Can Tesla’s Solar Roof Disrupt The Solar Market?

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Tesla (NYSE:TSLA) has been looking to shake up the solar market following its $2 billion acquisition of SolarCity with its new solar roof system. While the product was announced late last year, Tesla began taking orders from prospective customers from May, noting that it has already completed the first few installations for employees. Although the solar roof has received a lot of publicity, it remains to be seen whether the product will be able to materially boost Tesla’s solar business, which has seen some sluggishness in recent quarters.

We have a $205 per share price estimate for Tesla, which is well below the current market price. Read our current stance on Tesla here.

High Pricing, Conversion Efficiency Remain Concerns 

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Tesla’s basic strategy with the product is to make solar more cost-effective and aesthetically pleasing for residential customers by embedding photovoltaic cells into glass roof tiles. However, the concept has been tried in the past and hasn’t been particularly successful. For instance, SunPower, the second largest U.S. solar manufacturer, produced a solar roof about 10 years ago but discontinued the product as it was perceived as being too expensive and not very efficient related to its size. Dow Chemical Company also stopped selling its solar shingles in July 2016, apparently for similar reasons. While Tesla has been able to bring down costs, with its active tiles priced at about $42 per square foot ($11 for non-active tiles), the tiles don’t appear to be as efficient or economical as conventional solar panels.

For instance, an analysis by EnergySage that considers a 3,000 square foot home in California estimates that a conventional 8.5kW solar panel system would cost about $26,030 before rebates. On the other hand, installing a Tesla solar roof on a similar property could cost $50,900 (almost double) and provide just 6.25kW of capacity. The proposition would make a little more sense if customers needed to redo their roofs or install it on homes that are under construction. Assuming that a new roof costs about $20,000, the Tesla roof could still be as much as 50% more expensive on a per-watt basis, compared to a traditional roof with mounted solar panels.

Tesla Does Have Some Advantages

However, there could be a couple of factors working in Tesla’s favor. For one, Tesla’s brand strength and its base of loyal (and affluent) automotive customers could help to drive early demand. Tesla has already indicated that its solar roof tiles are sold out into next year (although volumes are likely to be small). Secondly, with the acquisition of SolarCity, Tesla has gained access to a sizable amount of high-efficiency solar cell production. The company’s manufacturing facility, which will be operated along with Panasonic in Buffalo, New York, will be the largest producer of photovoltaic modules in North America when it is fully operational, producing about 1 GW of panels by 2019. The significant economies of scale from the mass production, coupled with technological improvements, could help Tesla gradually bring down pricing for the solar roof. Thirdly, Tesla has also been working on modifying its sales and marketing model for solar. Customer acquisition costs account for a meaningful portion of the costs of a residential solar system, and Tesla has been working to reduce these by using its upscale automobile stores in shopping malls and other prime locations as touch points for prospective customers. The company stopped SolarCity’s door-to-door sales earlier this year, while increasingly staffing its auto stores to take care of solar transactions as well.

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