When SolarCity Corp (NASDAQ: SCTY) burst onto the scene and started posting growth rates in excess of 100%, it was selling a solar product investors bought into as a "cool" consumer energy product. But, at the end of the day, the sales pitch to customers wasn't about being "cool," it was about saving money by going solar.
Tesla Motors (NASDAQ:TSLA), on the other hand, was always selling cool and sex appeal with the Model S and the upcoming Model 3. You don't spend $70,000 or more on a car because it's the most economical option, you buy it because it's a high-performance vehicle that will impress your friends.
In the combination of SolarCity and Tesla Motors, Musk appears to want to make solar panels and energy storage just as "cool" as an electric vehicle, but that may be a tough sell in energy.
Cars are about emotion; energy is about dollars and cents
Buying an automobile can be one of the more emotional large purchases we make in our lives. People care about how they'll feel driving a vehicle and how they'll be perceived by others, not just the economics or reliability of the vehicle.
There's not the same emotional pull in energy, especially energy storage. An energy storage system will likely be installed in a homeowner's garage, out of sight of friends or neighbors. Energy storage isn't a conversation topic or something you can show off in the way a Model S might be. It's similar to a solar system in that it has to be driven by economics to gain any sort of mass adoption.
And here's where the flaws of Elon Musk's vertically integrated energy plans start to emerge. Today, there are few places in the world where energy storage is in any way economical, and the only state in which SolarCity operates that might have an economic case for energy storage today is Hawaii.
Energy storage doesn't have a business model
It's easy to see how storing energy created from your rooftop solar system for use in evening hours or as a dispatchable asset the utility can use to lower expensive peak electricity production makes good sense. But today, the incentives and regulations aren't in place to make either economical. Except for Hawaii, the arbitrage opportunity between rooftop solar costs and what the grid will pay for you to export that electricity isn't high enough to justify storage. In most states, where net metering rules are in effect, there's zero economic reason to save energy from one hour of the day for another.
States like New York are starting to test concepts like the "virtual power plant" to give utilities control over energy storage systems to stabilize the grid. But these are in pilot phases and could be years before they're rolled out on any kind of scale.
In a vast majority of locations, there's no way to financially justify spending $10,000 or more to install energy storage today. And that's what energy products need to build the scale a Tesla-SolarCity merger would need to justify.
Financing energy storage is an unknown
The real revelation of SolarCity's business model early in its history was the solar lease. Leases allowed SolarCity to sell solar to customers with $0 down, provide them energy bill savings from day one, and SolarCity could make money. The company made the economics of consumers going solar work and that's why it could double its business year after year.
Key to the model was SolarCity's ability to get banks and other businesses to finance those solar projects. The tax equity portion and consumers' payments were sliced into pieces investors could buy, and that funding fueled the model.
Without a business model that will make energy storage profitable, there's no financing waiting in the wings to fund energy storage. And until there is, it'll be a very limited market.
Elon Musk's energy vision not ready for prime time
In five or 10 years, it's possible battery prices, regulatory rates, and utility systems will be ready to incorporate solar with energy storage and millions of smarter devices. I think that's a future everyone should be excited about. But that's not the structure we have today, and Tesla Motors buying SolarCity makes the solar business harder because of the complex financing SolarCity needs.
I don't see Tesla Energy as ready for prime time, and if he combines SolarCity and Tesla Motors, Elon Musk has to bridge an even larger company for a few years until the energy industry is ready for a real transformation. That's a big risk to take -- and one the market will have to have patience with, because both companies are still losing money as they build out their energy capabilities.