How Tesla failed to maintain a huge lead in residential solar, and why Elon Musk is unlikely to win it back

Reuters/Bobby Yip; Business Insider/Dave Smith

Despite a recent bump in Tesla's rooftop solar installations, analysts say the company is unlikely to see explosive growth in its solar business.

• SolarCity dominated the rooftop solar industry in the years before it was acquired by Tesla in 2016.
• Now the firm, part of Tesla's energy business, has just 4.6% of the market share, according to the research firm Wood Mackenzie.
• What happened? SolarCity was a huge solar installer, but was struggling financially when Tesla bought it.
• Tesla diverted resources away from SolarCity following the acquisition to focus on the Model 3, according to analysts interviewed for this story.
• Elon Musk's firm has also struggled to deliver solar products that consumers want and can afford, analysts say.
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Just five years ago, a Silicon Valley company founded by two of Elon Musk's cousins ruled rooftop solar.

In 2015, SolarCity controlled more than a third of the market for residential solar and installed a whopping 870 megawatts, according to the research firm Wood Mackenzie.

The second-largest company at the time, Vivint Solar, had just 11% market share.

Then, a year later, when SolarCity was struggling financially, Tesla bought it.

In the years that followed, SolarCity's installations fell, bottoming out last spring, when it installed a mere 29 megawatts in the second quarter.

Through the first nine months of 2019, Tesla controlled just 4.6% of the rooftop solar market, per Wood Mackenzie.

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Now, Musk says its solar business is on the ascent and will eventually "grow faster than automotive," according to an earnings call last year. And that view is shared by some Wall Street bulls.

"In the coming years, we think Tesla will replicate its success in Energy Generation and Storage," a note from the investment bank Piper Sandler stated recently.

But four analysts who follow the company told Business Insider that they disagree.

They say Tesla has had problems with its solar offerings and it's unlikely to see major success in this line of business, despite a slight bump in the firm's installations last quarter. Tesla installed 54 megawatts of rooftop solar in the last three months of 2019, while industry leader Sunrun projected it would install more than double that.

Tesla did not respond to a request for comment.

SolarCity

The decline of SolarCity

It's not all Tesla's fault.

As several sources have already reported, SolarCity was saddled with debt in 2016, leading some investors to call the acquisition a bailout.

Musk is scheduled to face a trial tied to the deal next month, in which shareholders are seeking $2.6 billion in damages. Shareholders allege that Musk failed to "disclose the depth of SolarCity's problems, or their own conflicts," per Reuters.

But since acquiring the firm, Tesla has done little to support the enormous lead the company once had. And several missteps have run it further into the ground, according to Gordon Johnson, an analyst at GLJ Research and well-known Tesla bear.

As Musk himself has acknowledged, part of the problem was that Tesla was focused on the production ramp for the Model 3 car at the time of the acquisition.

"For about 1.5 years, we unfortunately stripped Tesla Energy of engineering and other resources," Musk said in an earnings call last year.

It's hard to know exactly what other resources Musk is talking about, but it's clear that SolarCity's door-to-door sales team was, at some point, gutted in favor of other sales strategies, according to Michelle Davis, a senior research analyst at Wood Mackenzie. Plus, the firm ended its partnerships with major retailers like Home Depot, she said.

Selling solar panels is nothing like selling cars, analysts say

Today's leading rooftop solar companies like Sunrun and Vivint Solar spend a lot on sales; a watt of solar energy costs about $3 in the US, and these businesses spend about $1 per watt on customer acquisition, Davis says.

Tesla has taken a different approach.

The firm has banked on a crossover sales strategy, said Jeff Osborne, a financial analyst at Cowen, whereby customers who are in the market for electric cars might also buy panels, either online or in a showroom.

But buying solar panels is far more complicated than purchasing a car, Osborne said.

"The idea of just going on a website and procuring solar or swinging by the mall and saying, 'I want to buy solar,' this $15,000-$25,000 purchase on average, is not something that happens in reality," he said. "I think that strategic goal failed."

Tesla

Tesla's solar glass roof faces questions

Business Insider has previously reported on issues with Tesla's solar panels, which some customers like Walmart say are linked to fires.

In recent interviews, Wall Street analysts pointed out other problems related to cost.

Unlike its competitors, Tesla says it manufactures its solar panels domestically, at a factory in Buffalo, New York.

While US-made panels benefit from the Trump Administration's tariffs, they still can't compete on price with products made overseas, Johnson said.

Joe Osha, an analyst at JMP Securities, agrees.

"It's pretty tough to make domestic panel manufacturing work," he said. "That's a tough row to hoe, and to be honest, I find that pretty suspect."

Tesla did not respond to questions about the cost of its Buffalo-made solar cells or about solar-roof production, but according to a Reuters story from 2018, the cost of Tesla's glass solar roof was "listed at nearly $6" per watt in California, or about double the national average at the time, per records from three utilities.

These roofs are made of attractive glass shingles that double as solar panels. With an emphasis on appearance, they've attracted a lot of attention.

Versions one and two of the glass roof "didn't work," Osborne said. And while Musk said 2019 would be the "year of the solar roof" and the company would soon produce 1,000 roofs per week, there has been little to show for it.

"The volumes are very small," Osha said. "I know it would require major changes in terms of how the business model works. You've got to get out and get roofers to do this. They've got to demonstrate the reliability of this."

Panasonic, Tesla's manufacturing partner for the solar glass roofs, plans to back out of the partnership at the Buffalo factory, according to Nikkei Asian Review. Bloomberg reported the decision was part of an effort at Panasonic to "curtail money-losing businesses," citing a person who wasn't identified. Tesla is still committed to operating the facility, a New York state official told Bloomberg.

Will Tesla's solar business bounce back?

In the last three months of 2019, Tesla reported a bump in solar installations, logging 54 megawatts, prompting some outlets to speculate about whether Tesla's solar slide is over.

A new online sales strategy, which includes lower-price systems, likely has something to do with that, Davis of Wood Mackenzie said. So does the impending wind-down of a solar tax credit in 2022.

Even absent the credit, some analysts say Tesla could, once again, become a major competitor in the rooftop solar industry.

It has an incredibly strong brand, a high potential for crossover sales, and it's already been on top, said Colin Rusch, an analyst at Oppenheimer & Co.

But "whether it's the best use of capital for the organization is a totally different question," he said. "I would say it's not a high priority, as a concern, for most folks."

Energy is just a sliver of Tesla's business, accounting for just 6% of sales in 2019, so investors aren't focused on the business. Roof or no roof, Tesla will still sell electric cars.

"90%-plus of investors don't care about it," Osborne said. "Quite honestly, it doesn't really move the needle for them, even if it doubled next quarter. If you were to have a list of Elon's top 20 priorities, I would be shocked if this is in the top 10."

Which leads to the final question, posed by Osha: Tesla has a highly successful EV and battery business, so why is Elon Musk still investing in solar at all?

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