SolarCity (SCTY) and Tesla (TSLA): Joined at the Elon Musk

Joel Anderson  |

When SolarCity (SCTY) announced its acquisition of solar panel manufacturer Silevo in June, the speculation about how Tesla (TSLA) and SolarCity would be joining forces ran rampant. I, for instance, jumped on that train pretty quick. Despite the fact that these are, in fact, two entirely separate companies, the fact that Elon Musk is Tesla’s CEO and SolarCity’s chairman led to rampant speculation about how Tesla batteries were going to be powering your home in 10 years.

In part, this sort of seemed like it was a little bit of a stretch that was born of the sort of rarified air that Musk currently resides in. His success, paired with his new-world qualities and commitment to technology, gave him the heady aroma of that intangible innovator, the entrepreneur whose vision will defy any and all skeptics. A Steve Jobs 2.0, if you will.

And, as is often the case with businessmen who manage to create the perception of magic pixie dust that follows their every decision, speculation runs rampant. Suddenly, even the simplest actions spark speculation about wildly elaborate and/or ambitious plans for the future.

In this case, though, it appears as though it was absolutely on point.

SolarCity and Tesla: A Match Made in Musk

This weekend at a private event hosted in New York by SolarCity, Musk and SolarCity CEO Lyndon Rive (who is also Musk’s cousin, so maybe some of the pixie dust has rubbed off on him) announced that in five to 10 years every SolarCity installation would come with a battery system, many of which would be manufactured by Tesla. I mean, “announced” is one way of putting it as this was already widely speculated and this is hardly any sort of hard deadline, but it’s a clearer connection between the two companies than had previously been acknowledged.

Why would this create much excitement? Well, if you’re familiar with the solar industry, you would know that the issue of intermittency has been the giant sword of Damocles hanging over the whole industry for years.

Essentially, even as solar panels get cheaper and more efficient and solar power begins to look more and more like a real solution to many of our energy problems, the fact that the sun only shines for about half the day has always been pretty much unavoidable. Come night time, your solar panels aren’t producing doodly and you’re going to need to go elsewhere for your power. The same can be said for cloudy days.

So, no matter how robust a solar system is, additional, more-reliable power sources is a necessity. That’s always going to be true. However, what if an efficient and reliable battery system could be connected to your solar panels? What if during the day, while you’re at work, the sun shining on the roof of your house was providing the very power you would be using that night? What if the battery you’re charging was made by very same magical visionary who manufactured the super high-tech car that’s sitting in your driveway getting charged by said battery?!?!

I don’t mean to be flip, stored capacity is very much a game-changer for the solar industry in its entirety. We’ll always need more-reliable sources of power, but the ability to make hay while the sun shines, as it were, and be able to use that hay later when you really need it would be pretty big.

Two Companies With Visions to be More Than They Are Now

This is the sort of news that suddenly changes paradigms for how you view both companies involved. Or at least it does for those of us who weren’t out ahead of this.

Much of the criticism surrounding Tesla as a company has centered on its absurdly high valuation. Which is justified. In fact, one source of that criticism is Elon Musk, who has repeatedly stated that he thinks the stock’s too pricey.

However, it’s not just about market hysteria. Plenty of people are quick to observe that Tesla’s manufacturing capacity is pretty meek when compared to other major automakers. Sure, electric cars are taking off and Tesla’s ahead of the curve on that, but what happens when other car makers start to flood the market with their own product? The economies of scale for an established company with built-out infrastructure would seem to have to potential to eat up huge portions

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But what Tesla watchers have been saying for a long time is that Tesla is actually much more than a car company. The battery technology developed for its vehicles is a game-changer in its own right and has a wide variety of applications outside of just vehicles. Even if BMW and Mercedes come out with their own sleek models of electric cars that rival the quality of the Tesla, they may very well be using Tesla batteries. What’s more, the applications for an efficient rechargeable battery outside the auto industry are virtually boundless.

It’s a market that Tesla appears poised to be the go-to technology for, and that suddenly makes the company’s valuation get a little closer to sane. Not all the way sane, for sure. Even its CEO thinks it’s crazy right now. But it’s not quite as bad as a $30 billion car company that can only make 20,000 or so cars a year.

It’s a big part of why news of the Tesla “gigafactory,” an enormous battery factory that’s going to be constructed near Reno, has been hotly followed by industry watchers.

SolarCity Also Potentially on the Verge of Major Breakthroughs

SolarCity, also, starts to take shape. The company is currently at the forefront of the power purchase agreement (PPA) movement that has suddenly made residential solar a reality. For the uninitiated, before the founder of SunPower (SPWR) Jigar Shah developed the concept of PPAs, home/business owners would have to invest a few thousand bucks to install solar panels on top of their building. Sure, it might be a wise investment, but anything that has a large upfront investment that pays itself off over the next decade is a pretty hard sell.

What Jigar Shah determined was that companies manufacturing solar panels could maintain ownership of their solar arrays then sign a lease with the home/business owner to sell them the power they generate over the next couple decades. Consumers could get solar panels installed for no money down and then buy power at a steep discount from the grid, saving them money. The installers could collect the hefty tax credit provided for installing solar panels and then securitize and sell their PPAs on the open market.

However, given that a large portion of the business for PPAs are homes, the fact that the power was being generated during the day made things tricky. If you’re not home during the day, as many of us aren’t, the peak generation hours and when you aren’t there. And the valley generation hours, when there is no power generated, is precisely when you’re using the energy.

But with Tesla batteries coming with your SolarCity installation, things start to look different. Now, the equation for a homeowner is to pay no money down, get a solar system installed on your roof, save significantly on your power bill, and now have the option to keep saving even if you’re testing out your new floodlights at 3 a.m. In fact, it’s not out of the question to envision a scenario where, if you live somewhere sunny enough, and you have a house that’s fairly energy efficient, you could be purchasing almost all of your power straight from SolarCity, cutting the utilities out of the loop completely.

Again, it should be noted that this would all be without any upfront costs. You wouldn’t own any of this stuff, sure, but it’s there saving you money anyway. This seems like the sort of decision that, as it loses some of its novelty, could easily become a pretty easy one for homeowners throughout the southwest. Getting a solar lease with a new home could be as routine as hooking up the cable/satellite dish.

The news also comes in addition to SolarCity’s Silevo acquisition from June, which had SolarCity stepping firmly into the panel manufacturing end of the business. Previously, the company had been taking advantage of the absurdly low panel prices, driven in part by Chinese companies dumping their wares onto American markets, and buying from other parties. Now? They’ve got big plans to mass-produce the same highly efficient panels they’ll be installing.

Win or Lose, Elon Musk’s Reputation is Still Riding High

On the whole, nothing about this announcement should be all that shocking. Nor should one overreact all that much given the source. It’s more big, grand plans from Elon Musk, and as far as he’s come, it’s appropriate to note that much of what Musk has envisioned for his business empire hasn’t yet come to fruition. Whether it’s headed for great things or not, Tesla is still a company that has never turned an annual profit and made a measly 21,500 cars last year.

SolarCity, likewise, has uncertain waters ahead. The company’s repeatedly manages to boost revenues since 2010, but it’s only been profitable in one of those years (2011). And while it’s building out infrastructure very rapidly, there could be some real concern that it might expand too quickly. Demand for solar is currently sky high, with 2013 seeing a 40% boost in installations, but it’s going to need to keep climbing to support what the company has envisioned. Add to that the expiration of the solar tax credit in 2016 unless Congress takes action to extend it at a time when the idea of Congress doing, well, anything seems pretty preposterous and SolarCity certainly has its own question marks to accompany the breathless anticipation of things to come.

However, news of this weekend’s announcement comes with one certainty: the Musk reputation remains one that’s got everyone excited. Like Steve Jobs at his peak, people seem to believe that there’s nothing Musk can’t accomplish, viewing his mere association with a project as a sign that it’s going to be a wild success. Here’s hoping they’re right.

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