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

  • 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 about 5% of the market, according to the research firm Wood Mackenzie. 
  • What happened? SolarCity was a huge solar installer, but it 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. 
  • The coronavirus pandemic has slowed installations, the company said. 
  • For more stories like this, sign up here for our weekly energy newsletter, Power Line.

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, dipping to a mere 29 megawatts last spring. Installations were slightly up in the second half of the year, only to fall even lower once the coronavirus began to spread. 

On Wednesday, Tesla said it installed just 27 megawatts of solar from April to June — its lowest deployment per quarter, ever. 

Competition is also heating up. Earlier this month, the leading rooftop-solar company Sunrun said it would buy the second-largest installer, Vivint Solar. The combined company would control at least 15% of the market. 

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The pandemic is partially to blame for Tesla's recent slide. In its earnings call Wednesday, Tesla's CFO Zachary Kirkhorn said the closure of permit offices limited installation volumes. 

But four analysts who spoke to Business Insider earlier this year — well before the coronavirus became a pandemic — said the company has long had problems with its solar offering and is unlikely to see major success in this line of business.

They also questioned whether the company's buzzy solar roof product would ever become mainstream, although Tesla said it tripled solar roof installations in the most recent quarter. 

Do you have information about Tesla's solar glass roof or solar panels? Please contact [email protected] or reach us through the secure messaging app Signal at (646) 768-1657.

SolarCity rooftop solar panelsSolarCity

The decline of SolarCity 

SolarCity wasn't soaring when Tesla bought it in 2016. As several sources have already reported, the firm was saddled with debt in 2016, leading some investors to call the acquisition a bailout.

Tesla's CEO Elon Musk is scheduled to face a trial, tied to the deal, 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. The trial, originally set for March, was delayed due to the coronavirus and a new date hasn't been set. 

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 

Tesla's solar competitors like Sunrun and Vivint Solar spend a lot on sales; as of earlier this year, a watt of solar energy cost about $3 in the US, and these businesses spend more than $1 per watt on customer acquisition, according to estimates from Wood Mackenzie. 

Read more: Sunrun is set to inherit almost 200,000 new customers overnight. Its CFO tells us how the solar giant plans to turn them into profit.

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 interviews earlier this year, 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. 

"It's pretty tough to make domestic panel manufacturing work," said Joe Osha, an analyst at JMP Securities. "That's a tough row to hoe, and to be honest, I find that pretty suspect."

Tesla's solar roof product, which differs from its panels, is made of attractive glass shingles that double as electricity-generating 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."

In its earnings report this week, Tesla said it tripled installations of the solar roof product in the period April through June, but a preliminary analysis by Wood Mackenzie suggests the absolute number of roofs is likely still low. The analysis showed the company installed just 100 solar roofs in California, the largest solar market, through the first three months of 2020. 

Will Tesla's solar business bounce back? 

Musk, for one, is confident that Tesla's energy business will ascend. In a call with investors last year, he said it will eventually "grow faster than automotive."

Tesla's solar offering is the cheapest in the US, at $2 a watt before tax incentives, Musk said on Wednesday's call. Analysts at Wood Mackenzie confirmed that, at $2 a watt, Tesla's offering would be among the cheapest solar in the country. 

"We're very confident that people will have our solar product, whether it's the solar retrofit or Solar Roof," Musk said on Wednesday. 

That view is shared by some Wall Street bulls.

Tesla 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? 

This story was originally published on February 26. It was updated with Tesla's second-quarter earnings report. 

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