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The leading residential solar installer in the U.S. SolarCity Corp. (SCTY - Snapshot Report) along with privately held SunRun Inc. has filed a lawsuit against Arizona Department of Revenue as the state decided to impose property tax over leased solar panels. This move by the state might erode customers’ savings from solar and eventually restrain solar power growth in Arizona.

SolarCity focuses on installing and financing solar panels for homes and businesses. The company allows residential customers to pay back for their solar installations on a monthly basis over an extended period of 20 years. This not only helps customers to evade bulky upfront payments, but also lends top-line visibility to the company. The monthly payments are generally less than a homeowner’s monthly power bill.

Recently, the Arizona Revenue Department started distributing valuation notices to SolarCity, SunRun as well as other companies involved in the business of solar leases to determine the value of all the property for taxes that will be due in 2015.

The solar companies involved in leasing panels argued that these panels are designed for generating solar power mainly for on-site consumption and they are not involved in the business of generating, transmitting or distributing electricity to customers. Thus, these products should come under the law exempting rooftop solar from tax valuations. However, the state department seems to view this differently, contending that leased rooftop solar panels were like small power plants providing electricity to homeowners or businesses. Hence, these rooftop solar installations will not be exempted from property taxes. The department analyzed the leased solar panels as renewable energy equipment.

The downstream solar company – SolarCity – has been playing on its strength, providing renewable power lower than the grid price to residential and commercial markets in the U.S. SolarCity is well supported in its endeavors by a booming U.S. solar market. The company sees installations climbing to as much as 900 MW to 1 GW by 2015. It also expects a million rooftop solar customers by 2018.

Residential solar in the U.S. is now a sizzling story. This market even outpaced the commercial and utility segments last year and has already started to attract more conventional electric power companies that produce power mostly from coal and natural gas. If the property tax is imposed on these companies, customers would eventually lose their savings that they enjoy on a monthly basis. This might impact the uptake of solar power in the state of Arizona. We note that Arizona secured the second spot after California in new installations last year, thanks to its hot sun-belt climate.

Backed by Tesla Motors Inc. (TSLA - Analyst Report) founder Elon Musk, SolarCity presently carries a Zacks Rank #4 (Sell). Other better-ranked players in the sector include JA Solar Holding Co. Ltd. (JASO - Analyst Report) and Yingli Green Energy Holding Co. Ltd. (YGE - Snapshot Report). While JA Solar sports a Zacks Rank #1 (Strong Buy), Yingli Green carries a Zacks Rank #2 (Buy).

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