Solar will never work until battery technology improves significantly.

That sentence right there has pretty much been the rallying cry for solar power doubters for quite some time, and to a certain degree, that adage has been correct. Recently, though, two companies owned by Elon Musk, Tesla (NASDAQ:TSLA) and SolarCity (NASDAQ:SCTY), decided to tackle that idea head on. Let's take a look at what these two have up their sleeve and why it could be a major game changer for the utility space. 

Cooperation makes it happen


Just when Elon Musk's companies looked great on their own, they decided to team up and become unstoppable. (Photo source:

For well over 30 years, solar power has tried to breakthrough into the mainstream as a viable power source. Over that time, it has been held back by two things. The first was the per watt costs were too high because either high efficiency panels were too expensive to mass produce or because less expensive alternatives have not produced at a high enough efficiency level to make them viable. The second has been that solar power doesn't have the ability to provide power 24 hours a day because of a lack of storage.

For the most part, the first problem has been dwindling away to the point that solar is starting to make sense even without subsidies, but an economical solution to provide adequate power storage has eluded solar panel makers and other alternative energy companies for quite some time.

This is what makes the recent announcement from SolarCity so significant. The company has announced that it will team up with Tesla and its advanced battery technology to offer commercial customers what it is calling the DemandLogic system. Think of it as an on site smart grid. By bundling on-site generated solar power with on-site energy storage, it provides extra power necessary during peak usage and can help provide power during the event of an outage. Like all of SolarCity's offerings to the public, there will be no up front costs and the company recovers the costs of the equipment and installation from long term power purchasing agreements and service contracts. 

In some ways, you couldn't ask for a better pairing for these two companies. SolarCity is starting to see much larger and better financed companies such as Sunpower (NASDAQ:SPWR) and NRG Energy (NYSE:NRG) starting to enter the distributed solar space, and this move will help to make their offerings that much stronger when compared to these competitors. Likewise, this also gives Tesla another revenue outlet outside the automotive space. According to SolarCity CEO Lyndon Rive, we could see as much as 50% of SolarCity's commerical installations using Tesla's batteries for storage in places where there are much higher costs for peak electricity demand such as California.

Before we all jump through the ceiling about this deal, let's put it into perspective. On SolarCity's most recent conference call, management stated that commercial customers only represented about 20% of its total installations are commercial clients, and the company expects installations next year to be in the 475-525 megawatt (MW) range. Based on those numbers and the expected clients to use Tesla battery backups, we're looking at about 50 MW.

So this deal is in its nascent stage and it may take a while before both companies realize significant revenie from the partnership. Looking down the road, though, SolarCity has major contracts with both the US Military and Wal-Mart. These major clients could be major outlets for both SolarCity and Tesla when it comes to bundled power systems. 

Fight or Flight
If this sounds like it could be a major headache for utility companies, you're right. The reason that utility companies have been able to live with distributed solar up until now is because they have changed their rate structures to put a premium on peak demand times. If energy storage were to be combined with on site generation, then it could allow customers to circumvent these peak demand times and further decline a utility company's customer base.

This is already starting to happen in one of the fastest growing solar markets; Arizona. This past quarter, distributed solar installations grow by 11%, and it has become such a threat to Arizona Public Service that the utility recently took the net metering laws to court. 

If distributed power generation/energy storage systems continue on their current trajectory, utilities will more than likely start to change their business models. NRG Energy has already started, and Exelon (NYSE:EXC) has also started to put together a solar power/energy storage option after so much demand following Hurricane Sandy. 

Distributed solar has made its mark, and utility companies can either choose to fight it or embrace it. I'll give you one guess which way is more likely to be successful.

What a Fool Believes
Obviously, solar power is not the end all solution to our energy needs, but in certain places this offering from SolarCity and Tesla could have an incredibly deep impact on the way we generate power. Furthermore, it could also put SolarCity on top of the distributed solar game. Combine a disruptive business model with a company that has the best offering in that space, and you could have a very potent investment on your hands. 

Fool contributor Tyler Crowe owns shares of SolarCity. You can follow him at under the handle TMFDirtyBird, on Google +, or on Twitter, @TylerCroweFool.

The Motley Fool recommends Exelon, SolarCity, and Tesla Motors. The Motley Fool owns shares of SolarCity and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.