Nate Berner is an investor, author, and co-founder of Deep Green Solar, which provides solar financing for commercial buildings.
In 2016, Elon Musk stepped onstage to show us the home of the future. As well as a battery in its two-car garage, the future home had solar roof tiles in a choice of slate grey or Tuscan red:
Tesla acquired Solarcity for $2.6bn in 2016. Marking the deal, a blog post on the Tesla website talked up the prospect of a rooftop solar panel “that looks better and is more durable than a normal roof, that can be easily customized to fit the unique needs of each house, and that will lower costs to the consumer.”
Seven years later, having won its lawsuit over the purchase of Solarcity, what was once a pillar of the Tesla strategy has been pushed further and further into the background. Not much is said any more about the status of the Solar Roof, nor Tesla’s solar efforts more generally. Neither “Solar” nor “Energy Generation” garnered a mention in the company’s Q3 2023 earnings call.
Tesla’s latest investor day presentation (subtitle: “Sustainable Energy For All of Earth”) offers some Masa-isms around the company’s plans for storage:
There are at least some numbers for solar . . .
… but it’s not always made clear whether the “we” that should build these renewables is Tesla or humanity, so good luck feeding that into an NPV model.
To be fair, there are a few reasons why Tesla might want to offer a nuanced view of its once-vaunted solar business. Across the solar industry, the bloom is well and truly off the rose.
Sunrun, once an industry leader with a market cap of $20bn in 2021, now has a market cap of $2bn and recently said it was “rapidly transitioning to a storage-first company.” Perhaps Sunrun is particularly keen to focus investor attention away from solar, given that it recently announced a $1.2bn goodwill writedown relating to its 2020 purchase of solar company Vivint for $3.2bn.
Many of the largest names in the US solar industry have shared Sunrun’s pain as higher interest rates, cost inflation, California regulatory changes and supply chain issues have checked much of the momentum created by the IRA. It’s been a rough four months:
The industry’s woes have not passed Tesla by, although it has idiosyncratic challenges as well. Tesla’s solar deployment volumes have been anaemic.
Produced primarily in its star-crossed Buffalo Gigafactory 2, the Solar Roof is an actual product a person can buy, which isn’t always the case with Tesla launches. But deployments, once targeted by the company to run at 1,000 per week, last year were estimated to average 21 per week.
Prices were hiked in 2021, with at least one customer charged more than double the contract cost, which resulted in a wave of cancellations and a class-action lawsuit that Tesla paid $6mn to settle. Between Tesla’s 10ks of 2021 and 2022, Solar Roof deployments nearly halved.
Opportunities to raise the roof have been few. Per Tesla’s 2018 10k:
[w]e have been installing this product [Solar Roof] at a slow pace to gather learnings about our design and installation processes, and plan to ramp the production of Solar Roof with significantly improved manufacturing capabilities during 2019.
The 2020 10k has this ginger note of encouragement:
We are ramping the volume production of Solar Roof at Gigafactory New York, and we are improving our installation capability and efficiency.
The 2021 filing offers some similarly bland wording:
We are currently focused on ramping production of energy storage products, improving our Solar Roof installation capability and efficiency.
Although there were hints of trouble of a negative gross margin kind:
Gross margin for energy generation and storage decreased from 0.9% in the year ended December 31, 2020 to -4.6% in the year ended December 31, 2021, primarily due to a higher proportion of Solar Roof in our overall energy business which operated at a lower gross margin as a result of temporary manufacturing underutilization during product ramp despite an improvement in gross margin compared to the prior year.
For the 2022 10k and the Q3 2023 10Q we get a repetition of the same catechism:
We are currently focused on ramping production of energy storage products, improving our Solar Roof installation capability and efficiency.
For more colour on how things have gone, we can turn to Musk’s June 2019 deposition as part of a lawsuit filed by Tesla shareholders alleging that by buying SolarCity the members of Tesla’s board of directors had acted in their own best interests. Musk explained that to meet quarterly numbers, he had redeployed every solar worker he could into the company’s car production lines:
But Musk said he remained optimistic about the division’s prospects. The strength of his optimism was such that when asked about staffing levels, Musk instead set off on a long meander around the difficulties of engineering solar roofs, and how Tesla’s retrofit solution “is going to be super easy”, and how he wasn’t answering the question because “at the end of this meeting, you’re like, oh, man, I want to get this thing, it’s going to be great”:
Its CEO’s confidence notwithstanding, Tesla’s plan for solar is difficult to discern.
Yet as of the end of September, Tesla had $5.3bn of “Solar energy systems, net” on its balance sheet at cost. These assets are mostly long-term leases and other agreements to sell power to building owners per Tesla’s accounting methodology, and (from the 2022 10k, with our emphasis) have not yet been impaired:
We review our property, plant and equipment, solar energy systems, long-term prepayments and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. We measure recoverability by comparing the carrying amount to the future undiscounted cash flows that the asset is expected to generate. If the asset is not recoverable, its carrying amount would be adjusted down to its fair value. For the years ended December 31, 2022, 2021 and 2020, we have recognized no material impairments of our long-lived assets.
Musk’s grand ambitions for the business may have been forgotten but for as long as interest rates persist, the equity value of Tesla solar is hurtling towards a head-on collision with reality.
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