Disruption is one of the big buzzwords in business these days. It seems like nearly every time the word Tesla is used, some variation of "disruption" is not far behind or ahead. The Gigafactory announcement is yet another point of confirmation that Tesla (NASDAQ:TSLA) is changing one of America's most beloved industries (automotive). But the Gigafactory announcement is also a harbinger to one of America's most essential industries (energy), and it may mean just as much or more to SolarCity (NASDAQ:SCTY) as Tesla.
We have all probably heard of Tesla's Superchargers by now, but not everyone is aware that they are powered by a combination of electric grid, solar, and batteries. The batteries are being used to store excess solar energy and offset the costs of buying energy from the grid. But a less known project by SolarCity has also been in the works; DemandLogic battery storage systems. SolarCity has been testing battery systems (provided by Tesla) in people's homes to complement their solar panels. Just like the Superchargers, the intention is to bypass peak rate charges and store or sell any excess energy, ultimately providing a lower energy bill. Now take a minute and imagine how a seemingly banal project like that could evolve in your city or neighborhood over the next five, ten, twenty years as the technology matures. Now think about how it could work for manufacturing companies, offices, and high-rises.
As solar and battery technology improve and proliferate, it could reach a point where people even with energy hungry mega-mansions could power their own home solely by solar/battery systems, we could potentially have clean energy independence as a nation (a national priority) and all the way down to each household. Eventually power utilities could go from being an essential part of civilized life to a just in case your solar/battery system fails service, like AAA subscriptions for your cars. While the Gigafactory obviously has profound implications for Tesla and the auto industry, it could potentially have even bigger implications to energy, and SolarCity is first in line to take advantage of it. Considering previous Tesla/SolarCity partnerships and their mutual ownership by Elon Musk, SolarCity is likely poised to benefit from the Gigafactory just like Tesla or factory partners.
Elon Musk (CEO of Tesla), Lyndon Rive (CEO of SolarCity), and Michael R. Peevey (California Public Utilities President) spoke Thursday afternoon at the California Public Utilities Commission Thought Leader Series on Innovation and the Impact of Regulation. One of the big themes of the talk was how public utilities can better regulate their way into better public benefit by supporting disruptive companies using new technologies such as SolarCity and Tesla. Part of the discussion even went so far as to talk about how the incumbent utilities are struggling to accept that green energy has now become not only better for society, but cheaper too. They referred to the traditional energy utilities as the horse and buggy manufacturers when cars where just beginning to become mainstream over a hundred years ago.
The trio also discussed how not very long ago, solar energy was a superfluous luxury, and now due to cost reductions and economies of scale, over 99% of American households that do not yet have solar energy will be drawn toward it, not only for the environmental aspects, but because it is now cheaper than coal/oil energy (that is why SolarCity has been able to grow with such veracity). So how is this relevant to investors? While it may be overvalued and volatile in the short term, on a long-term scale, it means that the energy market is on the cusp of a widespread shift in technology, and SolarCity is outpacing its next eight competitors combined in market share, they dominate the solar installation market. SolarCity has been growing at impressive rates with the above-mentioned 99% of the market ripe for picking. Moreover, it is providing such a high quality of service and product that it can actually bundle its solar lease agreements together and create BBB+ bonds (which essentially gives it unending and cheap access to capital for further expansion).
Perhaps most poignantly, the discussion turned briefly to the Gigafactory. Musk detailed how the batteries will first be used in cars and when the batteries reach a certain point, they will be replaced with new batteries, while the old batteries will be recycled and used for solar energy storage in homes (the demands of cars are much more capacity dependent than homes). So while the Gigafactory is of course an important milestone for Tesla, it is perhaps just as or even more crucial for SolarCity.
Disclosure: I am long SCTY, TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.