A few days ago, Tesla updated the energy segment of their website. Specifically, the solar page has some new options, changing Tesla’s solar model. Since Tesla’s solar installation business has been declining since the acquisition of solar city, it’s in need of revitalisation. Can the new solar model save the declining business?
Tesla’s Solar Business
The graph above shows Tesla’s solar deployed since its acquisition of solar city. As you can see, Solar City started at a peak of 200 MW and has now declined to a measly 29 MW.
Since 2014, Solar City has been experiencing rapid growth in solar installation capacity. Their trajectory looked great until Tesla acquired them in Q4 2016. In order to understand the drop in Solar Installations, let’s go through the history of Solar City.
Solar City was the leading provider and operator of Solar Panels in the United States. It’s business model was to lease solar panels to customers, meaning they wouldn’t have to pay any major upfront costs in order to own solar.
Why Use the Leasing Solar Model?
Consequently, the customers were happy because they could have solar on their roof without any real out of pocket cost. This was because the monthly lease cost of the solar panels was offset by the money saved from the energy bills that the customers would no longer pay.
However, there was one problem with this model, leading to Tesla’s decision to transition the business model to a sales-focused approach. The problem was in the leasing. Since Solar City would have to pay for the solar panels, they needed capital.
Customers leasing solar panels would not give Solar City capital because the whole point of the contract was that they were paying a lease, not a huge upfront capital. Presumably, Solar City doesn’t own a money printing machine, thus they had to get the money from somewhere.
The obvious solution to this (and the one that Solar City ended up using), was to take capital loans. These would supply Solar City with enough money to construct and install the solar panels. Similar to a mortgage, this would be paid off (by the lease cash) and a set interest rate and term length would be established.
As you can imagine, this can get a bit messy, resulting in the question of why use the leasing model in the first place?
Why Use the Leasing Solar Model in the First Place?
As we established earlier, the leasing model is easier for customers who would like solar but are not prepared to pay the initial upfront costs of owning it. However, there’s another reason which is more convincing.
Although Solar City pays the lender for a set number of years (e.g. 10 years), the customer continues paying the monthly lease fee every month for as long as they have the solar. So, if they have the solar system for 15 or 20 years, Solar City receives 5-10 years of cash flow every month.
Cash flow is one of the leading causes of a business going bankrupt. This lease setup is a stable source of cash every month, keeping the business running. Alternatively, if the customer had given Solar City the initial upfront cost and Solar City had mismanaged their business, using all the cash, they’d have nothing to keep giving them cash except new sales.
In contrast, this would be far less likely happen with the leasing business model because income is more likely to come in every month than new sales are likely to come in every month.
Next, it’s just a case of sticking to the plan and maximising economies of scale. If Solar City accumulates a large customer base with each one paying a monthly sum, it’d be difficult for Solar City to become bankrupt due to cash.
Why Did Tesla Switch the Business Model?
Fundamentally, we can assume that the business model was switched to reduce the liability on the business due to the outstanding debt. Tesla sometimes has some financial struggles and a pile of debt in the solar business probably doesn’t help that.
From there, there’s a couple of factors which have influenced the decline of the solar business. These are cost and Tesla’s focus on the business.
Firstly, the Model 3 production ramp has led to all other Tesla products being neglected. That includes the energy business and somewhat covers the Model S and X’s declining sales.
Secondly, the enormous upfront cost of a large solar installation was clearly not preferred by many compared to the leasing model still used by other companies in the market. People just weren’t willing to splash out over $10 000 for a solar installation on the spot.
Why Has Tesla Switched Back to the Leasing Solar Model?
What made Tesla switch back to what they previously didn’t want?
Obviously, the declining business is the leading factor here. Solar deployment is a growing sector within the economy and Tesla must regain its market share. Clearly, the sales model isn’t working and Tesla needs something new.
Solar City has proved that the leasing solar model is economically viable, though Tesla did want to avoid the risk of having such large amounts of debt hanging over its shoulders.
Furthermore, solar panels have got cheaper. Cheaper solar panels would mean that manufacturing costs are lower and the loan size is reduced. Perhaps the lower loan payments pushed Tesla over the edge into making the decision to switch back to the leasing model.
A combination of these two factors is likely. The declining business model is the reason and the cheaper cost of solar panels is the justification for that reason.
How Does the New Solar Model Work?
For the previous few years, buying solar from Tesla was a difficult and lengthy process. First, you would inquire about potential solar installation. At this point, you may receive a rough quotation on cost. Next, Tesla would come and inspect your roof, calculating the installation cots and configuring the perfect solar system for your house.
After that, you would likely receive an updated quote which would include installation costs. After a few months, your solar might finally be installed. The whole process could take many months to complete. A process like this frustrates customers.
Instead, Tesla has made it easier to obtain rooftop solar by allowing you to lease three sizes of systems; small, medium and large. Small is best for a 1,000 – 2,000 sq ft home. Medium is best for 2,000 – 3,000 sq ft homes. Large is best for 3,000+ sq ft homes.
The average US home size has fallen a little since the recession, to 201 m2 (2,164 ft2) in 2009. Consequently, people with slightly smaller houses are best with the small system and people with slightly larger houses are best with the medium system. The large system is only needed on large properties, particularly businesses.
Each one of those estimates is based on the average energy consumption of a household in California. Other states like Nevada may be sunnier. Likewise, some states will experience more cloudy weather.
How much does it cost?
Tesla still offers an option to buy the system upfront. According to a tweet by Musk, this makes more financial sense. Since the leasing cost stays the same for as long as you keep the panels, buying is a better option if you plan to keep the house for another 10-20 years.
- Small = $7,581
- Medium = $15,162
- Large = $22,743
Those costs are factoring in the tax rebate which is offered to Californians. This reduces the cost by 30%, considerably reducing the cost for the larger options. For example, the large system is $32,490 without credit.
Costs vary by state and the system which you need. Delivery costs are larger if you live in Alaska rather than in California. That being said, I’m not sure anyone in Alaska is likely to have Tesla solar. Countries like the UK aren’t yet served, though renting Tesla solar is likely to be an option soon.
There’s one caveat, though it’s not a deceptive one like some other solar companies impose. It’s that in order to repair or restore the roof, Tesla must remove the panels. This costs a flat rate of $1500 to cover the labour costs of completing such a task. According to Tesla’s website, they don’t aim to make a profit on this part of the business, just have their labour cost covered.
What about the solar roof?
As you may have figured out by now, the solar roof will be a purchase only product. Similarly to renting a roof, the solar roof would be impractical to pay for as a lease.
At the autonomy investors day, Must said that 2019 would be the year of the solar roof. Although this prospect is now looking slightly less likely, the solar roof should be coming soon. It was pitched at being cheaper and better looking than a newly installed roof alongside newly installed solar.
From the ground, it would be difficult for a passer-by to even realise that your roof. is basically a giant solar cell. Additionally, the panels used for that are supposed to be stronger than standard roof tiles and have a 30-year weatherization and power warranty.
Combine that with the best hail, wind and fire ratings to get a truly irresistible product for home developers. Although the solar roof is best used for residential property, it can be used for commercial buildings with roof tiles as well.
Conclusion – Should You Rent or Buy?
Aside from various location considerations, your decision to rent or buy comes down to two factors.
- How long are you going to be in your home for?
- Can you afford a deposit?
If you plan to be in the home for another 15-20 years and have the funding needed to invest in solar upfront, you should buy it. It will become more valuable to you in the long run and once it is paid off, it’ll be very profitable.
Secondly, if you do plan to rent solar, it will save you money from the off. Despite that, make sure to consider the $1500 surcharge for having solar removed. If you plan to move out within the next few years, certainly consider renting. Make sure that the amount you save will be greater or equal to the amount it costs to remove the panels.
Do you think the new solar model will spark growth in Tesla’s energy generation sector?