In the largest economic development effort he has undertaken in his five years as governor of New York, Democrat Andrew Cuomo has committed up to $750 million to build a giant solar panel factory the state claims will be the largest of its kind in the Western Hemisphere. The state will own the factory, leasing the space.
Cuomo’s commitment is a big bet on solar energy in general, a competitive, risky business, and on one company, SolarCity of California, in particular, that will operate out of the factory.
The state and SolarCity argue the potential benefits will be large, creating 5,000 jobs, 3,000 in western New York alone, when the factory opens in 2016. In addition, if the demand for solar power continues to grow and, because of its investment the solar industry, the state attracts additional companies related to the solar or the renewable power industry, the state, and SolarCity, could be well positioned to profit.
Project Involves Risks
The project comes with substantial risks, because it is wedded to the solar industry in general and to SolarCity, in particular. Neither the solar industry nor SolarCity have made a profit so far, rather they depend on government subsidies and tax credits for survival.
On October 25, the New York Times reported although SolarCity has a market capitalization of $3.8 billion, it has not turned an annual profit since going public in 2012. In addition, recently solar stock prices have fallen sharply due to low natural gas prices and ongoing concerns about the industry’s viability absent federal and state subsidies.
SolarCity, itself, has increasingly become a target of Wall Street short-sellers, traders who make money when a company’s stock falls in value. NASDAQ, reports roughly 45 percent of the company’s total public shares are held by short-sellers.
In August, dominant short-seller James S. Chanos announced his firm was concerned about SolarCity’s business model. In particular, its dependence on a federal tax credit for its success; the tax credit is scheduled to decrease to 10 percent from 30 percent for commercial customers in 2017 and be eliminated for homeowners.
Chanos points out, SolarCity customers tend to lease their systems, and pay the company a monthly fee. This, Chanos argues, is a problematic business strategy.
“You basically lease the panels from SolarCity, they put them on your house and they collect the lease payments,” Chanos said in an interview with CNBC. “So in effect, if you put on the panels, you have a second mortgage on your home because you hope it is an asset, but in many cases it turns into a liability.”
This leasing scheme has raised political and potential legal problems for SolarCity. In a series of articles, author Tori Richards has detailed practices resulting in SolarCity placing liens on people’s homes. This prompted U.S. Sen. Jeff Flake (R-AZ) to ask in hearings on the matter, “After entering into these long term agreements, a lot are in for a surprise when they realize they have to pay off a lien put on their house,” said Flake. “What role, if any, can or does DOE plan to play in ensuring these companies who access federal tax incentives in particular … aren’t misrepresenting what they are doing to their customers?”
SolarCity’s practices prompted the Arizona legislature to enact the nation’s most comprehensive transparency laws banning the practice of placing secret liens on homes.
The United States Congress has also taken notice of complaints about the roof-top solar industry’s business practices. Letters sent by 12 Republicans to the U.S. Federal Trade Commission and four Democrats to the Consumer Financial Protection Bureau asked these agencies to investigate concerns solar rooftop “leases are not offered in good faith or with accurate disclosures.” SolarCity’s business practices, in particular, were high on their lists of concerns.
High Risk, Questionable Reward
Despite the pending decline in the solar industry’s tax credits and subsidies and increasing legal scrutiny, Cuomo expanded the state’s commitment from an initial $225 million investment to $750 million and announced, contrary to previous statements, SolarCity would be the lone tenant for the state’s factory.
Initially, two tenants were identified for the factory Soraa, a California-based manufacturer of LED lighting; and Silevo, which makes solar panels. SolarCity subsequently bought Silevo. Soraa has been left trying to find space elsewhere.
Representatives of SolarCity say the company is poised to thrive regardless of what happens to federal tax credits as it has the lowest costs in the industry. Evidently, New York is banking on this claim being true.
The New York Times quotes Howard Zemsky, chief executive of Empire State Development, the government’s economic development agency, saying “If the solar industry were to go through hard times, and if there were to be consolidation, I think that typically benefits the larger players.” SolarCity is the largest.
Government watchdog groups are not as sanguine as company representatives and state boosters are concerning SolarCity’s prospects. “This is speculative stuff,” said E. J. McMahon, president of the Empire Center for Public Policy, to The Times. “This is not like opening the checkbook for Mercedes-Benz, a known entity with a known and tested product.”
“New York has a huge history of putting enormous amounts of money into a small basket,” The Times quotes Greg LeRoy, the executive director of Good Jobs First, a nonprofit that tracks government subsidies, as saying.
The basket has gotten smaller since Cuomo decided to make SolarCity the sole tenant of the state owned factory. The fear is, with SolarCity’s track record of losses year after year, when state and federal subsidies end, the company could fold, or, as other companies have done when state support has waned, pull up stakes and move to states or countries with lower cost structures and better government support.
Even if SolarCity becomes profitable, weathering the financial and political storms it faces, Empire’s McMahon notes, it’s far from clear New York’s gamble will ultimately result in a net benefit to state and city governments and taxpayers. After all, McMahon notes, New Yorkers are paying a high price for the jobs the state government’s investment has attracted, “We are essentially paying people to do things here,” he said to the Times.
H. Sterling Burnett, Ph.D., ([email protected]) is the managing editor of Environment & Climate News.