June 23, 2016

A few days ago Tesla offered to acquire Solar City. There are many theories about why: combined, Tesla and SolarCity can meet their world-saving, sustainability goals; Elon Musk is wrangling finances to prop up his various business interests; by mingling their tax and carbon credit markets, the two companies can pull in more cash. The theories range from practical to deeply conspiratorial, but all of them fall short of the real question: how will the acquisition expand the Musk-Empire in the rapidly shifting alternative energy market?

In April, Tesla wowed the world when approximately  400,000 people each invested $1000 in reservations for the Model 3 electric vehicle. If every reservation results in a purchase, then Tesla has already booked $14 billion in the most successful product launch ever. But don’t hold your breath for that new car smell! Assuming no delays, most investors will not receive their car for 5 years which is an optimistic timeline given the fact that Tesla has never delivered a car on schedule (the Model S was 3 years late.)

The production timeline for the Model 3 is tied to the construction of the Gigafactory which is ahead of schedule with power cell production starting as early as November. Without the Model 3 ready, where will all these batteries go? Not to the residential market which is struggling. In March, Tesla terminated sales of their 10 kWh Power Wall since other manufacturers offer a better product for half the price. Further, dissatisfied residential customers have complained that the electronics for the 7 kWh are too noisy for a residential setting. Why purchase a $6,500 battery to save $31/month when it keeps you up at night? Until there are drastic price reductions in batteries, the residential market will stay on the fringe.

Tesla’s battery market is not limited to residential. In fact, they are one of the primary suppliers for the commercial/industrial market.  Southern California Edison awarded all of the behind-the-meter battery storage to two Tesla-supplied storage companies: AMS and STEM . The market continues to grow – EnerNOC uses Tesla batteries, and the  CPUC has approved an expedited procurement of additional battery storage to avoid blackouts in Southern California this summer.

This is where the acquisition of SolarCity starts to make a lot of sense.  SolarCity is cash-strapped and struggling. Shares are down, losses are growing and the market is not cooperating. Recruiting commercial solar customers continues to be an expensive process, and SolarCity eliminated over 550 jobs in Nevada due to unfavorable regulatory developments. SolarCity needs work for their design and construction teams. If Tesla supplies the batteries and SolarCity provides the design, installation labor and sales, the profit and growing market stays with the Musk companies. The merger gets more attractive when you know that solar powered batteries are entitled to the 30% Federal Investment Tax. By combining solar and batteries, SolarCity will have an edge on the commercial battery and solar market, the Gigafactory will have a market for all the batteries that would have gone into their likely-to-be-delayed Model 3, and Tesla can help corner the energy storage industry without ramping up its field service personnel.

And what about those customers who are looking for a fully integrated residential energy solution? Pairing electric vehicles with the smart grid is hardly a new idea.  Back in 2011, Tendril looked into smart plugs for EVs and in 2012, announced a partnership with BMW. SolarCity/Tesla could do the same thing and transfer all the value of a residential battery installation to the electric vehicles customers with no cost of customer acquisition.

Smart grid, distributed generation, batteries, electric vehicles are markets driven by tax credits, incentives, regulatory policies and lobbying power. If SolarCity accepts Tesla proposition, then we can be certain that there will be a major shake-up in the commercial battery, residential solar, and electric vehicle markets. Will Tesla and SolarCity continue to grab market share without making a profit? Will other companies be able to compete, or will there be a consolidation in the commercial battery market? Only time will tell. Come back to our blog for more information!

 

Disclaimer: this post is entirely our opinion and is based exclusively on public information. Throughout the post we have cited articles with more background information on each of the facts above.

 

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