When Tesla (NASDAQ:TSLA) spent $2.6 billion on SolarCity in the fall of 2016 it was sold as a marriage of two energy companies that were designed for the future. Under Tesla, EVs and solar panels could be sold together, and SolarCity could more easily incorporate Powerwalls for energy storage along with the financial backing of a much larger company. 

In reality, Tesla has shrunk SolarCity to a fraction of its former self. Before long, Tesla may be passed by SunPower (NASDAQ:SPWR), Sunrun (NASDAQ:RUN), and Vivint Solar (NYSE:VSLR) in the distributed solar market (residential and commercial systems). It's hard to give up a lead in solar that quickly, but Tesla is giving up on solar right before our eyes

Man installing solar panels on a roof.

Image source: Getty Images.

Tesla drops the ball in solar

In the third quarter of 2017, Tesla installed 109 Megawatts (MW) of distributed solar systems, down 36% from a year ago. At the same time, Tesla is laying off sales staff and other undisclosed positions at former SolarCity operations and launching an unproven strategy of selling solar in its car showrooms.

As Tesla has been shutting down its solar operations, competitors like SunPower (NASDAQ:SPWR), Vivint Solar (NYSE:VSLR), and Sunrun (NASDAQ:RUN) have been steadily improving and even growing their businesses. In the third quarter, SunPower installed 70 MW of residential solar systems globally and 91 MW of commercial solar. SunPower doesn't break out sales by country, but it's safe to say the U.S. was its biggest market.

Sunrun said it expects to deploy 88 MW of solar systems in the third quarter, up from 76 MW in the second quarter. If there's one company that could pass Tesla in U.S. market share in the next few quarters it's Sunrun.

Finally, Vivint Solar projected 46 MW to 52 MW of installations in the third quarter, which is smaller than the other three but still formidable. As Tesla gives up its leading position I could see Vivint decide to grow its business more to fill in the void. 

Tesla was supposed to leverage solar, not eliminate it

What's amazing about the fact that Tesla is giving up its lead in residential and commercial solar is that it could have been a point of leverage for the company. Studies have shown that people who drive electric vehicles are far more likely to be interested in installing solar on their homes, and vice versa. Sales across those product lines could have been a point of strength for the company. 

Instead, Tesla is about to give up its solar lead to Sunrun and/or SunPower, with Vivint Solar not far behind. Not only is that bad for Tesla's $2.6 billion acquisition of SolarCity, this may be important for the next generation of solar and energy storage products as well. Solar inverters and energy storage systems can, and likely will, include a charger that will charge a car based on the homeowner's energy usage and preferences. The solar installer will be the lynchpin of that offering, not the EV manufacturer, and Tesla is giving up a powerful position and market share that once approached 40% in residential solar. That could have driven the next generation of integrated energy solutions. 

Solar, storage, and EVs united in the home is a market Tesla could have dominated. Instead, it's abdicating its role as a leader to competitors and giving up a lot of growth potential in the process.