There are basically three segments in the solar industry:
- Residential (or 'distributed'), that is, rooftop.
- Commercial (or 'non-residential' solar).
All of these can be connected to the grid, often even with guaranteed tariffs (the feed-in tariff). This often isn't the main concern in residential solar as people put solar panels on their roof simply to save on their electricity bills. However, even here putting surplus generation back into the grid can be a nice extra.
Commercial solar are larger scale projects for corporate customers. Utility scale solar are basically electricity generating plants for the grid consisting of large arrays of solar panels.
The point is that utility (and large scale commercial) solar is way more efficient compared to solar panels on your rooftop. This shouldn't be surprising, rooftops are often not very well aligned with the sun, they cannot move with the sun, they might fall partly or even completely under shades at certain times and are labor intensive to put up.
Compared to these, utility and large commercial projects benefit from economies of scale and can be much better aligned, which makes them twice as efficient, on average.
That efficiency difference has led to some innovative thinking in some quarters, and a new business model, 'community solar' has emerged. Forbes explains us what that is:
Instead of installing a small solar system on your roof, you sign a contract to pay for a portion of a large, utility-scale solar installation that the utility builds and operates for you somewhere else (in my case, on top of a big commercial building just outside of my hometown of Madison, Wisconsin). The utility still gets to earn a rate of return on the solar plant (as it would with any plant it owns and operates). So the utility is happy. I get greener, more efficient utility-scale solar power without having to put anything on my roof.
The advantages (twice as efficient, no unseemly panels on your roof, no installation costs) of community solar are actually so significant that this could catch on and produce different consequences for different players in the solar market.
For utilities it's also attractive as through net metering, residential solar doesn't pay its fair share in the cost of maintaining the grid.
Basically, community solar seems a considerable competitive threat to those companies which specialize in residential solar panels, and residential installers. That is, we are thinking about companies like Tesla (NASDAQ:TSLA), SunPower (NASDAQ:SPWR), and Vivint Solar (NYSE:VSLR).
Vivint (which was supposed to be taken over by the now defunct SunEdison) is obviously in the firing line as a big solar installer.
SunPower also engages in commercial and utility solar projects, they have a yieldco joint-venture with First solar (NASDAQ:FSLR) for this purpose. However, their solar panel efficiency is one of their competitive strength and this counts more in the residential market where space is limited.
Also, as the company is experiencing a cyclical downturn, the residential sector still is one of their bright spots at the moment, so if community solar catches on this could be a problem for them. The most interesting case is Tesla
Tesla has become the only integrated alternative energy company on the market through the takeover of SolarCity, the largest solar installer in the US. While investors were lukewarm, the deal was approved by a good majority (85%) of shareholders.
There are serious skeptics though. USB slapped a sell rating and a $160 price target on the stock.
We believe that the longer term vision remains very attractive and see two significant benefits from the acquisition:
- Opportunities for cross-selling.
- Opportunities for integrated offerings, including services to the grid.
The cross-selling opportunities are fairly obvious. SolarCity sells roughly 100,000 solar roofs a year while Tesla has contracted orders for 300,000 Model 3 EVs.
When charged at home, EVs will increase electricity demand considerably so this should get more Model 3 buyers interested in a solar roof.
The reverse also holds, and we note that people buying either product are already likely to be favorably disposed to the whole Tesla vision, at least more so than the average population.
But how will Tesla be affected by community solar? Well, at first sight, this looks problematic. SolarCity is the biggest installer of rooftop panels. What's more, Tesla had just made a considerable PR coup with fancy looking solar shingles that look indistinguishable from a high-end roof and nothing like these unseemly solar panels.
There are seven styles in all although the most popular four (above) will be offered first (the coming summer), the others will follow after three months. How does Tesla pull this off? Well (from Bloomberg):
The roof tiles are actually made of textured glass. From most viewing angles, they look just like ordinary shingles, but they allow light to pass through from above onto a standard flat solar cell. The plan is for Panasonic to produce the solar cells and for Tesla to put together the glass tiles and everything that goes along with them.
There is actually a disadvantage attached, but perhaps not for long (from TechCrunch):
The current versions of the tiles actually have a two percent loss on efficiency, so 98 percent of what you'd normally get from a traditional solar panel, according to Elon Musk. But the company is working with 3M on improved coatings that have the potential to possibly go above normal efficiency, since it could trap the light within, leading to it bouncing around and resulting in less energy loss overall before it's fully diffused.
They have another problem which is heating, as the glass substrate allows for very little ventilation.
But the advantage is not just (much) better looks, it's also cheaper than a normal roof, according to Elon Musk (from Bloomberg):
Tesla's new solar roof product, he proclaimed, will actually cost less to manufacture and install than a traditional roof-even before savings from the power bill. "Electricity," Musk said, "is just a bonus."
How can he pull that off? Well.. (from CleanTechnica):
Elon explained to the audience that a lot of it has to do with the current supply chain for roofing materials, which he said is incredibly inefficient. It turns out, the glass tiles weigh up to 80% less than conventional roofing materials, especially ceramic tile or concrete tiles. Both of those are very popular in many locations around the world, especially southern California and the Mediterranean countries. Not only do the Tesla glass tiles weigh less, they are less fragile, which means less loss for breakage. Much of the cost of conventional roofing materials can be attributed to shipping all that weight over long distances. And, as Musk said last month during the grand unveiling for the solar roof, glass is basically sand and sand is super cheap. Not every tile on every roof will have a high-efficiency solar cell embedded into it. Some sections will be unsuitable for producing solar power either because they face the wrong direction or are shaded during all or part of a day.
It wasn't instantly clear what "cheaper than a normal roof" meant exactly, but here is an important clarification. Here is Elon Musk again (our emphasis):
The goal is to have solar roofs that look better than a normal roof, generate electricity, last longer, have better insulation and have a lower installed cost than the price of a roof plus the price of electricity.
By the price of electricity he basically means the cost of a normal solar system. We'll spare you all the calculations (you can find some here at GreenTechMedia), but basically it means that these solar shingles are only really interesting if you need a new roof, or (better still) if it is used in the construction of a new house. At least for now.
It's not quite as clear cut, perhaps the real selling point is simply this (from Julian Spector, GTM):
Customers fed up by "messy" installs by solar lease companies are starting to crave the elegance of solar integrated roofs for their homes, explained Oliver Koehler, CEO of solar roof company SunTegra, in an interview earlier Friday.
Putting this solution to market isn't entirely straightforward either (Julian Spector, GTM):
There's a market for new roofs -- 5 million a year in the U.S., as SolarCity's Lyndon Rive has pointed out. But people don't buy roofs from solar installers. Solar companies don't come with the expertise to install watertight roofs, so the product will require partnering with a new cast of companies from the roofing and homebuilder industry. Musk did not touch the question of what channels he would leverage to get the shingles to customers.
Roof versus community
This whole idea, which was very well received and seen as a bit of a PR coup, could receive considerable headwind with a take-off in community solar.
However, Tesla has another card to play here which can put it into contention in the community (and even the commercial and ultimately also the utility sector). It's an integrated energy company.
While the merger and the new solar shingles got most of the attention, there might just be a more important breakthrough in the form of the new Powerwall 2 (from Bloomberg, emphasis ours):
The Powerwall 2 may be the cheapest lithium ion battery for the home ever made when deliveries start in January. Tesla is selling the batteries at retail prices that are cheaper than the average manufacturing cost at most companies, according to data compiled by Bloomberg New Energy Finance. We "certainly expect it will move the market prices downwards as we saw last year with the first Powerwall," said Yayoi Sekine, a BNEF analyst who covers battery technology.
We have to say, here is where it gets interesting. Energy storage is the holy grail of clean energy as it does away with its main problem, intermittency.
The capacity has been more than doubled, 14kWh versus 6.4kWh for the first version, much more suitable for a typical American home.
Now, not only does an integrated residential offering, including storage make Tesla more competitive, the batteries could also position Tesla to offer community and commercial projects itself, with the competitive edge mainly coming from the storage metrics that nobody can meet, at least not yet.
And integrated offerings have other advantages, here is Sonia Aggarwal, director of strategy at the think tank Energy Innovation ( GTM):
An aggregator like Tesla could sell a portfolio of distributed assets to a utility or directly into wholesale markets to balance out large-scale resources at different times of day, Aggarwal explained. Right now, California, New York and Texas are really the only places where a wholesale market offering makes sense. But Aggarwal said she believes vertically integrated markets will also see greater value in aggregated distributed energy services over time, because it's good for the grid, affordable for customers, and low carbon. Well-integrated distributed energy resources can also be a valuable resource for utilities. Solar alone creates challenges for the utility, such as California's duck curve. However, solar-plus-storage, in combination with more sophisticated rate designs, can be a grid asset.
Even EVs themselves can have benefits for grid stability. After all, from an energy point of view, they're just mobile batteries.
Residential solar installers and solar panel manufacturers which mainly depend on the residential market might come under pressure from the new community solar model.
Tesla, while having just taken over the largest of the residential installers, SolarCity, might not escape these pressures, but as an integrated alternative energy company it can have a few more tricks up its sleeve and could even join the segment.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.