Does Tesla Acquisition of SolarCity Make Sense?

Does Tesla's Proposed Acquisition of SolarCity Make Sense?

Electric vehicle and battery manufacturer Tesla announced a bid to acquire solar leader SolarCity for $2.8 billion, and has clearly stated its motivation behind the deal: reduce the cost of solar plus storage through vertical integration and be more of an energy company than just an automotive one. The immediate benefits of the union are unclear, the strongest potential impact lies in long-term dominance in the incipient solar-plus-storage business.

Photovoltaic installations have clearly demonstrated their value in providing grids with a reliable – and increasingly cheaper – source of electricity while also providing a return on investment to investors, home-owners, and businesses. Solar’s intermittency is still an issue, but one energy storage can solve. So it’s no surprise that partnerships are forming to develop solar-plus-storage business cases as shown below.

Given this scattered landscape, the merger of Tesla and SolarCity could cement the firm as a go-to energy solutions brand, forming an integrated heavy-weight to muscle out competitors. However, according to Lux Research, two key issues limit the short-term upside of this deal.

  • Vertical integration: Tesla has touted the benefits of being the only fully integrated company offering solar plus storage, but are there benefits to this level of integration? Tesla could lower the soft costs of combined solar and storage, but systems are still expensive enough that eliminating soft costs does not unlock markets in the short term. Nonetheless, SolarCity stands to gain through lower-cost battery supply and access to Tesla’s sales network.
  • Timing: While there are long-term benefits to being a vertically integrated provider of solar and storage, it’s not clear that the time to act for Tesla is now. Although CEO Elon Musk’s long-term vision is for Tesla to be more than an automotive OEM, the company is in arguably its most crucial period while it continues building its Gigafactory and accelerates production ramp-up of its Model 3. Tesla has continued burning cash, and adding SolarCity’s debt burden adds considerable financial risk.

While the long-term synergies of solar and storage do exist, Tesla’s bid is far too risky for the company to act on while it scales up production of its most important vehicle to date. This deal is unlikely to happen in part due to the legal concerns – over half of SolarCity’s board has recused itself while it still must pass a vote from both shareholders – and Tesla will be better off for it.