The residential solar industry that Tesla Motors (NASDAQ:TSLA) is entering after acquiring SolarCity is very different from the solar industry SolarCity helped build when the company was founded. Costs are dramatically lower, which is great, but the third-party financing that drove SolarCity's growth is losing market share, and customers are demanding differentiation, something Tesla's current products don't have.
As a result, Tesla has to offer a compelling solution that will beat competitors on efficiency, cost, or integration with other energy products. And there's a path to success, if Tesla wants to take it.
What Tesla can do better than anyone else
Now that Tesla is a vertically integrated energy company, it can provide services that would be difficult for others to copy. The first differentiator will be the Powerwall, which has been built with an internal inverter that can turn direct-current energy from solar panels into the alternating current used by home electrical circuits and the grid.
Energy storage integrated into solar power systems will be more and more valuable in the future as utilities change rate structures toward demand charges and time-of-use rates. Energy storage can help lower customers' costs and allow them to use more of the energy they produce at home.
Designed correctly, Tesla's solar panel may be able to offer better performance and a reduction in overall costs. The company traditionally bought panels from third-party suppliers, but now that panels will be built in-house, they can be designed to incorporate electronics in the factory and speed installation in the field.
The electric vehicle could also play a role in Tesla's ability to both attract customers to the solar side of the business and add value. Smartly charging EVs with either lower-cost energy (through time-of-use rates) or energy produced from solar panels on the home could save money and increase a customer's independence. These are advantages that wouldn't be easy for competitors to replicate.
What Tesla has to get right in the process
What's risky about Tesla's current plans is that the company needs these products to take off quickly in order to keep the business afloat. SolarCity's business came with about $1 billion in annual operating costs, primarily for sales staff. And that doesn't include thousands of workers, trucks, and offices -- a source of ongoing expenses -- that Tesla now has under its wing. Keeping a flow of customers in the system is necessary or the solar side of the business could be a financial sinkhole before Tesla's potential advantages in the market appear.
We've seen in the last year that solar sales are becoming more difficult and customers are demanding loans, thereby reducing some of the advantage a national company like SolarCity had in the market. To attract customers, the company has to offer a compelling product that's lower-cost, offers better integration, and has features competitors can't match. Tesla has the ability to do it by designing the solar power system end to end, which is how it could become a solar energy powerhouse.
Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.