SolarCity Corp (NASDAQ:SCTY.DL) CEO Lyndon Rive and Chairman Elon Musk are talking up a new product that will be announced in a joint event with Tesla Motors (NASDAQ:TSLA) on October 28, and they're setting a high bar. The pair talked about a solar roof on the Q2 2016 conference call, and that could be part of what they introduce later this month. There could also be a new solar panel coming out of SolarCity's Buffalo manufacturing plant.
Whatever it is, Rive said SolarCity will "have a better product now than we've ever had before" heading into 2017. That begs the question, why sell SolarCity if the future is so bright?
How the future can be bright and difficult
One reason the future for SolarCity could be bright is that it plans to go full force into energy storage. These plans, however, may require Tesla's help.
According to Musk, combining solar with storage and EVs has been the plan all along, and merging the two companies would allow them to build an integrated solution with energy storage included in the inverter. In theory, this would cut down wiring, installation time, and hardware costs.
Whatever will be announced on October 28 will be related to solar plus storage -- somehow. And if SolarCity remains independent of Tesla, it may be difficult to complete the design of solar plus storage in the holistic way it could with Tesla. In that sense, there's some logic to becoming one company.
Is the market ready for SolarCity plus Tesla?
As it stands today, the problem with going full force into solar plus storage is that it doesn't make financial sense in 98% of the country. Hawaii is the only state where the rate structure would make it possible to save solar energy during the day for evening hours and earn any kind of return.
Some states are moving to plans that would compensate energy storage for its backup capability or the deferral of equipment upgrades, but regulators and utilities are still contemplating what that compensation structure would look like and the process of changing rates could take years. California is ahead of most other states, but its structure favors large battery installations, like Tesla's 80 MW-hr project in California that will help the state adjust to the natural gas leak at Aliso Canyon.
Later this month, Rive and Musk will have to make their best case that solar plus storage is a real money saver for customers, and a business opportunity for their companies. To top it off, they'll have to convince shareholders that SolarCity and Tesla have to be combined to take advantage of the opportunity.
Is this really the best deal for SolarCity and Tesla?
What's difficult to justify here is why Tesla's acquisition of SolarCity makes sense for both sides at the same time. If the residential solar market is bright, and SolarCity has new products that will expand both the market and margins, then why sell to Tesla? As fellow Fool Simon Erickson argued here, the case can be made that SolarCity is selling to Tesla at a discount.
On the flip side, if SolarCity's future isn't bright, as I've argued, why would Tesla shareholders approve the acquisition?
It's hard for Lyndon Rive and Elon Musk to argue that SolarCity is in great shape, driven by new products while also saying it should be bought by Tesla. Both can't be true at the same time. And that's a hurdle shareholders in both companies will have to get past if Elon Musk is ever going to complete his vision of building a vertically integrated renewable-energy company.