Nearly two years after the Solar Roof was announced, Tesla (NASDAQ:TSLA) has begun installing the product on consumers' homes. It's a notable accomplishment because the Solar Roof is the first major design change for rooftop solar in decades and could excite the same type of customers who have fallen in love with Tesla's electric vehicles.
A little excitement might be needed for Tesla's solar business, which has been in decline ever since the company acquired SolarCity. Installations fell 57% to 87 megawatts (MW) in the fourth quarter of 2017, and Tesla lost its No. 1 market share position in U.S. residential solar. Tesla's hope is that the Solar Roof will turn its solar fortunes, but the task may be easier said than done.
Why there's excitement over the Solar Roof
The Solar Roof is unique among residential solar products because it masks the fact that there's a solar installation at all. The solar cell is embedded in a glass tile, which is then installed like a traditional shingle or tile on the roof. If you didn't know it was a Solar Roof, you may not know it has any solar energy production at all.
Tesla is hoping to excite customers willing to pay a (big) premium for the solar roof, some of whom will be the same customers who buy a Model S or other electric vehicle. If all goes well, customers may even add a Powerwall to their solar installation, completing the trifecta of energy products Tesla has developed.
The solar roof costs what?
Being intrigued by the solar roof is one thing, but being able to afford one is something entirely different. Electrek is reporting that one of the first solar roof installations in San Jose, California set a customer back "about $100,000" for a 9.85 kW solar system and three Powerwalls. By comparison, a typical solar installation of the same size would cost about $31,000, according to data from EnergySage, before tax incentives. Techsport is reporting that a second Solar Roof customer said their solar roof cost was in the mid-$50,000 range after tax incentives.
The premium for Tesla's Solar Roof may be tough for customers to swallow. EnergySage predicts that the typical owner of a 3,000 square foot home in California would pay $50,900 for a solar roof compared to $26,030 for a traditional solar installation. Making the economics worse, the traditional solar system will generate 13,000 kilowatt hours (kWh) in a year, but the solar roof will only generate 10,000 kWh because it packs fewer solar cells onto the same roof.
Economically, the solar roof has never made much sense. But customers may be willing to pay a premium for a better looking solar roof. At least, that's what Tesla hopes.
The solar roof's potential market
Given the new design of the solar roof and its price point, it's tough to gauge the market potential. But if we use SunPower's (NASDAQ:SPWR) premium product as a gauge, we can estimate what the potential market could look like. EnergySage reports that SunPower's equipment-only price premium in 2017 was 24.6% over the cheapest solar panel and inverter combination. A full SunPower installation would be about 10%, given the fact that equipment is about one-third of the cost of a residential solar installation, so it isn't a perfect comparison to the Solar Roof's 100% price premium, but it's the best comparison we have.
In 2017, SunPower sold 291 megawatts (MW) of high-efficiency solar panels into the global solar market. The company doesn't break down where panels are sold, but if we assume that half hit the U.S. market (145.5 MW) we can get a feel for how many customers will seek out a premium product. SunPower's estimated 145.5 MW of U.S. solar installations are about 6.5% of the 2,227 MW installed on rooftops in 2017, a small but sizable portion of the market.
Given Tesla's name recognition and established fan base, I wouldn't be surprised if Tesla could sell 100 MW of solar roofs annually when fully ramped, nearly matching SunPower's premium solar business. That could mean big business for the company. If we use EnergySage's estimated Solar Roof cost of $8.14 per watt, we get a market potential of $814 million for the solar roof. That's probably a high-end estimate of the super-premium solar market, but I wouldn't count out Tesla selling an innovative product to high-end consumers.
The next questions facing Tesla's solar roof
But next big uncertainty facing Tesla concerns whether Tesla can produce Solar Roof tiles at scale and ultimately make a profit. Tesla's manufacturing is unproven and has already been through months of delays. It was eight months ago that we learned Tesla executives were having solar roofs installed, and the company indicated it would ship the product months ago. Could manufacturing challenges be behind the delay, and will that make the product prohibitively costly to produce?
Tesla can't afford another product to be a cash drain, so investors will want to see proof that the solar roof is both selling at volume and generating positive cash flow in coming quarters. If it can't, this will be another example of how buying SolarCity and tackling a complex new solar product was an unnecessary distraction for Tesla.