Editor’s Note: A couple of years ago, when I created a list of 17 top cleantech champions, I actually put both Jigar Shah (author of this piece) and Tesla CEO Elon Musk in a tie at #1. Jigar has a wealth of knowledge from the solar industry, as well as other realms of cleantech, so I’m honored to have him publishing his take on the SolarCity–Tesla merger here on CleanTechnica. Check it out, and chime in down in the comments if it triggers more thoughts. –Zach Shahan
Over the next few months, Tesla Motors (TSLA) will finalize its all-stock offer for SolarCity (SCTY). The transaction would create a vertically integrated sustainable energy company that offers consumers electric vehicles (EV), energy storage, energy efficiency, demand response, and solar energy capabilities. Some have described the move as complex, or a distraction, but I believe that this could achieve the dreams that Elon Musk has of a company that is more valuable that Apple (AAPL) in the future. While Elon has recently put out his 2nd Tesla Master Plan, I am going to focus more on the tangible product and less on the vision.
As the solar industry reaches more than a million systems across the US this year, the market has reached critical mass. At the same time, the EV market, while starting from a low base, will surely continue to gain market share in this decade. However, the deployment of cost-effective technologies is not accelerating fast enough. For instance, Australia put solar on 1 out of every 7 roofs in just five years. With over 60 million homes with rooftops in the USA, the market potential could be enormous. If we reached what Australia has, that would be ~9 million solar homes, massive growth compared to the ~700,000 we have today.
Another way to look at the market potential is through the eyes of climate change. Tony Leiserowitz, the Director for Yale’s Program on Climate Change Communication, has done extensive research on this matter, noting in his “Six Americas” study that almost 13% of the US population is “alarmed” by climate change. This 13% gets you to roughly the same 9 million homes. With so many people concerned about climate change and their personal footprint, there is an opportunity in the United States to sell a combined solar + EV package unveiled as a “climate change package.”
One question that is often asked is, “couldn’t Tesla and SolarCity just coordinate?” I find that coordination at this scale is problematic. SolarCity really does have the sales resources, installation personnel, maintenance systems, and microgrid expertise. Today, SolarCity has thousands of sales people dedicated to selling their product and over 100,000 folks getting paid to send leads to these sales people. Tesla is really just a product and manufacturing company with a reactive sales effort, but superb marketing. If Elon and Tesla were to use their marketing prowess to help SolarCity sell and do more, without benefitting from that effort directly, it seems like that would be hard for Tesla shareholders to swallow. Additionally, in such a case, Tesla executives and shareholders wouldn’t have control over SolarCity policy and operations, which they may feel are in need of some changes.
SolarCity also really is on the forefront of integrating everything from smart thermostats to high-efficiency heat pumps. It is obvious that the time that it takes to deploy proven residential technologies at scale is too long, and Tesla could further help with that while also benefiting from the SolarCity side of sales and B2C relationships. The in-home cleantech business model needs shaking up. “Shaking up” seems to be something Tesla does well.
Another insight is that almost all internet marketing has failed in this space. People simply won’t buy a $30,000 car or solar package without being convinced by a salesperson. With over 190 existing retail locations, often in malls, Tesla has an avenue to efficiently reach many more consumers.
While residential solar is more mature than electric vehicles, a solar-only package isn’t cost effective in all 50 states. Solar power sold using a loan product and some basic energy efficiency could be cost effective and legal to deploy in about 20 states representing about 50% of the US population. On the other hand, Tesla’s Model 3 offering is cost effective to anyone in the market. The average American spends $9,000 per year on each vehicle they own – including car payments, insurance, fuel, and maintenance. This is almost $800/month. Tesla could provide electricity through SolarCity, buy a small insurance company, organize all non-home charging, and arrange for all maintenance for far less than $800/month on 300,000 Model 3s. If there was a combined solar ($20,000), EV ($30,000), and deeper efficiency ($5,000) package, SolarCity could cost effectively sell into all 50 states.
So, let’s try to put some total numbers behind this opportunity. Rapid solar deployment in Australia took place between 2009–2014. With over 60,000,000 eligible US households, if Tesla/SolarCity could help the USA match the solar penetration of Australia, you would achieve an initial package revenue of over $470 billion – more if a few homeowners upgraded from the Model 3 to the Model S. With the five-year extension of the federal investment tax credit for solar, there is no reason to believe that the solar industry couldn’t achieve the same market penetration in the USA by 2021.
Assume the target households pay an average of $200/month for their electricity/gas bill and $800/month to own, fuel, and maintain their car. Tesla/SolarCity could provide a 20-year loan to customers with a payment starting at $900/month (initial savings of 10 percent) for the next 20 years. At an average upfront fee of 10% and interest rate of 9% across their consumer base, consumers could afford a $100,000 package. This would include a solar system, energy efficiency, multiple cars, and all of the maintenance and other services required over 20 years. The gross margins for the company should be at least 20% on the first costs and 50% on the additional services (fuel, insurance, O&M).
Now, Elon Musk didn’t say any of this in his new Master Plan. Heck, I’m not sure that he has even thought through how to implement what I’ve described – that is what the SolarCity team is for. But with climate change solutions representing the largest wealth creation opportunity of our lifetime, the world is waiting for someone to simplify decarbonisation for consumers. Who better to do it than Elon Musk?