While Tesla’s electric vehicles are gaining popularity, its solar business has been in retreat in an ultra-competitive market. Tesla lost its crown as America’s leading rooftop solar installer in 2018, falling behind lesser-known rival Sunrun (RUN), according to research firm Wood Mackenzie.
Now Musk is trying to jump-start Tesla’s solar business with a simple strategy: Cutting costs. Sharply. Tesla has cut its solar panel prices below the national average.
“Tesla is likely hoping to use low prices to drive out competition and gain market share,” said Timothy Fox, vice president and research analyst at Clearview Energy Partners, an energy research firm.
To make the cost cuts work, Tesla has standardized systems and begun to require customers to order solar panels online, the company told The New York Times this week. By stopping door-to-door sales, Tesla is trying to slash so-called “soft” costs that play a significant role driving up the price tag on solar panels.
Tesla’s ‘half-court shot’?
But some observers on Wall Street are skeptical that Tesla can pull off the strategy without eating into its already-shrinking bottom line. Profit margins in the solar industry are razor-thin.
“It feels like a half-court shot,” said Dan Ives, an analyst at Wedbush Securities who recently downgraded his rating on Tesla.
SolarCity was the No. 1 solar player when Tesla made a controversial $2.6 billion deal in 2016 to acquire the company, which was founded and run by two of Musk’s cousins. While Musk pitched the acquisition as a way for Tesla to become a one-stop shop for clean energy, analysts say the benefits have been elusive.
“So far, it’s been like a first-round draft pick that was a bust,” said Ives.
Tesla falls behind Sunrun
Understandably, Tesla’s main priority is its far larger electric vehicle business. The company has spent heavily on mass-producing the Model 3, developing self-driving technology and building massive factories to manufacture batteries.
Tesla’s solar business, on the other hand, has shrunk by about 60%, according to Colin Rusch, senior research analyst at Oppenheimer & Co.
“They’ve really throttled that business back and stopped throwing cash at it like SolarCity was,” said Ben Kallo, an analyst at Baird.
That has allowed Tesla’s solar rivals to catch up.
In 2018, Tesla dropped to second place in the solar home installation race in 2018 behind Sunrun and just ahead of Vivint Sola (VSLR)r, according to consulting firm Wood Mackenzie.
“Elon Musk has a lot of priorities on his desk,” said Fox. “His competitors may just have a more singular focus that has allowed them to gain market share.”
In a statement, Sunrun said it “welcomes” industry efforts to reduce costs and is “actively engaged” in cutting soft costs through permitting reform and other activities.
Tesla’s solar business isn’t big enough to really move the needle on Wall Street. Shareholders care way more about the latest Model 3 numbers.
“Most investors assign minimal value to it,” said Ives. “It continues to be more of a distraction than a value-creator.”
But Tesla is trying to change that by slashing costs. Depending upon where they live, Tesla customers can now expect to pay $1.75 to $1.99 per watt after a federal tax incentive.
After accounting for the federal investment tax credit, the national average is $2.14 per watt, according to EnergySage, an online marketplace for buying and selling solar that is backed by the Energy Department.
Tesla’s price cuts are overdue, Rusch said.
“They were going after aggressive pricing that was unnecessarily high,” he said.
Tesla has a big advantage over its competitors: brand recognition.
“They retain the sexy factor. It’s a company with a household name and a well-known CEO,” said Fox.
When will the Gigafactory 2 ramp up?
Most of Tesla’s solar panels are manufactured by third-parties based in China, Japan and Korea, according to analysts.
However, Tesla is hoping to make its solar business more viable by mass-producing panels at a factory in Buffalo, New York. The facility, known as Gigafactory 2, is owned by the state and run by Panasonic (PCRFF).
Production began at the Buffalo factory in early 2018, though construction has not yet been completed, Tesla said in a filing on Monday. Tesla said it plans to meet certain hiring and investment requirements at Gigafactory 2, but warned that it could need to pay New York “significant amounts” if it fails to do so.
Bigger picture, Tesla’s price cuts underscore the advances made in the solar industry. Plunging costs have allowed both wind and solar to steal market share from coal.
For the first time ever, America’s renewable energy sector may have generated more electricity than coal during the month of April, according to a recent report by the Institute for Energy Economics and Financial Analysis.
“Solar power is cheap and getting cheaper. The long-term trends are very bullish,” said David Sandalow, inaugural fellow of Columbia University’s Center on Global Energy Policy. “From Indiana to India, solar is competing strongly with other forms of power generation.”
– Correction: A previous version of this story overstated the difference between Tesla’s solar panel cost and the national average.