SolarCity (SCTY) made headlines yesterday in its potential merger with Tesla Motors (TSLA). The company focuses on applications for solar energy and installation.The company’s EBITDA margins are very low (under -100%). And while growth is strong and should continue in the 20%-30% range for a while so long as it remains solvent, it means nothing if costs can’t be cut in tandem.While I believe Musk’s unique financing strategy for Solar City is sustainable so long as federal and/or state alternative rebates are available, the company suffers from extreme over-leveraging with a cash burn rate that makes debt repayment a viable concern. With my own projections, naturally SCTY’s capital structure is optimized at 0% (no debt), but comes up as a worthless company either way on its own.Regarding its business model, sheer amount of capital intensity to solar vending and installation provides little help, nor is it a model that provides much in the way of competitive insularity. SCTY, outside of acting as a solar vendor, also provides solar installation financing for consumers. Investment tax credits and lower energy costs incentivize individuals to install solar panels on the rooftops of their homes, while SCTY serves as the specialty lender. Nonetheless, SCTY is stuck in a catch-22 regarding its financing rates. Should the company lower rates, it would increase its value-add to consumers (i.e., saves them more money) but directly cuts down on their profits. Should the company raise rates, consumers have less incentive to install solar panels and would consequently hurt SCTY’s value-add. Traditional financial institutions can simply pass on higher rates to consumers if and when rates rise again. However, that is not a viable strategy for SCTY, given it would directly strain whatever ROI is available for their customers. It’s also not a guarantee that solar panels will have value in the future. The ubiquity of solar energy makes its merits seemingly obvious, but the technology still remains costlier than the energy that can be derived from natural gas power plants. Moreover, given solar energy fluctuates throughout the day, it must be supported by mid-merit plants that work to buffer against these intra-day shifts.