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Can SolarCity's Business Survive Coming Solar Competition?

If done cost effectively, this could put SolarCity another step ahead of a competitor like , which has no plans of changing from commodity solar panels. The efficiency level is still behind , who makes panels as efficient as 21.5%, but SolarCity has other advantages I'll get into below.

If done cost effectively, this could put SolarCity another step ahead of a competitor like Vivint Solar , which has no plans of changing from commodity solar panels. The efficiency level is still behind SunPower , who makes panels as efficient as 21.5%, but SolarCity has other advantages I'll get into below.

The other change in the solar panels themselves could be more problematic for SolarCity. SunPower and others are beginning to include micro inverters in solar panels, effectively making them plug-and-play for installers. In five years, it's possible you could install a racking system and solar panels on your own roof and only need an electrician to hook the system into the grid. What value does a nationwide installer provide, then?

Source: SolarCity.

New financing options

Another challenge over the long term is changes in the way solar systems are financed. One of the major changes SolarCity made in the past year is a transition to loans versus being primarily focused on leases, or third-party ownership. CEO Lyndon Rive said that by the end of this year, loans could be half of the company's business.

Long term, this is absolutely the right move, giving customers more choice and reducing risk that 20-year leases bring into the business. It will also bring revenue and profits into the quarter the systems are sold instead of spreading both over a 20-year period. This makes the business far more transparent for investors.

But selling solar systems also brings competition into the market. Until now, SolarCity was able to beat competitors because it had a low cost structure and better financing terms than many competitors. If they're selling systems, it's far easier to compare system prices from two installers and pick the cheaper option. Unless SolarCity has some differentiator, like higher efficiency from its own solar panels, SolarCity could be entering a commodity business of being a solar installer, competing against small installers willing to take low margins to make a sale.

Is national solar the way to go?

This brings up the overarching question facing the residential solar industry today: Is a national, vertically integrated business model the most efficient option, or should companies specialize in niches?

Many people within the solar industry debate this today, and the answer is unknown. It's certainly true that the vertically integrated model has helped SolarCity grow as quickly as it did and take over the industry in the last few years, but will that be the case in five or 10 years?

Other construction-related industries haven't found a national footprint to be effective. Homebuilders aren't truly national or vertically integrated, and neither are electricians, or home repair contractors, or even utilities. The businesses comparable to installing solar panels and players who may be interested in getting into the solar business aren't national, and it's unknown if this time will be different.

Thus far, SolarCity and even Vivint Solar have been able to leverage large sales fleets and access to financing, but will that change as we move to automated online sales and loans that come from your local bank?

That's an unanswered question, but there are plenty of other companies betting that "owning the trucks" nationwide isn't the right strategy. SunPower, Clean Power Finance , and Sunrun are three of the largest players in financing and providing sales tools to third-party installers who do the dirty work on the ground. In SunPower's case, they're beginning to leverage online tools that will eventually allow customers to build a virtual system and see potential savings from solar energy before talking to anyone.

Source: SunPower.

Long term, it may be more efficient to own the technology, sales, and financing behind installing solar systems than it will be to "own the trucks." Much in the same way Home Depot will help you design a new kitchen, it isn't Home Depot workers who come to install your new cabinets; it's a subcontractor. That may be the way the industry moves in the future.

Does solar energy become a commodity?

As installing solar panels becomes easier and financing becomes more readily available, does a company like SolarCity start facing commodity-like competition, where price is what wins at the end of the day?

I think that's a very real danger, and it's why it's dangerous to build out a national infrastructure the way SolarCity has. But it's also why the company is investing in things like higher-efficiency solar panels and standardized racking systems as ways to cut the cost of energy. This vertical integration could help keep SolarCity a step ahead of competitors large and small.

The real danger is that even these advantages could be limited when you're competing against installers willing to sell for low margins. SolarCity currently generates nearly $2 per watt installed (or roughly $10,000 per home) in retained value and thinks it can keep that figure near $1 per watt long-term. How the industry plays out will tell us if that's true, but I'm skeptical that value will be that high for anyone actually installing solar panels.

Also, remember that building a competitor isn't as hard as it may seem. Vivint Solar was founded in 2011, and it's already the No. 2 residential solar installer in the country. That's alarming considering big names like SunPower and NRG Energy coming after this market. With enough focus, it may not be as hard to disrupt as you think.

SolarCity has certainly shown the ability to act nimbly the adapt to the changing residential solar market, but with a $5.4 billion market cap, are investors looking at this stock with rose-colored glasses? As I've pointed out, there are certainly a lot of unanswered questions, and how the industry, and SolarCity, evolves will tell us whether the company has the kind of growth ahead that investors hope.

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The article Can SolarCity's Business Survive Coming Solar Competition? originally appeared on Fool.com.

Travis Hoium owns shares of SunPower. The Motley Fool recommends Home Depot and SolarCity. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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