Taking Another Look At A Tesla/SolarCity Merger

Wall Street has not been kind to the idea of Tesla Motors buying SolarCity in a deal that would involve no cash but would pay the solar panel company with $2.8 billion in Tesla stock. Some analysts have even used words like “deranged” when referring to Elon Musk’s latest idea. But according toBloomberg, Elon may be crazy like a fox. Here’s why:

It says the residential solar power business is all about branding. No one can argue that in just a few short years, Tesla has built itself into a major brand respected and trusted around the world.Bloomberg sees parallels between the electric car business and the solar panel business. In both, potential customers often have a raft of questions. The technology for each is still fairly new and not widely understood.

A rooftop solar system involves lots of pieces. What panels do you buy? What about an inverter? What happens on cloudy days? Can I get paid by my local utility company if I send excess electricity back to the grid? How reliable is the installer? What about inverters? Which one is best? Who will service my system in the years ahead? What about warranties?

When you buy a Tesla, you get the entire car. All the pieces are there and they all work in harmony with each other. The company has the highest customer satisfaction numbers ever seen. Its service is widely praised. The vast majority of people are happy to do business with Tesla, as evidenced by the nearly 400,000 people who willingly stood in line for hours to plunk down a deposit on the upcoming Model 3.

Bloomberg remembers a time when computers were still novel technology and there was a welter of confusing claims. Then Apple opened its first stores. They were places where people could come to get answers to their questions without being pressured to buy something. Apple’s approach transformed the personal computer business.

It thinks if Tesla took the same approach with SolarCity products at its stores something similar would happen. That could ignite the domestic solar industry in a way that critics of the deal simply cannot imagine. A Tesla showroom that also offers SolarCity products would calm the fears of millions of potential residential solar customers and drive the industry to an entirely new level.

Bloomberg says, “What ties the cars-plus-solar Tesla store together is an implicit guarantee of good customer service and sophisticated technology that’s easy to use. That’s branding that can never quite come together so long as Tesla and SolarCity remain separate companies. But together, it just might expand the entire market for solar.”

But residential solar is just the tip of the iceberg. Tesla is also deeply involved in battery storage. Keep in mind Elon Musk’s overarching goal, which is to show the world how to break its fossil fuel addiction. As Tesla expands its solar customer base, it will be in a position to become not just a battery storage company but a quasi-utility company in its own right.

A battery can respond instantaneously to a call for power, something conventional generators cannot do. The demand for electricity on the grid fluctuates significantly over time. Any electricity a utility company generates must be used immediately or it is wasted. That means utilities generate a lot of electricity they never get paid for.

But what if that excess power is stored, some of it in batteries that are part of residential solar power systems? And what if, through a fully connected network that links all those systems together, Tesla could supply power to the grid for just a few minutes, a few seconds, or even fractions of a second? That could make it a significant force in grid operations. Bloomberg expects upcoming regulatory changes will make it easier for Tesla to become a supplier of electricity to the grid, rather than just a battery company. “Musk’s intentions are larger than simply adding a third product category,” said BNEF analyst Hugh Bromley. “The future of Tesla Energy could be in energy services.”

Bloomberg concludes its analysis this way: “Is SolarCity a major distraction for Tesla? Probably. Does it add existential risk to both of these long, cash-torching bets? Most likely. Are the conflicts of interest messy? Definitely. But could the deal also result in the world’s first clean-energy juggernaut, a company that does for solar power, batteries, and electric cars what Apple did for computers, phones, and software apps? It’s worth considering.”

The stock analysts who are ripping Tesla for its plan to buy SolarCity all have valid points, but they may be missing the forest for the trees. For whatever reason, Elon Musk is like the chess master who thinks twelve moves ahead while mere mortals are focused on what to do next. His ability to peer into the future and see connections that others do not is uncanny. Once you realize Musk’s mission is nothing less than an end of a fossil fuel–driven world, his ideas start to make a lot more sense.