Tesla had made it a goal to vertically integrate long prior to the current offer to purchase SolarCity. SolarCity took action purchasing a solar panel and solar racking company. A looming question becomes – how exactly will TeslaSolar protect itself in the solar inverter market? TeslaSolar could purchase a close technology partner like SolarEdge or design in house like it does with Tesla automobiles. With powerful options like these, arguments of value of cash, availability of in-house focus, risk of inaction/value of action and control over data are probably the driving considerations.
The inverter is one of three main components in a solar power installation – solar panels to collect the sunlight and convert it to electricity, racking to hold the solar panels and connect to the ground or the roof of a structure, and the inverter to convert the solar panel’s Direct Current (DC) electricity to power grid compatible Alternating Current (AC). In addition to converting electricity, the inverter also manages and monitors. For instance, in Hawaii – Enphase inverters and the power company are managing bumps in sunlight via information collection on individual solar panels. This increasing management ability has meant the stature and intelligence of the inverter has risen significantly.
The probability is very high that during executive level discussions at both Tesla and SolarCity its been asked whether to act on this challenge. We know that conversations on design of inverters and how they affect hardware are ongoing in the labs of Tesla. During the initial talks about Tesla purchasing SolarCity, Musk mentioned how a PowerWall + SolarCity install means two hardware systems to report data – something an inverter does. This potential synergy is representative of technical overlaps that could lower the cost of solar power + energy storage (and – key point – drive sales).
With the PowerWall 2 coming out this summer, I’d be willing to bet there were a few drawings of hardware that interconnects a PowerWall, Silevo modules and a Tesla automobile. Pure DC energy coming from solar modules to charge a PowerWall and a Tesla concurrently sounds like pure gold to me.
The most pressing consideration – risk of inaction/value of action – might be summarized in two points:
- Will buying 3rd party inverters hurt margins?
- Will 3rd parties develop technology to our unique needs?
According to NREL (in a year old report), a residential solar inverter will cost $.23-34/W out of about $3.09/W. SolarCity’s installation costs, as per the Q1 Earnings Report, are presented as similar to the broader market. I’ll hazard a guess, based upon my purchasing prices, that SolarCity is paying – at most – $.20/W for its inverters. With an approximate 1GW of solar power to be installed by SolarCity in 2016 at about $3.00/W, inverters represent a $200M cost out of a total project development cost of $3B. The inverters represent about 7% of total install costs. The manufacturer’s 10-20% margin would theoretically give SolarCity $20-40M/year of ‘profts.’ $20-40M out of $3B represents about 1% of annual costs and $0.02-4/W of an installation.
Is it worth $.02-0.04/W in profit and $200M in revenue to purchase a company like SolarEdge? At first blush, maybe yes. With Tesla being so close, and complimentary, to SolarEdge – I’d reason that the market price of $688M has been studied by analysts looking for a merger and acquisition edge. SolarEdge being slightly under the IPO price of $18, even after great growth and slaying their main competition, makes the idea a bit more reasonable sounding. SolarEdge is expecting to sell greater than 1.5GW of inverters globally, they’d more than to meet TeslaSolar’s needs. A share premium of 25% could be expected – $860M all in for Tesla’s $34B market cap – and you’d have premier talent from the globe around in the form of Silevo solar panels, Zep racking, Panasonic/Tesla batteries and SolarEdge inverters.
I’d argue very hard that SolarEdge’s ability to offer solar panel level analytics to an individual like Elon Musk is very valuable. SolarEdge has come to dominate in this specialty and seems to have taken a further step ahead with the SolarEdge HD Wave while working closely with Tesla. SolarEdge’s competency both increases the desire to purchase and decreases the need to purchase in the same breath – TeslaSolar will want to buy the best to fill out their portfolio, but because the best is doing a pretty good job they don’t have to. If SolarCity were done with its Buffalo factory and not potentially being purchased, buying SolarEdge might be the smartest bet it could make – but right now, maybe keep up the close working relationship.
Ought TeslaSolar consider purchasing a more exotic technology, like that from CE+T Power, and then building something of their own on top of it? CE+T won the Google & IEEE Little Box Challenge, a contest to develop a very small inverter. Is that same $200M in revenue enough to attempt to outdevelop a company like SolarEdge? Tesla already designs similar, high quality hardware for its cars. As well, SolarCity is experienced managing a distributed network of data collecting devices – their own solar systems. For $200M a year – and growing – in expenditures, with a CEO that is very talented at designing electronics, a whole new inverter infrastructure might be worth the investment. Whether they have the time and resources to design this new network while integrating two companies, ramping up the X, launching the 3, building the SolarCity Gigafactory, finishing the Tesla Gigafactory, and going to Mars might be a question that stockholders would prefer not research.
The biggest reason for TeslaSolar to consider taking more control over inverters is the data being collected. As Elon Musk tries to light the nighttime sky, while building his own solar modules and pushing the lives of solar modules further – understanding every facet of energy production, usage and storage will be of the utmost importance. Technologies like these are at the heart of the US Department of Energy’s goal of having the power grid run at 100% solar power in the future while Germany is using AI to predict sunlight three days out. Information tools will be a requirement if TeslaSolar is to become a $1 trillion company.