The SolarCity deal isn’t only about putting panels on your house.
Solar Problem No. 1: It’s too complicated
Consider the average homeowner who might be vaguely interested in adding rooftop solar. Where does the process start?
Adding solar requires customers to sort through competing technologies and complex financing schemes with no household names to turn to. And then there’s the aesthetic impediment: Solar panels alter the look and value of one’s most important personal asset—the home. It’s a big leap of faith, even in regions where adding solar is an economic no-brainer.
This problem has dogged solar companies for years. Vivint Inc. has legions of door-to-door salesmen, while others have deployed mailers, robocalls, sports sponsorships, and internet search ads. None of it resonates all that much.
Musk, who turned 45 on Tuesday, wants to change this daunting transaction in the same way the Apple Store changed the way we buy consumer electronics. Fifteen years ago, Apple Computer Inc. (as it was known then) faced problems similar to those hobbling solar today. Buying a computer was a big investment: They were complicated, the benefits uncertain, and the choices undifferentiated. Sound familiar?
With the opening of the first Apple Stores, electronics shopping turned from exasperating to joyful. Consumers got to touch and play with the products and ask questions from no-pressure salespeople. Early critics said the stores had too few products and would never make money, but before long the stores themselves became a destination.
Tesla showrooms are cast from the same mold. At the new Tesla outpost in Brooklyn’s Red Hook neighborhood, customers sip free espresso and chat about cars. People go there to learn about electric vehicles often for the first time, and much of the experience is focused on education. Central to all of the showrooms is a stripped-down aluminum Tesla chassis, so customers can get a feel for how the battery and electric motors work. You can even take a test drive with the kids in a tricked-out $130,000 Model X SUV, and no one will ever ask if you want to buy a car, let alone haggle over prices and options if you do.
This could be home to the Tesla Solar experience.
For solar companies, one of the biggest costs is making that initial connection. For every dollar SolarCity spends on marketing, it installs only an additional half-watt of solar power, according to Bloomberg New Energy Finance (BNEF). To put that in perspective, a typical rooftop solar system in the U.S. is rated at more than 5,000 watts.
This is the biggest reason rooftop solar costs almost twice as much at SolarCity ($3.20 per watt) as similar systems in Western Europe or Australia ($1.70 per watt), according to BNEF. Most people in the U.S. just ignore the expensive marketing anyway: A BNEF survey found that 40 percent of buyers were referred by a friend or family, and 28 percent instigated the purchase themselves.
Other retail companies have experimented with solar partnerships—including Home Depot Inc. and Ikea—but the strategy never really took off for these retail megastores. The solar industry is a product in need of an Apple Store, and Tesla happens to have hundreds of showrooms with very few products to sell. Critics of the SolarCity deal brushed aside the so-called synergy of selling cars and solar panels in the same location, but that may miss the point. Is a customer likely to walk in and buy both at the same time? No more likely than an Apple Store customer will buy an iPhone and a desktop Mac simultaneously.
Instead, what ties the cars-plus-solar Tesla store together is an implicit guarantee of good customer service and sophisticated technology that’s easy to use. That’s branding that can never quite come together so long as Tesla and SolarCity remain separate companies. But together, it just might expand the entire market for solar. A Tesla showroom finally answers that question asked by millions of homeowners: Where do I start?
Solar Problem No. 2: The sun goes down
Here’s where things get interesting. Tesla isn’t just a car company looking to buy a solar company. It’s also a battery company that wants to link its two biggest markets: energy supply (solar) with energy demand (electric cars). Cheap and efficient batteries are what make Tesla cars possible, and they have the potential to change the economics of solar, too.
The solar-plus-battery bundle hasn’t really caught on yet. SolarCity’s total bundled sales thus far number in just the hundreds. But that’s because the batteries are still too expensive, and because a government policy known as net metering makes it more profitable to sell solar power back to the grid. Both of these obstacles are about to be flattened. Musk is betting that, in the next five years, the price of solar bundled with batteries will cost less than electricity from the power company.
A Tesla Powerwall battery currently costs about $3,000 for a 6.4-kilowatt-hour (kWh) battery, not including the considerable costs of the power inverter and installation. That’s a lot of money for a little bit of electricity. But Tesla plans to announce the first production of battery cells from its massive “Gigafactory” in Nevada later this summer: When fully up and running, it will produce more battery capacity than the entire global market for lithium ion batteries made last year. The scale is crucial for the rollout of Tesla’s mass-market Model 3 electric car, due in 2017.
When this battery factory is finished, it will have the largest footprint of any building in the world.
By 2020, Tesla is aiming to bring the cost of battery packs down to about $100 per kWh—from an industry average of $1,000 in 20101—according to RBC Capital Markets analyst Joseph Spak. At that price, a Tesla Powerwall battery could cost as little as $640 to make. With an integrated Tesla Solar company, the additional costs of bundling a battery with a $25,000 rooftop solar system would be minimal. At that point, it almost makes sense for Tesla to install batteries as standard with every new solar project.
Net metering rules, which require electric utilities to buy back rooftop solar from customers at retail rates, are the biggest U.S. subsidy for solar power. But as solar power spreads, the policy will begin to destabilize grid economics. Several states have reversed their rules already, most notably Nevada, where the abruptness of the turnabout left customers in the lurch with overbuilt solar systems and no way to recoup costs. Higher-capacity battery storage will eventually allow solar customers to profit from their solar systems with or without net metering. It's investment security for the homeowner.
A group of solar firms and utilities are pushing to keep net metering rules in place until at least 2020, according to Peter Rive, SolarCity’s chief technology officer. After that, the company plans to begin including batteries with most of its solar systems, Rive told investors on a May 9 call.
Next Up: Tesla Energy
Everything described thus far is the beginning, not the end, of the possible advantages of "Tesla Solar." What comes next is more speculative, but perhaps more profitable. Basically, there are regulatory changes that are coming to U.S. utility markets that could allow Tesla to dip into one of the most lucrative businesses in the power sector. Tesla could become a sort of power company itself.
“Musk’s intentions are larger than simply adding a third product category,” said BNEF analyst Hugh Bromley. “The future of Tesla Energy could be in energy services.”
The idea is that Tesla could create its own electricity network, aggregating bits of power from thousands of batteries and rooftop solar systems it installs for customers, and sell that energy back to the grid when demand is greatest. This could be used to provide the grid with extra generating capacity during hours of peak demand. But an even brighter market for a network of lithium ion batteries may be to smooth out the tiny surges and shortfalls of the electricity supply that occur throughout the course of any given day.
A power plant for your basement.
“This is the most popular service for stationary storage, as it pays so well,” said BNEF analyst Julia Atwood. “And it pays so well because the provider has to respond incredibly quickly and accurately, which is something batteries do very well.”
If Tesla produces the cheapest lithium ion batteries available, and it begins to offer them standard with every rooftop solar system that Tesla Solar sells, it could suddenly find itself in control of a very large supply of flexible battery storage. The proceeds could be shared with customers directly or used to subsidize the upfront cost of rooftop solar installation.
This “is the dream,” said Yayoi Sekine, a BNEF analyst. “But there are so many hurdles to get there.”
Aggregating battery and solar capacity into a virtual power plant isn’t a particularly new idea, and it’s one that companies like SolarCity and Enphase Energy Inc. have flirted with in the past. It just hasn’t yet had the scale or the regulatory freedom that the business requires. But California, New York, and Texas are all working on plans that would allow this very scenario to play out.
Why now, and why SolarCity?
SolarCity does all of its own installations.
Without a merger, Tesla could continue selling batteries to various solar installers, including SolarCity, but its would always compete in a commodity market for the cheapest battery. The solar project itself would be branded SolarCity (or Vivint or Sunrun), instead of using the Tesla name, and it wouldn’t be Tesla that aggregates and profits the most from its batteries.
Tesla and SolarCity also have complementary product announcements coming up that make sense for the timing of a deal. Tesla is about to cut the ribbon on the world’s biggest battery factory and unveil the next version of its Powerwall battery pack. SolarCity is getting ready to reveal a new line of high-efficiency panels that it developed from its acquisition of California startup Silevo Inc. in 2014. Musk said he wants to put his mark on those panels, which will be produced in the largest U.S. solar panel plant, which is still under construction.
Like Tesla’s cars, SolarCity’s new panels will be made in the U.S. and sold by the company’s thousands of in-house installers. Here are some of the plant's particulars:
SolarCity’s Panel Gigafactory
Cost: $750 million
Location: Buffalo, New York
Manufacturing capacity: 10,000 panels a day
Power: 1 gigawatt of panels a year
Panels: Industry-leading efficiency; Musk promises new aesthetics that add value to the home
Start date: 2017
The acquisition really couldn’t have happened with another solar producer. SolarCity has the right scale of operations and the American-made panel factory. It’s also hopelessly tangled up with Tesla already. There’s only one member of SolarCity’s board who doesn't have direct ties to Tesla, and two-thirds of Tesla’s shareholders already own shares of SolarCity.
While the timing does complicate Tesla’s unprecedented ramp-up of its Model 3 electric car production, the competition for electric and autonomous cars is only going to get more fierce. Companies including Apple, Volkswagen AG, General Motors Co., and Daimler AG have all committed to electric vehicle programs to challenge Tesla. Musk’s ambition creep is all his company has ever known, and is probably all it will ever know if it’s going to succeed against the biggest technology and automobile companies in the world.
Is SolarCity a major distraction for Tesla? Probably. Does it add existential risk to both of these long, cash-torching bets? Most likely. Are the conflicts of interest messy? Definitely. But could the deal also result in the world’s first clean-energy juggernaut, a company that does for solar power, batteries, and electric cars what Apple did for computers, phones, and software apps? It’s worth considering.
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