installing panels, then the Chinese will be able to offer cheaper panels, and you lose money. However, if you’re offering the panels free to customers up-front, then you’ve just turned the business model upside down. The cheaper the panels are, in fact, the more attractive it will be for customers to consider solar energy as an option, and the more money SolarCity eventually makes. That’s what separates Elon Musk’s SolarCity from a company like Solyndra, which went belly-up once the Chinese started flooding the market with cheap solar panels.
4. Solar energy companies can tap into the power of the crowd.
Perhaps the single greatest change in the solar business that can really propel the business ahead is its ability to tap into the power of the crowd. Shifting from fossil fuels to renewable energy requires a massive change in preferences, habits and attitudes, and this is where the power of the crowd matters. That’s why you’re starting to see innovations like Mosaic’s unique crowdfunding initiative for solar energy projects.
SolarCity was already the first to market with bonds backed by the revenue from rooftop solar projects, making it possible for institutional investors to invest in the success of future solar projects. (It’s essentially the same logic that makes it possible for investors to buy mortgage-backed securities, thereby creating a robust housing market) SolarCity’s latest move, announced this week, is the ability for individual investors also to participate in this market. SolarCity is essentially creating a new Web-based platform to enable the crowd to make money off other people installing solar panels.
5. You won’t hear about “peak sun” for another 5 billion years.
Unlike a conventional fossil fuel utility, SolarCity doesn’t have to worry about running out of resources. We’ll never hear about “peak sun” the way we hear about “peak oil” because the sun isn’t scheduled to burn out for another five billion years. As long as the sun shines, customers can use solar panels to capture sunlight and transform it into electricity. Any excess electricity can then be transferred back to the grid for other customers. Theoretically, this excess electricity could be exchanged globally.
That’s perhaps why solar energy has such a loyal following in tech circles. In his 2012 book Abundance — which has been endorsed by the likes of Richard Branson, Kurzweil and Arianna Huffington — entrepreneur Peter Diamandis makes the most eloquent case for why the sun is such an important player in any future scenarios of energy self-sufficiency. Diamandis states that Africa has enough solar potential to supply the present world’s energy needs 40 times over.
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Maybe the growth projections for SolarCity are too rosy. Maybe the cost savings for solar customers aren’t as high as SolarCity claims. Maybe we’re experiencing a Solar Energy Mania on par with the Tulip Mania hundreds of years ago. Maybe one day we all wake up and realize that Solarcity, with all of its talk of being a new kind of utility with fancy financing schemes, is the next Enron. All valid points.
But then again, would you really be willing to bet against Elon Musk?