A Solar Power Success Story

Solarcity's innovative way of selling power could disrupt the utility industry

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Even if Lyndon Rive weren't related to Musk--their mothers are twin sisters--entrepreneurship would have been in his blood. The South African native started his first business at 17, setting up a distribution network for a health-products company. With his proceeds, Rive moved to California, where he and Peter launched a business-software startup called Everdream in 1999. It had 280 employees at its height and was eventually sold to PC giant Dell in 2007 for $120 million.

Despite his business success, Rive was unable to get a green card while running Everdream and worried about deportation. His wife, also South African, eventually secured one thanks to her skill in underwater hockey. Both Rive and his wife, now American citizens, ended up playing for the U.S. national underwater-hockey team, Rive's sole passion outside his business. That impressed John Fisher, the managing director of venture-capital firm Draper Fisher Jurvetson and an early investor in Everdream and SolarCity. "He was wily, smart, highly energetic and very savvy," he says.

As Everdream wound down, Rive began looking to start a new business. It was Musk--in an RV on the way to the Burning Man festival in 2004--who nudged him toward solar power. SolarCity's innovation wasn't technological but financial. Instead of selling solar systems outright, which can cost $20,000 or more, SolarCity would install them for free and then sell the electricity the panels generated to customers at a fixed rate over the life of a 20-year contract.

Given that utility rates are expected to rise, customers taking advantage of so-called power-purchase-agreement contracts are able to avoid the prohibitive up-front cost of solar and save money over the life of their contract. SolarCity also offered solar leases, not unlike car leases, in which customers pay a fixed monthly price for their systems. "With a lease, you immediately start saving, and from Day One you pay less for electricity than you were before," says Shayle Kann, vice president for research at Greentech Media. The model--now used by most solar installers--opened a huge new market.

Of course, subsidies help. The federal government offers a 30% tax credit on solar systems, and states provide additional incentives. Some states also have net-metering laws, which require utilities to pay solar-system owners for any excess electricity they feed back into the grid. That's what has some utilities concerned about distributed solar. If solar can keep growing, a significant percentage of utility customers will begin producing more and more of their own energy--and paying less to utilities. Rhone Resch, the president of the Solar Energy Industries Association, argues that if utilities don't evolve, SolarCity will become a threat.

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