On November 17, Tesla shareholders approved the acquisition of SolarCity in an all-stock transition worth $2.6 billion, with more than 85 percent of shares cast in favor.
"The acquisition of SolarCity will create the world’s only integrated sustainable energy company, from energy generation to storage to transportation," Tesla wrote in a blog post published ahead of the shareholder vote. The deal paves the way for the companies to offer a seamless home solar-plus-storage solution, featuring Tesla’s attractive new solar roof line and the second-generation Powerwall battery.
Since the merger plans were announced in June, energy and finance experts have been mulling over what the integration would look like. Below, we revisit our earlier insights on the merits of the deal.
This article was originally published in June. Because very few details have been released since then -- aside from the solar roof, onto which Musk seems to be focusing a lot of attention -- the broad questions about the combined companies still stand.
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The Tesla Motors store on Santa Monica's 3rd Street Promenade is located next to Greek Cuisine Stop’n Cafe and across from J.Crew. Here, it’s possible to purchase some slacks, a high-end electric vehicle and a gyro within a dozen or so steps.
Someday in the future, it might be possible to purchase solar panels at this location as well -- all in one quick and easy round of errands.
This is the future that Tesla’s Elon Musk envisions -- a near future where a consumer’s decision to go green is convenient, stylish and economically appealing, all at the same time. That is the future he’s hoping to create with Tesla’s proposed purchase of SolarCity for roughly $2.5 billion.
“In order to solve the sustainable energy question, we need sustainable energy production, which is going to come primarily in the form of solar, overwhelmingly in the form of solar in my view. Combine that with stationary storage and electric vehicles, and you have a complete solution to a sustainable energy future,” Musk said on a Wednesday morning conference call. “And those are three things that I think Tesla should be providing.”
Tesla currently offers electric vehicles and energy storage solutions for homes, businesses and utilities. But while Tesla already has a close relationship with SolarCity -- Musk is on the board and the company is run by his cousin Lyndon Rive -- Musk made the case that there are efficiencies to be gained by formally combining the two entities.
“It’s quite difficult to create an integrated product if you’re forced to be at an arm’s length and be two different companies,” he said.
Investors have not responded favorably to the proposal, however. At market close on Wednesday, Tesla’s stock was down 10.45 percent since the announcement. Setting aside market concerns for a moment, what would Musk’s vision actually look like?
An integrated portfolio "is a really exciting opportunity"
For one thing, it could translate to a lot more solar, storage and electric-vehicle adoption.
“I think what Elon was trying to say is they have 300,000 Model 3 depositors, and SolarCity sells 100,000 residential systems a year, so you can see how the synergy between electric-vehicle owners and solar owners reverberates off of each other and ends up getting bigger and bigger and bigger,” said Jigar Shah, co-founder of Generate Capital, during a live taping of the Energy Gang at GTM’s Grid Edge World Forum on Wednesday.
For Sonia Aggarwal, director of strategy at the think tank Energy Innovation who oversees America’s Power Plan, the opportunity to sell more products isn’t the most exciting aspect of the SolarCity deal. Rather, it's the potential to merge product offerings within a single entity and also sell grid services.
As more intermittent renewables get integrated into the bulk power system and the distribution system, it increases the need for fast-acting, flexible resources to provide grid stability. Tesla and SolarCity both want to provide those resources.
“Different distributed energy resources have different profiles that enable them to be able to provide different services. And if you’re only working with one of those resources, even if you have a big set of resources you’re managing, you still might not be able to provide the different types of services the grid will require,” said Aggarwal. “But if you have a portfolio of distributed energy resources, I think it provides a lot more flexibility to an aggregator to come in and provide both local and bulk system services.”
"I’m not sure what the Tesla/SolarCity business model is likely to look like -- but I would say that offering a more integrated portfolio is a really exciting potential opportunity," she said.
An aggregator like Tesla could sell a portfolio of distributed assets to a utility or directly into wholesale markets to balance out large-scale resources at different times of day, Aggarwal explained. Right now, California, New York and Texas are really the only places where a wholesale market offering makes sense. But Aggarwal said she believes vertically integrated markets will also see greater value in aggregated distributed energy services over time, because it’s good for the grid, affordable for customers, and low carbon.
Well-integrated distributed energy resources can also be a valuable resource for utilities. Solar alone creates challenges for the utility, such as California's duck curve. However, solar-plus-storage, in combination with more sophisticated rate designs, can be a grid asset.
“We’re looking for batteries and solar to be a solution for any and all customers,” said Lisa Cagnolatti, the vice president of Southern California Edison's business customer division, on a panel at Grid Edge World Forum.
Among other initiatives, SCE is undertaking an in-depth study of how distributed energy resources can be deployed to offset increasing customer demand in central Orange County with its preferred resources pilot. When the Tesla-SolarCity announcement came out, she thought, "This is what we’ve been looking for,” said Cagnolatti. “Two markets have come together.”
"You can never count Elon Musk out"
But despite all of the potential, the financial hurdles of the acquisition are difficult to ignore.
Financial analysts see SolarCity’s recent weak performance as a major drag for Tesla, which is only just approaching the point of being cash flow positive. Barclays called the deal a “lean, mean cash-burning machine for Tesla” and a “life-line for SolarCity.” J.P. Morgan said the firm sees few synergies between the two companies. Credit Suisse analyst Patrick Jobin estimated there is a low, 20 percent to 40 percent probability the deal will ultimately be approved by shareholders. UBS was also skeptical, largely because of the risk around SolarCity.
“We see the differing business models could complicate results for both companies, as well as having a more limited investor overlap (TSLA appears tracked by industrial/tech investors, while SCTY tracked by largely ~energy/tech investors),” wrote UBS’ Julien Dumoulin-Smith in an investor note. “Our recent analysis suggests SCTY is (1) losing market share and (2) [facing] significant regulatory risks, and is in (3) difficult markets amidst (4) challenging financial needs.”
SolarCity’s delayed New York manufacturing facility is one of the concerns. Meanwhile, Tesla is busy finishing up the Gigafactory and preparing to manufacture nearly 400,000 units of the Model 3. With Tesla’s plate already full, Dumoulin-Smith and others have called the SolarCity acquisition “a distraction.”
One clean energy investor, who spoke on the condition of anonymity, admitted it was difficult to see why Tesla would buy SolarCity, given that both companies bear financial risk and there are far cheaper solar options on the market for Tesla to buy.
“I’m struggling on this one, although broadly speaking, I’m a fan of Tesla, and SolarCity has done some good things too,” he said.
“It is my belief that consumers, more and more, are looking for complete solutions and that may mean smart homes, that may mean EVs and energy storage and energy generation. In that regard, a Tesla energy-plus-automotive solution is a powerful, grand vision,” the investor said. “However, the short term for both companies is not necessarily enhanced. Given the challenge both companies face from a cash burn standpoint, they are not advantaged by a merger in any way I understand.”
“That said, you can never count Elon Musk out,” said the investor. “He has proven that over and over again.”
How many solar sales can a car dealership drive?
According to Musk, one of the primary reasons for the merger is to reduce the cost of selling solar systems through Tesla’s stores. Customer acquisition costs remain one of SolarCity’s biggest challenges. But it’s not a given that selling solar through car stores will drive down soft costs.
“The benefits seem to be brand recognition rather than complementary products in the near term,” said MJ Shiao, director of solar for GTM Research. “For now, EVs and solar are different products, and the sales pitches for a three- to five-year lease or loan on a premium car versus a 10- to 20-year lease or loan on energy services don't match. Is the average person going to walk into the store expecting to buy one and then suddenly get upsold on the other?"
“I like the retail angle in that it makes solar-plus-energy products more visual to the homeowner,” he said. “But Tesla's retail footprint is limited -- how many sales is that truly going to drive for SolarCity?"
Even if the partnership does open up access to a larger addressable market of more educated, wealthier customers, that still leaves questions about why a merger is necessary to go after them.
“I agree that a comprehensive energy product suite requires a strong integration,” said Shiao. “But even after Musk's comments, I still don't understand why Tesla and SolarCity couldn't do this through an exclusive partnership.”
BMW has actually been selling SolarCity products at its dealerships since 2013. Customers who buy a BMW i vehicle are eligible for a $1,000 credit for their solar purchase. “Electric vehicles and local solar production at your home just makes so much sense,” said Rob Healey, manager of electric vehicle infrastructure for BMW North America, in an interview.
This week, BMW announced the launch of an energy storage solution for homes and businesses. Similar to Tesla, the German automaker wants to offer customers a comprehensive sustainability package.
What does BMW’s new suite of cleantech solutions say about the Tesla/SolarCity deal? On the one hand, BMW’s under-advertised and likely undersold solar-plus-EV offering is a signal that there’s room for another entity to come on the scene and do it much better. On the other hand, the fact that BMW is making a play with an expanded suite of distributed energy offerings is a signal that competition to lead the sector is heating up.
The billion-dollar word: Synergy
The market is also changing. Healey said he sees net metering policies being rolled back, which will only enhance the case for combining solar with some form of energy storage. If customers no longer receive a retail-rate credit for putting excess solar energy back on the grid, they need to consume as much as possible on site for solar to make financial sense.
“What we’ve seen in 2015 is pressure on the net metering topic. In Nevada, [net metering] is going to get rolled back over the next few years, and there was a very close call in California where they also debated not offering net metering,” said Healey. “If you don’t have any place to put that energy and no net metering, you really have no financial incentive to put solar on your roof. [BMW’s home battery] will address that issue, which may be coming in the future.”
Regulatory uncertainty is hurting SolarCity. The Southwest has been a flashpoint for debates over net metering, and now distributed solar debates are spreading. This week, the Federal Trade Commission held a workshop to discuss utility anti-competitiveness and solar consumer protection, possibly with a plan to introduce new, onerous guidelines for solar companies. Meanwhile, a handful of utilities have proposed introducing demand charges, which makes rooftop solar less attractive.
Interestingly, energy storage companies tend to like demand charges, because energy storage gives customers the flexibility to shift their load and avoid higher fees. SolarCity has been pushing hard to preserve net metering, so it’s unclear what kind of policy position a Tesla solar-plus-storage company would take.
Tesla is also working closely with utilities to sell grid-scale batteries, which Musk said is the real money-maker for his energy storage business. Would a merger with SolarCity, which has a much more adversarial relationship with utilities, jeopardize those deals? Musk would no longer be able to pass off any aggressive political tactics on his cousin.
Meanwhile, as long as net metering is in place, it’s hard to make batteries “work” in the near term, said UBS’ Dumoulin-Smith. For that reason, he doesn’t see a real synergy between SolarCity and Tesla’s battery business through the next three- to four-year period.
“Synergy” has become a billion-dollar word in the clean energy industry. Investor concerns that Vivint’s residential solar business was a poor fit with SunEdison’s large-scale wind and solar business killed the acquisition deal and played a significant role in SunEdison’s bankruptcy.
Tesla is not SunEdison, but the SolarCity merger invokes a comparison. SunEdison attempted to become a leading next-generation energy company, but ultimately took on too much and collapsed in the process. Does Tesla risk doing the same?
At the very least, SunEdison’s experience doesn’t help the Tesla/SolarCity case from an investor sentiment perspective. Solar stocks have been under intense scrutiny across the board, and investors are wary of the growth-at-any-cost model. Consequently, some investors see the SolarCity deal as a “bailout.”
"Giving Elon the benefit of doubt, I think he saw an opportunity to go all-in on a vision he believes in -- and I share that view of an integrated service that goes beyond EV, solar and stationary storage as individual components,” said GTM Research's Shiao. “That said, his answers on Wednesday morning's investor call don't inspire confidence that he has a clear roadmap for the 'synergies' that Tesla and SolarCity can unlock as a single company.”
Listen to Shayle Kann and Stephen Lacey discuss the merits of Tesla's solar roof below.