NEW YORK (The Deal) -- San Mateo, Calif.-based SolarCity , a solar-panel installer, announced last week that it had created a new investment fund to finance $750 million in residential solar projects, with $300 million coming from Google . The move is the latest example of how rapidly distributed generation, or DG, is spreading. The Solar Energy Industries Association defines DG as electricity produced at or near the point where it is used. Distributed solar energy, the most common form of DG, can be located on rooftops or on the ground, and is typically connected to the local utility distribution grid. The new fund is the largest of its kind ever created for residential solar power. It covers installation, solar panels and other equipment. The homeowner simply pays SolarCity for the electricity the solar panels produce, or monthly rent for the panels in the case of a lease. Google's investment is in the form of tax equity, with SolarCity providing the remaining $450 million, a large portion of which is financed by debt, according to a spokeswoman at Google. Developers bring in tax equity investors, usually financial institutions with large tax liabilities, to take advantage of all the depreciation and tax credit incentives provided by the government in exchange for specified rate of return. The investment marks the second time Google has teamed up with Solar City. In June 2011, the two companies announced the creation of a $280 million fund, also meant to finance residential solar projects. While investment banks are the typical investors in these kinds of funds, utilities have been slow to respond to consumer demand for solar. Google clearly recognizes the potential. Residential solar installations rose 60% in 2013 and hit an annualized installation rate of over 1,000 megawatts in 2014, according to Fitch Ratings. The agency projected a 40% growth rate in residential installations in 2014, and it expects that rate to be about 30% in 2015 and 2016. In addition, the cost of solar photovoltaic technology has come down dramatically. The average price of a completed system has dropped by 33% since the beginning of 2011, according to the SEIA. While manufacturing costs have dropped significantly, the upfront costs of installing a solar system remain too high for most consumers. So many are turning to third-party owners, such as SolarCity, to foot that bill and put a long-term lease in place, one that typically spans about 20 years. Must Read: 10 IPOs for 2015 – Because Silicon Valley Needs More Billionaires Even with the federal investment tax credit declining from 30% to 10% in 2016, Glen Grabelsky, a managing director at Fitch, said in November that improved panel efficiency and lower installation costs would continue to drive solar sales. Nat Kreamer, president and CEO of San Francisco-based Clean Power Finance and chairman of SEIA, said at the 28th Annual Power and Gas M&A Symposium late last month that customers typically save about 20% on their utilities bills when they go solar so it adds real value to them. And the utilities industry can't seem to keep up with all of the change, making penetration much easier for solar companies. "There is competitive muscle that is missing from the (electric utilities) sector," Kreamer said. At the conference, Thomas Flaherty, a senior partner at consulting firm Strategy&, estimated that utilities are about "three times slower" when it comes to adopting technology than other industries. "It's just really hard for this industry to adapt quickly as they are very slow to move on technology." However, solar is gaining momentum among customers, creating a challenge for traditional generators, he said. "We are well beyond the time when just millionaires were putting solar on their rooftops," said J. Radford Small, a managing director at Goldman Sachs . "People are realizing that there are immediate cost savings so they are going lower now for price reasons." Solar companies cannot completely rest on their laurels as utilities begin to respond. "We've had a captive audience for a long time now, but that is changing" said Meghan Grabel, a general manager at Phoenix-based Arizona Public Service, the principal subsidiary of Pinnacle West Capital . "I think at least within my utility, our culture is changing and we are becoming much more forward-looking and thinking about how we should partner with third-party providers." That said, expect utilities to continue fighting an uphill battle, creating an opportunity that Google executives undoubtedly understand, as evidenced by the SolarCity investment. Kraemer put it best: "Fundamentally, entrepreneurs don't think about how they'll let someone else determine their economic power. (Utilities) are competing with a tenacious set of solar entrepreneurs and we're not a small group anymore."Must Read: 16 Rock-Solid Dividend Stocks With 50 Years of Increasing Dividends and Market-Beating Performance Read more from:
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