Image source: Tesla Motors.
Even the most conservative estimates show that we're entering a huge growth phase for the electricity energy storage industry. As wind and solar generation grows, energy storage is necessary to smooth out the peaks and valleys of energy generation. It's even a way to regulate electricity frequency and offset investment in natural gas peaker plants.
According to GTM Research, the U.S. energy storage market will grow from just 226 MW in 2015 to 2,081 MW by 2021. And it's that potential that Elon Musk sees for Tesla Motors (TSLA 1.85%) for the Powerwall and Powerpack. But the acquisition of SolarCity (SCTY.DL) could send competitors to alternate battery suppliers.
Projected growth in U.S. energy storage installations. Image source: GTM Research.
Tesla Motors isn't the only home energy storage game in town
Thus far in the energy storage business Tesla Motors has been a big beneficiary of brand recognition. The company brought a lot of attention to energy storage when it launched the Powerwall and Powerpack and built a slew of important partners as well.
SolarCity was an obvious partner for the Powerwall, but solar installer Sunrun (RUN 2.19%) has added a Powerwall offering as well. To gain market share and all-important data from customers, Tesla Motors should want to partner with as many residential solar installers as possible in energy storage. But why would they do that if Tesla Motors owns their biggest competitor?
At the same time the Powerwall was working with partners, other competitors have been developing products that competitors can use. Sonnen has built a low cost energy storage system that's already popular in Europe and is growing in the U.S. And SunPower has partnered with Sunverge Energy on its energy storage system.
There are options out there for competitors looking for energy storage offerings and if Tesla Motors owns SolarCity it will surely push potential customers away to these other energy storage offerings.
Will commercial storage be a lost opportunity?
Through at least 2018, commercial energy storage is expected to be a much larger market than residential energy storage. That's in large part because there's an economic case for commercial energy storage as a way to reduce demand charges, whereas residential storage hasn't shown a way to make money in most locations.
Again, Tesla Motors may be boxing itself into a corner with commercial customers if it acquires SolarCity. Companies like Stem and Sonnen are building out their commercial businesses and have solar as a partnership, not an integrated offering with solar. Depending on the capability and financing arrangements a business is looking for that could dissuade them from going to Tesla Motors for energy storage.
To make matters worse, SolarCity has struggled with its own commercial solar business. It has dealt with delays and cost overruns, and hasn't been able to gain anywhere near the market share it enjoys in residential solar. So, Tesla Motors could be buying a company that has just a small fraction of a very important target market for energy storage.
The downside of vertical integration
Energy storage is just starting to get off the ground globally and as it does Tesla Energy will need to find as many customers as it can to fill capacity at the Gigafactory. But being tied to SolarCity may limit its market to SolarCity customers and give competitors an incentive to find other energy storage offerings. And let's not forget that SolarCity is losing market share in residential solar, so Tesla could be buying a partner that's already on the downturn.
This is another risk investors need to think about with the potential Tesla Motors and SolarCity merger. It could have a negative side effect in an energy storage market that's expected to grow rapidly for decades to come. That's a limitation Tesla Energy doesn't need as it builds its business.
