SolarCity Corp (NASDAQ:SCTY) and its new partner, Tesla Motors Inc (NASDAQ:TSLA), could face troubling times in the near-future, suggests a new study by researchers at the University of Chicago. With low oil and natural gas prices, solar alternatives may not be as attractive to consumers. This is especially true if solar technology doesn’t become cheaper in the near-term.
SolarCity Corp Needs Natural Gas Prices to Spike
Batteries for electric vehicles cost about $325 per kWh. The cost of solar power is $150/MWh. U.S. Crude prices are trading at above $40 a barrel. Natural gas prices are at or near record lows. If you’re a consumer with a limited budget, which ones would you pick? Naturally the more affordable options.
This is the conclusion that researchers at the University of Chicago made. According to a study by the researchers, oil prices would need to spike 1,000 percent in order for electric cars to become cheaper than gas-fueled vehicles. At the same time, natural gas prices would also need to spike a considerable sum for solar power to be cheaper than natural gas.
Although the cost of solar power technology has considerably decreased, it still remains too expensive for the average homeowner. Moreover, the developments in technology to create large currents of natural gas-fired power are also helping stave off the adoption of solar power.
Thomas Covert, an assistant professor of microeconomics at the University of Chicago’s Booth School of Business, said in a statement that we shouldn’t end our technological capabilities from extracting fossil fuels. He added that with tech advancements, the world will be flooded with fossil fuels for decades or centuries to come.
And this would spell trouble for SolarCity and other solar firms. Right now, state governments are more or less subsidizing solar initiatives. This is why solar power has become a contentious issue in states like Nevada and Maine because solar homes are being subsidized by non-solar homes.
As history has shown, solar technology will cost less in the future. In 2009, solar power cost nearly $500 per mWh. Today, the cost has been slashed by more than half. Until then, however, the researchers suggest that governments need to lift the price of fossil fuels to allow solar to compete.
“While alternative sources of energy and energy storage technologies have vastly improved, lowering costs, they still have a long way to go before they are cost competitive with fossil fuels,” said Chris Knittel, co-author of the study and director of the Center for Energy and Environmental Policy Research, in a statement.
“To change this, governments should put a price on carbon emissions and start injecting more money towards the basic R&D that is critical to making these technologies more cost competitive.”
Carbon taxes have become very popular for governments run by both sides of the aisle. Last month, the Democratic National Committee (DNC) added carbon taxes to its platform for the 2016 general election.
SolarCity Corp: We Have a Problem
The merger between Tesla and SolarCity proved one thing: SolarCity would benefit more from the deal than Tesla would. This has been the general consensus, and perhaps is one of the many reasons Wall Street is adamant in opposing the move.
Prior to the news of the merger, SolarCity was facing financial difficulties. With lower energy prices, declining sales and a more competitive market, SolarCity leaders have made their concerns public. And some of the leading investors on Wall Street have aired their frustrations, too.
For instance, Hedge fund manager Jim Chanos told CNBC in May that he sees troubling times ahead for SolarCity. The reason he decided to short SolarCity is because it loses money on each installation. He referred to it as a “subprime” finance company. Chanos added that the solar firm’s clients will be disappointed with their existing leases because solar prices will come down.
SolarCity posted negative cash from operating activities of $790 million in 2015. It also recently reported slower-than-expected growth. Year-to-date, its shares have tumbled 51 percent to just under $25.
The solar firm has been falling behind the latest trend in solar power, too. Over the last couple of years, with solar technology prices coming down, new players have come into the market. In the market today, consumers are being offered loans to buy their solar panels by banks and smaller firms. This has contributed to SolarCity’s diminishing market share of just more than 50 percent.
SolarCity recently adapted to this trend by launching a new program.
With the Tesla merger, SolarCity will no longer be dying a slow death. It will stay around a lot longer than initially anticipated, particularly if more state governments adopt and subsidize solar power.