Tesla & SolarCity: Exploring the Solar System

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A lot of attention has been heaped on the Tesla / SolarCity merger, and for good reason. We’re talking about two companies, both of which have difficult economics and tough operating profitability. To some, it feels like SunEdison’s ill-fated acquisition of Vivint.

Here’s where the two are different. SunEdison acquired Vivint to augment its portfolio of renewable generation businesses, doubling down when the entire portfolio was weakening financially due to growing risk and changing market valuations. Musk is making a product play first and foremost, rather than a financial portfolio play. In the end, there’s a big difference.

A portfolio play falls apart if financial markets or sentiment turn. A product play can buy time from long term investors, if a compelling vision can be sold… and that’s likely what Musk is teeing up at the end of October. A product vision.

Industry observers commonly believe that it’ll be a solar + storage combination. That’s likely true, but odds are that it’ll be packaged as a modern, home energy management system which gives homeowners new levels of independence and control. It’ll probably include an integrated combination of EV charging, a sexy new solar roof product, a platform for demand management, and software to allow consumers to control the whole shebang. Perhaps Musk only announces parts of that in October, but that’s where it’s going.

He’s going to wrap the offering in Tesla’s brand and foment product lust, much like Apple did with its products, to the benefit of pricing premium. He’ll sell that to the upper end first, as he did with Tesla, and move down the chain. (It’ll be Tesla’s brand because SolarCity doesn’t have the brand to pull that off. For most consumers, SolarCity is a transactional installer and financing agent, not a product company.)

Here’s why the above strategy is important to Tesla, SolarCity and clean energy generally.

The adoption of residential solar faces a headwind in advanced markets as we exhaust the army of those who are willing to take a 20 year bet to contribute their part to the greater good. To be fair, this market is fueled by a lot more than environmentalists who want to feel good; it’s also an economic decision. Nonetheless, the economics (and thus the decision) get a lot shakier if rate structures change or net metering gets called into question, as it has in a number of places, most notably Nevada. Both prospects tend to emerge and strengthen the farther along solar gets in penetration of a given market.

“At present, our capacity to integrate renewable generation gets complicated as we approach 15% of peak power” -Gretchen Bakke (from her book, The Grid)

A home energy system (which marries solar with storage, EV charging and software) solves a lot of the problems. We move from a solar-only play [that is exhausting the ranks of those willing to absorb risk to make their contribution], to a product for those willing to pay for independence and control. By adding storage, Musk also logically addresses the increasing problem of solar saturation in advanced markets.

SolarCity will keep selling solar installs, but the bet is that Musk will tee up a new, sexy, high-end product. Catnip for wealthy technophiles. The opposite of a restraining order. We’ll hopefully hear more about energy independence, islanding and personal grids as chic products and status symbols.

If the Tesla playbook is any indication, Musk will play the high-end market for a couple years and then move downstream as the cost of storage (one of the biggest BOM cost drivers) declines.

On the battery front, it’s worth pointing out that Tesla is going to start getting used batteries back from their cars in growing volume. Musk will be able to use those to bring the costs of the system down for the broader market, just when he needs to do so.

There’s certainly a lot of conjecture there, but it’s a reasonable conclusion.

For what it’s worth, we’re also starting to see the redefining of energy product play out elsewhere. The game is moving from solar as the sole focus. The inverter companies are starting to make hay about their role as the anchor of energy management systems. We’re seeing products like SmartFlower and SolPad that are looking to productize integrated capabilities into new, compelling consumer offerings.

Of course, there are a lot of complex factors in how it all develops. The overriding bet here, though, is that we’re seeing the start of a market shift. A shift from solar as the product to a more holistic offering in which solar is an anchor feature, but not the only feature.

As we transition, you can bet the game and market will ultimately favor the solutions with the most sex appeal, delivered through storytelling, brand and software. Tesla holds a strong hand on all fronts. Others will emerge.