Image source: Tesla Motors.
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Tesla Motors (NASDAQ: TSLA) is holding a product demonstration event with SolarCity (NASDAQ: SCTY)this evening to "unveil an integrated solar roof with next-generation energy storage and EV [electric vehicle] charging," and it could shape the future of both companies. In the midst of their merger, Tesla needs to convince investors it would be better with SolarCity as a subsidiary -- and this product will be part of that argument. But there are a lot of questions for Elon Musk to answer in the presentation.
What in the world is a solar roof?
On the second-quarter conference call, the solar roof was unveiled as a concept to investors, but there wasn't much detail on what it was. That needs to change tonight.
Solar manufacturers have tried to make solar roofing products from shingles to flexible solar panels, and the history isn't good. Greentech Media put together a list of 12 companies that have gone out of business or abandoned building integrated photovoltaics in the past decade, and noted another 11 that are still in the business with very little success. In other words, Tesla and SolarCity have an uphill battle convincing people that integrating solar into a roof is a good idea. There are even simpler questions that don't have easy answers in the solar roofing market.
- Who is going to install solar roofs, or will SolarCity add this task to its installation functions? It doesn't seem feasible to train all of SolarCity's installers to build roofs, so will there be specialists or will the work be outsourced?
- How flexible will the installation of solar roofing modules be? Every roof is different and that's why wood and shingles work well in most modern residential roofs. They can be cut and shaped to fit the odd and off-center spots in every home. But solar cells aren't flexible, and somehow the solar roof needs to be adaptable to each house. Musk needs to explain how that will work.
- What is the sales channel? Most people won't think to call a solar company to replace their roof, so if this is going to be a big product, Tesla and SolarCity need to explain how they're going to sell it. And if they're going to target roof replacements, they need to figure out how to identify when and by whom roofs will be replaced, which doesn't seem like a trivial task.
Those following the solar industry closely know solar roofs have been a huge failure until now. Tesla and SolarCity will have to prove they have a product that'll buck the trend.
How will customers pay for integrated energy storage?
The more consequential product to be announced will likely be a next-generation Powerwall that seamlessly works with a standard solar power system. If Tesla can design the inverter into the Powerwall, so homeowners have fewer electrical boxes around the house, it would be a win for everyone. But there's a big outstanding question: How will customers justify the cost?
In theory, a homeowner could save solar energy during the day for use at night, but justifying that economically is a tough task. Today, the only state where there's a big gap between what a customer pays for electricity and the price they're paid to export electricity to the grid (known as arbitrage) is Hawaii. And Hawaii's electricity cost is about three times that of the continental U.S. In the other 49 states there's no clear way to justify the energy-storage price tag today.
Image source: SolarCity.
This isn't to say that there's no value in energy storage in the home, which will be unlocked eventually. But right now, it's not clear how a customer will accept spending thousands of dollars on energy storage.
Tesla's 6.4 kWh Powerwall currently sells for $3,000, which is before an inverter or installation costs that would run into the thousands of dollars. And since the average U.S. home consumes 29.6 kWh of energy per day, it would take five Powerwalls to store a single day's worth of energy, costing $15,000 for the batteries alone and well over $20,000 when you include installation and inverters. The cost of a next-generation Powerwall may be lower, but it's still a big outlay for consumers.
Let's say Tesla wants to sell the $20,000 Powerwall system (which would come down to $14,000 after the investment tax credit) to a homeowner, and to offer a 12-year payback that's financed either through Tesla or by the homeowner. Somewhere in the system, there would have to be $97 per month of cost savings or revenue opportunity from the energy-storage system for customers to justify the purchase. And Musk has to answer where those cost savings or revenue opportunities will come from. With solar alone already offsetting most of the utility bill, how will solar and storage be justified?
The cost-savings side is really key for energy storage, as it was for solar. Selling energy storage, however, won't be as easy as selling an electric vehicle, which can get oohs and ahhs from the neighbors. The sales process will come down to dollars and cents for customers, and if Tesla can't prove the integrated Powerwall will save money today, the product will be doomed before it even gets off the ground.
What is going on with SolarCity's solar panels?
The third thing Musk needs to address is SolarCity's solar panel manufacturing plans. Two years ago, the Silevo plant in Buffalo, New York, was key to SolarCity differentiating itself in residential solar, and if Tesla and SolarCity are going to be one company, a big value driver will be integrating the design of panels, inverters, and storage.Tesla has to be a leader in technology innovation in each component to be successful.
On a related note, Tesla recently blindsided investors with news that it had an agreement with Panasonic to come in and help SolarCity with solar panel manufacturing in Buffalo. It's not clear exactly what that means, but if Musk doesn't talk about a SolarCity high-efficiency solar panel that will be available to customers soon, it should be a red flag to investors, suggesting that there already are big problems with SolarCity's manufacturing.
For Tesla and SolarCity to succeed long term, they need to have both better technology and better integration than competitors for solar and storage. Without a proprietary solar panel that outperforms commodity panels, that thesis starts to fall apart.
There's a lot for Musk and team to cover tonight as they try to build the renewable-energy company of the future. Check back to Fool.com for more coverage on the product release over the next week. There will surely be a lot for investors to digest.
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Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of and recommends SolarCity and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.