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The SolarCity Bubble

NEW YORK ( TheStreet) -- SolarCity (SCTY - Get Report) is going to be the most controversial play on the market today, after jumping 23% Friday because it said business is good.

The company didn't announce results, but "metrics." It said it installed 78 megawatts of power during the third quarter, and is on track to install 278 MW for the full year, and about 500 MW next year.

It didn't say how much money it would make from all this, and in fact it has only come near to breaking even once, in the fourth quarter of 2012.

But it's looking at a growth rate of 90% next year, and since these are solar leases, it continues to own the contracts, which should generate $1.74 billion in cash over their working lives. The debt load on those assets has been falling steadily, and at the end of June was just 18% of the assets' value.

In a solar lease, the installer finances and controls the panels, and the roof owner agrees to pay for power from those panels over a set period. The Solar Energy Industries Association has said 68% of California's residential projects were financed this way in the second quarter of 2013, up from 48% two years ago.

California is a hot market for solar because utility rates there are above the costs of panel power. A "solar parity map" produced by the Institute for Local Self Reliance indicates there will be more than 16,000 megawatts of production there this year from commercial and residential installations, 6.9% of the total market, with the state's utilities targeting 20% of their load from solar overall.

In a solar lease, tax credits and other incentives are captured by the installer, who also bears the installation's costs. Roof owners pay a set rate for their power from the installer, which is said to be below the rate being charged on the grid, and excess power is sold back to the power company. SolarCity is talking of selling battery systems to leaseholders so that they can capture some of this excess.

The chief challenge to the model SolarCity offers is simply financing an installation from a bank, with the roof owner then capturing incentives for himself and negotiating directly with the power company. That is expected to become more feasible as the cost of systems, now $20,000-$30,000 per roof, continues to fall.

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