Last spring I mused on whether we would see vertical integration in the solar market when First Solar acquired TetraSun and eyed the Japanese residential rooftop market. The opportunity to be the panel maker, installer, proprietor of mounting systems, marketer and even financing vehicle seemed to be a very tempting way to drive competitors out of the market while driving up margins.
Apparently SolarCity was thinking just that. After picking up Zep Solar, a maker of mounting systems, and Paramount Solar, an virtual sales and marketing company focused on solar, the company took the final critical step recently by acquiring Silevo, a maker of solar modules with efficiencies of 21 percent at converting sunlight to electricity.
SolarCity already controls roughly a third of the rooftop solar market and while the Silevo plant will be up and running in 2016 at the earliest, it’s going to get increasingly difficult for competitors to survive. Vivint and Verengo will struggle to match the company’s efficiencies of scale and vertical integration while mom and pop regional installers will face similar problems. SolarCity acquisition is the beginning of building a highly defensible position, effectively locking others out of the market.
And if you look at the language that SolarCity’s Chairman Elon Musk has used, it’s clear that SolarCity isn’t even particularly concerned about competition being other solar installers. Rather, when he writes things like the “”Goal is for unsubsidized solar power to cost less than grid electricity from coal or fracked gas” it’s clear that the company is gearing up for a long term cost fight against natural gas power and retail electricity rates.
The Silevo acquisition comes on the heals of Tesla’s own announcement that it would be building a “gigafactory” to produce batteries. In both cases one of the stated reasons is that not enough batteries and panels would be available to meet market demand. That’s probably more true for batteries than solar power, where there’s actually oversupply. But really the real reason is that Tesla and SolarCity realize they want to be in charge of the core building block at the base of their respective businesses.
And going forward it’s likely that the companies will become more intertwined. As Tesla lowers the cost of batteries and SolarCity expands, we’re likely to see greater cooperation where selling residential customers solar systems combined with less expensive battery backup systems for the evening hours becomes more ready for the mass market. This is one way of handling the ongoing net metering fights in which utilities are pushing for larger connection fees and new formulas to lower payments to residential solar customers that want to sell power back to the grid. Someday soon it may be cost effective to be grid independent.
The realities of Musk’s strategy to vertically integrate both Tesla and SolarCity has not been lost on the competition. Boston-Power, a battery manufacturer which began in Massachusetts before moving to China to focus on manufacturing there for the Asian market, recently raised $250 million. CEO Sonny Wu noted to The Wall Street Journal“Somebody has to compete with him [Musk].” With China’s significant urban pollutin problem, there’s optimism that an EV market could find more growth in the coming years.
In the end, both Tesla and SolarCity have opted for vertical integration, wanting to be in control of IP and manufacturing. Others will argue that advantages remain for a value chain in which panel makers specialize to produce greater efficiencies or solar financing firms optimize capital costs. But at the types of volumes and profit margins that Tesla and SolarCity are gunning for, there’s an equally good argument that these two companies will have capital to pour into R&D while expanding margins as competitors struggle to compete.