Tesla’s decision to buy SolarCity is unpopular, to say the least.
Ever since the proposed merger was announced, analysts have referred to it as a bailout. The general criticism surrounding the deal has largely stemmed from the following:
As part of the merger, which shareholders will vote on November 17, Tesla will acquire SolarCity’s $3+ billion in debt. SolarCity is burning through cash, and its shares have plummeted more than 50% since the beginning of the year. Musk is also the largest shareholder in both companies, and has personal ties with it as the cousin of SolarCity CEO Lyndon Rive.
All those moving parts have led many to wonder why Tesla, which is about to embark on a huge undertaking with Model 3 production, has decided to enter the fledgling solar industry.
But Tesla’s move into solar actually makes more sense than meets the eye, and it certainly isn’t unexpected.
A long time coming
While it would be naive to assume Musk’s bid for SolarCity is solely part of his vision to save planet Earth, it’s also foolish to say the entire deal is predicated on propping up SolarCity.
In fact, Musk has been planning on getting into the solar business for a long time. As Musk wrote in his original “Master Plan” in 2006, “the overarching purpose of Tesla Motors (and the reason I am funding the company) is to help expedite the move from a mine-and-burn hydrocarbon economy towards a solar electric economy, which I believe to be the primary, but not exclusive, sustainable solution.”
Musk also said that as part of that solar plan, Tesla would be “co-marketing sustainable energy products from other companies along with the car” in an effort to “provide zero emission electric power generation options.”
Tesla launching its at-home battery option, the Powerwall, in 2015 is a testament to Musk’s commitment to solar.
Betting big on batteries
Musk’s argument that at-home batteries are a necessary component of solar installation is a solid one.
At-home batteries allow users to store solar energy and use it at night. They also draw electricity from the utility grid when rates are low. The fact that the two processes don’t already go hand-in-hand seems outdated.
“Solar and storage are at their best when they’re combined,” Tesla wrote in an August 1 blog post. “As one company, Tesla (storage) and SolarCity (solar) can create fully integrated residential, commercial and grid-scale products that improve the way that energy is generated, stored and consumed.”
This is why Tesla is betting big on batteries and investing billions in getting its giant Gigafactory up and running. The Gigafactory, of course, is where Tesla will build the batteries for its cars, the Powerwall, and its commercial battery option, the Powerpack.
Even though it’s still early, Tesla’s battery bet seems to be working.
The company received 38,000 pre-orders for the Powerwall, selling out through the first half of 2016. And while we’ll have to wait and see how the new and improved Powerwall 2.0 fares, it appears that Tesla’s commercial business with the Powerpack is also gaining momentum.
Musk said in 2015 that Tesla expects “80% if not 90% of all the stationary storage we sell will be the Powerpack, not the Powerwall.”
Tesla has struck deals with several utilities for its Powerpack.
Most recently, Tesla was selected to provide 20 MW/80 MWh Powerpack system at the Southern California Edison Mira Loma substation, making it the largest lithium ion battery storage project in the world. The Powerpacks will charge by drawing energy from the grid during off-peak hours.
But as a better indicator of how the Powerpack fits into solar installation, SolarCity is using Tesla’s 52 MWh Powerpack to bring 20 years of power to the Hawaiian island Kaua’i. SolarCity built a 12 MW solar farm to help supply the power.
It’s promising that Tesla and SolarCity have been able to collaborate with utilities at a time where electric companies are doing their best to slow down solar adoption. Electric companies in Florida have spent $29.3 million on political campaigns to quell solar adoption, the Miami Herald reported. Similar wars have been waged by utility companies from Colorado to Nevada.
That’s not to say the path ahead won’t be rocky for a new Tesla-SolarCity as it traditionally has be for solar companies. But initial adoption of the Powerpack shouldn’t be written off.
The solar roof
There are still a lot of questions that need to be answered for Musk’s new solar roof product, which he unveiled last week. Musk still hasn’t gotten into the weeds about the installation process for it or even its price. SolarCity CEO Lyndon Rive has said they are aiming to get to a price point of 40 cents a Watt for its cells, which would be in line with the competition.
But it’s clear that Musk is trying to take the same approach with the solar roof as he did with the Tesla Roadster. Musk purposefully made sure Tesla’s first electric car was an undeniably sexy sport car to generate enthusiasm at a time where EVs were seen as anything but sexy.
Roof tiles inherently aren’t as sexy as a car, but Musk is aiming to compete on an aesthetic level.
“First of all, I’ve never seen a solar roof that I would actually want… they’re weird,” Musk said on a conference call Tuesday night. “Every one of them that I’ve seen is worse than a normal roof, without exception. So unless you’re going to beat a roof on aesthetics, why bother?”
Of course, we have yet to see what kind of demand there is for a solar roof. But by offering a new line of product offerings for solar, Musk is trying to position Tesla as a disrupter for the solar industry in the same way it was for electric cars.
There were critics for that strategy then, as there are now, but if anyone is going to make solar sexy enough to trigger greater adoption, it’s Musk.
And at the very least, solar adoption is poised to grow. Total U.S. installations are expected to reach 13.1 gigawatts by the end of 2018, more than double the amount now, according to Bloomberg New Energy Finance.
The Buffalo factory
What Musk’s grand vision really comes down to is the Buffalo, New York factory that will produce the solar cells.
Tesla is notorious for having production issues, most notably with the Model X, which suffered delays that pushed back deliveries to the second half of 2016, three years after it was originally promised.
Tesla’s auto factory has the capacity to build 500,000 vehicles a year, but currently only produces a fraction of that. Tesla is maintaining its full-year guidance of delivering 80,000 to 90,000 vehicles by the end of this year.
Of course, just because Tesla has had production issues with its cars doesn’t mean the same will be true for its solar cell production. But it’s more that Musk has a of history of over promising and under delivering, and construction on the Buffalo factory has already had its hiccups.
The Buffalo plant Tesla has chosen was originally meant to be a production facility for SolarCity. SolarCity originally wanted the Buffalo plant to be up and running this year, but the plant’s production timeline was delayed until 2017, the Buffalo News reported in August.
The Wall Street Journal reported that construction on the Buffalo plant is slated for completion in November, with production beginning at the end of June. Shareholders will vote on the merger November 17, and if all goes according to plan it will be important to hear how Musk plans to roll out its new solar products if the factory won’t kick in for another six months.
At the very least, Tesla has time to generate cash before it has to deal with SolarCity’s debt, and SolarCity has made moves to improve cash flow going into 2017.
The company has conventionally leased panels, but is now selling more panels to generate cash. SolarCity introduced a loan program in June to incentivise purchasing as part of that change in strategy, and nearly one-third of SolarCity’s residential bookings in September were purchases.
Tesla certainly has a big undertaking ahead, but there are a lot of moving parts working in Tesla’s favour. Either way when it comes to Tesla and Musk, investors need to be willing to play the long game.
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