Here Comes the Sun

The Tipping Point

Utility Retail Electricity Price

Solar Retail Electricity Price

Time

Rate per kWh

A Brief History

• European-led 2007-2008 boom became a Chinese overcapacity-driven bust

• >65 companies went bankrupt including Suntech and Solyndra

• Polysilicon prices collapsed from $450/kg to $20/kg – down 96%

• Industry tainted

Module Prices Decline 80% in Five Years

Cost of Solar vs. Hydrocarbons

Source: Thinkprogress.org

Solar Industry Recovery

• Grid Parity in Many States & Countries• Net Metering• Conversion Efficiency Increasing• Pricing Stabilized; Excess Supply

Reduced• Anti-dumping Resolved in Europe and US• Improved Solar Company Balance Sheets

Module Prices & Gross Margins

Source: NPD Solarbuzz

Global Demand Rising

Europe• High electricity price drives demand • Demand driven by unsubsidized market• Germany: Unsubsidized solar today is

cheaper than grid electricity• Installation rate in Spain has been so high

that tax has been implemented

China• Largest global solar market opportunity• 20% growth in 2014• Pollution in Beijing: 10x World Health

Organization recommended maximum

China• Target: 35 GW by 2015

- Potential for 200 GW by 2020• Policies:

- August 2013: NDRC introduced subsidies for solar power plants- October 2013: 50% immediate refund for solar VAT, VAT declines from 17% to 8.5%- Current feed-in tariff is fully funded through tax

Japan

• Power constrained island is the 2nd largest market opportunity

• Need for diversified generation following Fukushima disaster

• All nuclear power to be phased out• 2012: Solar subsidy of US $0.39/Kwh

Middle East/Africa• Saudi Arabia: Installing 6 GW of solar

capacity by 2020; likely to be exceeded- To install 16 GW by 2032

• Dubai: Target 5% of energy from solar by 2030

• Qatar: Goal is 20% of energy from renewables by 2024

• South Africa: 20 year feed-in tariff

Brazil• Large dependence on hydro creates

drought risk• December 2013 A-5 Auction: 3.6 GW of

PV• 2016 project completion required

Chile• At grid parity today with no incentives• Most electricity growth is tied to new mine

activity, particularly in copper• September 2013: New renewable energy

standard requiring utilities to get 20% of their energy from renewables

Shell Year 2100 Forecast

The United States• 30% Investment Tax Credit• 5 year accelerated depreciation recovery

of net asset costs• State “up-front” rebates• Time-of-use rates = higher daylight rates

encourage PV• Renewable Portfolio Standards in 29

states

The United States

Average Retail Price of Electricity to End Use CustomerCAGR 3.1%

7.00

7.50

8.00

8.50

9.00

9.50

10.00

10.50

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Average Retail Price of Electricity to End Use Customer

2013

Source: EIA

Financial Innovation

• Tax equity financing: U.S. Bancorp, Goldman Sachs, Google

• Project finance lending• Leasing• Securitization• Yield Co’s• Bank loans

SolarCity• $3.8b market cap• Average volume 7m shares• Shares outstanding 88m• Float 34m• 27% of float is short

• First mover advantage in 1% solar penetrated market in the US

• Business model: Instead of buying, customers lease equipment

• Customers lock in cheap electricity at no upfront cost

• LT contract provides a hedge to the customer against future price increases for utility electricity

• Structure long term leases• Create 20 year cash flow stream• Constant CF reinvestment into new

streams • First mover advantage in solar

securitization • Barrier to entry: Scale needed for

securitization

• Scale allows economies in equipment purchasing

• Equipment agnostic = can continually source optimal technology

• Strong brand name an asset in retail market

ValuationYear 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2034 2035 2036 2037 2038 2039 2040 2041

CF (57) 200 300 510 408 449 494 538 587 628 672 1,238 1,263 1,288 1,314 1,340 1,367 1,394 1,422 Y/Y Grth 50% 70% -20% 10% 10% 9% 9% 7% 7% 2% 2% 2% 2% 2% 2% 2% 2%PV (57) 189 267 428 323 335 348 358 368 371 375 115 104 95 87 79 72 65 60

Stream 1 Stream 220 Year Contract Discount Rate 6% 10 Year Contract Renewal Discount Rate 12%

DCF Assumptions:No terminal valueAcceleration into ITC step-down in 2017

Stream 1 PV 7,138 Stream 2 PV 780 Total PV 7,917 Shares 99 Target 79.97$ Today's Price 50.00$

Upside 60%

Future• International expansion• REIT or MLP structures possible• Lower cost of capital will drive penetration

further• Hidden potential: Investment in battery

storage can revolutionize industry and grid dependence