From The Wall Street Journal:
Allysia Finley: How Government Is Making Solar Billionaires
SolarCity has never recorded a profit, but powered by subsidies, its stock price is $57 a share.
By Allysia Finley | Opinion | Oct. 21, 2013 7:09 p.m. ET
[wikichart align="right" ticker="SCTY" showannotations="true" livequote="true" rollingdate="1 year" width="300" height="245"]Welcome to SolarCity, the latest booming green company that has never recorded a profit. The startup’s stock price has soared by 600% since its IPO last December—it closed on Monday at $57 a share—and spiked after the company announced a couple of weeks ago that it expects business to grow by 70% to 90% next year. Yet the company, based in San Mateo, Calif., and specializing in deploying rooftop panels, ended the first six months this year $61 million in the red.
Ordinarily, that sort of number might disconcert investors. But SolarCity’s business model is powered by government subsidies, which also fueled the 500% stock run-up and turn to profit this year of the electric-car maker Tesla. Steering both companies is Elon Musk.
In addition to being the chairman of SolarCity and CEO of Tesla, Mr. Musk is the largest shareholder in both companies. The increase in their stock prices has raised his net worth by more than $5 billion over the past year.
SolarCity’s second-quarter filing with the Securities and Exchange Commission notes that the company’s “ability to provide solar energy systems to customers on an economically viable basis depends on our ability to finance these systems with fund investors who require particular tax and other benefits” (emphasis added).
The company’s base is a 30% federal tax credit that accrues to investors who provide upfront financing for the rooftop panels that SolarCity installs for customers at no charge. Customers “lease” the panels from SolarCity by paying for the solar power they generate, which is priced below their utility’s retail rate.
Much more at the link, which I encourage you to read, because it details the various financial twists and turns Solar City takes to seem profitable, twists and turns which exist only due to a variety of government subsidies and tax breaks. Unstated, but implied, is the clear and obvious fact: Solar City, like the other so-called green energy companies, would be a complete financial failure were it not being propped up by he government.
[wikichart align="left" ticker="TSLA" showannotations="true" livequote="true" rollingdate="5 years" width="300" height="245"]The JOURNAL article doesn’t really elaborate on Elon Musk or Tesla, the assumption being that JOURNAL readers are already well informed on them. But Mr Musk has made his fortune riding on the back of government subsidies. Bloomberg BusinessWeek published an almost fawning article about Tesla last June, but recent stories have the stock falling. Tesla produces a well-received electric car, but it requires substantial government incentives to get people to buy the things. Given the prices of the Tesla models,1 they are available only to very well-to-do buyers. The federal government is, in effect, taking the tax dollars of low-and-middle-income taxpayers to subsidize luxury automobiles for wealthier people. How is that right?
Of course, Mr Musk knew that all along: his business model has been to make his profits on the margins provided by government subsidies, and has a net worth of between $6.7 billion and $7.7 billion, probably what you’d expect from a large Obama donor, though it appears that being an Obama donor hasn’t kept the Infernal Revenue Service from having a few questions.
The Internal Revenue Service is auditing SolarCity, the SEC filings reveal, and at the same time the Treasury Department’s inspector general is investigating the company. The question at hand: Did President Obama’s Treasury Department inappropriately give stimulus money to Musk’s company.
Obama’s stimulus transformed a long-standing tax credit for renewable energy investment into a direct grant from Treasury, worth 30 percent of a company’s investment in a renewable project. Musk’s company has applied for approximately $325 million in these stimulus grants, according to the SEC filing.
Treasury found that SolarCity repeatedly overstated the value of its investments, the SEC filings indicate. In those cases, Treasury awarded smaller grants than SolarCity had tried to claim. Now the department’s IG and the IRS are doing a broader audit of the projects for which SolarCity and other large solar companies got stimulus cash. Investigators want to know if the companies regularly overstated the value of their investments and thus got overly generous taxpayer grants.
While no government body has accused SolarCity of wrongdoing, the company disclosed: “[I]f at the conclusion of the investigation the Inspector General concludes that misrepresentations were made, the Department of Justice could decide to bring a civil action to recover amounts it believes were improperly paid to us.”
The Obama administration’s possible mismanagement of the grant program is one issue here. Musk’s intimate ties to politics are another.
Musk is the paradigmatic political entrepreneur, launching businesses that seek to capitalize on government favors and lobbying clout rather than provide goods or services that consumers demand.
Musk is CEO of and the biggest investor in Tesla Motors, an electric car company that depends on stimulus money and other subsidies. He also founded Space Exploration Technologies, or SpaceX, whose primary customer is the federal government.
Musk has personally given more than $100,000 to Obama’s re-election campaign, including two gifts of more than $30,000 each to the Obama Victory Fund, which divides the money between the maximum allowable donations to the Democratic National Committee and the maximum to the Obama campaign. (Musk has also given generously to Republicans.)
Well, of course he has! When your business model is to profit from government subsidies, the only sensible thing to do is to give handsomely to government officials. Mr Musk knows how the game is played.
It is perfectly legal to give money to political candidates — campaign contributions, not bribes, you understand — but the real problem is that people like Mr Tesla do so because of government policies which make their companies and investments profitable. If the government were not giving tax incentives to Mr Musk’s customers and direct subsidies to his companies, if his companies were forced to compete in the marketplace on the same basis as other automobile and energy companies, Mr Musk would (probably) not be giving such large sums — and “bundling” more donors — to candidates, and his companies would (probably) have failed.
Somehow, your Editor, a working-class taxpayer, isn’t particularly thrilled with the idea than my tax dollars are being taken to make someone like Mr Musk a billionaire.