This week, Tesla Motors (TSLA) announced an all-stock offer for SolarCity (SCTY). The transactions would create a vertically integrated sustainable energy company with Electric Vehicles (EV), storage, efficiency, demand response, and solar capabilities. Some have described the move as complex, or a distraction, but I believe that this could achieve the dreams that Elon Musk has of a company that is more valuable that Apple (AAPL) in the future.
As the industry reaches more than a million systems across the US this year, the solar market has reached critical mass. At the same time, the EV market, while starting from a low base, will surely meet goals of one million cars on the road in this decade. However, the deployment of cost effective technologies is not accelerating fast enough. From smart thermostats to high efficiency heat pumps, the time that it takes to deploy proven technologies at scale is too long. The business model needs shaking up – “Old is New”. Out is search engine optimization and email spam -- replaced by actual salespeople and showrooms selling solar power and electric vehicles.
The market potential could be enormous. Tony Leiserowitz, the Director for Yale’s Program on Climate Change Communication, has done extensive studies noting in his six Americas study that almost 13% of the US population is “alarmed” by climate change. Given that only 1% of residential consumers in the United States have solar on their roof and less than that have electric vehicles, there is the potential to unveil a combined “climate change package”.
Today, the solar only package isn't cost effective in all 50 states. Solar power sold with loan products could be cost effective and legal to deploy in about 20 states representing about 50 percent of the US population. On the other hand, Tesla’s Model 3 offering is cost effective to anyone in the market. The average American spends over $9,000 per year on each vehicle they own – including car payments, insurance, fuel, and maintenance. This is almost $800/month, far more than the fully burdened cost of a new Tesla Model 3. If there was a combined solar ($20K), EV ($30K), and efficiency ($5K) package SolarCity could cost effectively sell into all 50 states.
So how big is the market for this package? Today, 1 out of every 7 homes in Australia has solar on their roof. This transition spanned 2009-2014. With over 60,000,000 eligible US households, if Tesla/SolarCity could help the USA match the solar penetration of Australia, you would achieve an initial package revenue of over $470B – more if the Model S were substituted for the Model 3. There is no reason to believe that the solar industry couldn’t achieve the same market penetration in the USA by 2021.
Assume the target households pay an average of $200/month for their electricity/gas bill and $800/month to own, fuel and maintain their car. Tesla/SolarCity could provide a 20-year loan to customers with a payment starting at $900/month (initial savings of 10 percent) for the next twenty years. At an average interest rate of 11 percent across their consumer base, consumers could afford a $100K package. This would include a solar system, energy efficiency, multiple cars, and all of the maintenance and other services over 20 years. The gross margins for the company should be at least 20% on the first costs and 50% on the additional services.
Now Elon Musk didn’t say any of this on their conference call. Heck I’m not sure that he has even thought through how to do what I’ve described. But with climate change solutions representing the largest wealth creation opportunity of our lifetime, the world is waiting for someone to simplify decarbonisation for consumers. Who better to do it than Elon Musk?
