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10 May 2019

Tesla trying to make good on $2.6bn solar deal, looks too knee-jerk

Nearly three years ago, Tesla shelled-out $2.6bn on SolarCity, then the largest solar player in the country. Some were skeptical of the rationale behind the decision, given that CEO Musk’s cousins were founders of the firm, and had begun experiencing some difficulties in the market. At the time, it made a lot of sense for Tesla to be able to offer some sort of bundled deal that included a car, home battery, and solar panels, as a single contract – but this hasn’t happened, and Tesla lost interest in SolarCity as it struggled to get the Model 3 out the door.

Now that it has finally cracked that nut, Tesla might have the energy to focus on what to do with SolarCity, as well as the Solar Roof tile technology that it unveiled to great fanfare. To this end, price cuts and renewed attention have been promised, but this news came as Tesla announced results that largely disappointed the investment community, and so might be (at least partly) a way to deflect from missed vehicle shipment targets and a $700mn quarterly loss and a 36% slide in solar sales – installing just 47 MW of capacity in Q1, down from 73 MW in Q1 2018 and the lowest post-SolarCity.

The new price-point for the solar offerings sounds almost too aggressive. Tesla says its new pricing is nearly 40% below the national average, with Tesla saying that design optimizations, standardized offerings, and an online-focused sales channel, are enabling these low prices – using the customers to take photos of their equipment and roofs to try and reduce the number of site visits needed. It is true that much of the cost of doing business in solar is in the sales force that has to carry out door-to-door sales and follow-up visits, but given Tesla’s famous total lack of spending on marketing, it might have a distinct advantage over rivals in this online-only channel approach.

The joined-up offering of a Powerwall battery system and rooftop solar might be a major issue for Tesla. We believe many solar customers are going to want the Powerwall too, and given that Tesla has an extensive backlog for Powerwall deliveries, thought to be due to its automotive wing eating through all its battery inventory, customers that want both are not going to settle for just solar – they’ll hold off on making the purchase all together.

If this is the case, then Tesla is yet again going to be tied up while it tries to sort out its own competing supply chain. It has its grid-scale storage offerings, its consumer-grade storage and solar, and the automotive demand for batteries to reconcile, and there have been a few occasions where large projects have seemed to inflict knock-on delays in other operations.

But while Wall Street is upset at the recent automotive update, Tesla should feel relieved that it has managed to right the ship, even if it is missing delivery volume targets. The Model 3 is on the market, and Tesla can move onto the next project – although it would probably be a healthier company if Musk’s absolute attention didn’t seem necessary for solving the particular issue at hand, but that could be a cultural issue.

The first step will be to see if the new solar pricing actually materializes on the open market, or if they fluctuate over time as many Tesla announcements are want to do. The current goal is priced at $1.75 to $1.99 per watt, varying on location, with solar systems planned to be sold in 4 KW arrays – meaning that this is still going to be a five-figure purchase, once you’ve added in other expenses. The cost of a Powerwall would also pretty much double that figure.

Tesla is also promising that it will ramp sales of its Solar Roof offering in the second half of this year, but it unveiled the technology back in November 2016 and has yet to launch it at scale. It starting taking orders in May 2017, but it took a year until the first installations, which clocked in at $50k and $75k – far higher than initially promised by the launch materials. It seems that you will be paying a premium to hide your roof’s solar power potential for the near future.

Nonetheless, the recent Tesla announcement said that the firm was on the third version of its roof tiles. Energy Sage outlines the timeline to date, which saw 12 roofs installed by August 2018, with delays blamed on production flaws. The next month, more details about the delay were given, and at the end of the year, production in the Buffalo Gigafactory ramped up – tackling the 11,000 orders it had received.

Tesla wants to prove that it can do a better job than Dow Chemical, which sold its own Powerhouse tiles for a brief period before killing it off in 2016. With roofs, the reliability and longevity of the product is a more critical factor than in cars or batteries. The labor costs of replacing roofs under warranties would be exorbitant, compared to a parts recall in cars or the cost of swapping out a Powerwall. To this end, Tesla needs to be sure that the shingles it ships to solar customers are going to last the life-time that is promised in the marketing.

So then, Tesla has hopefully ironed out all the creases that have delayed production to date. If it has finally nailed a final design, then it should be able to ramp up its efforts, and try to rectify having list the lead in the US to Sunrun and Vivint. Musk won’t like being third, and Tesla’s investors would like to see that situation rectified too. We’re still waiting for the joined-up package offering, however – that would actually be a game-changer.