It's hard to argue that Tesla's (NASDAQ:TSLA) foray into solar energy has been anything other than a disaster. In 2015, the year before it was acquired by Tesla, SolarCity installed 870 megawatts (MW) of solar systems, and had its eye on goals of 1 gigawatt and a million customers. By 2018, Tesla had shrunk the solar business to just 326 MW of installations, and there were no signs it was going to turn the business around. The solar roof (seen below) was supposed to spur interest in solar, but appears to be nothing more than a small niche product, at best, and the Gigafactory 2 manufacturing plant that was supposed to lower costs and improve solar panel efficiency is laying off employees and doesn't appear to be hitting its own production targets.
This week, Tesla launched a last-gasp effort to become a big solar power player again. Its plan doesn't entail offering better technology or customer service -- the company is betting that simply lowering prices will drive growth.
Tesla is addressing solar energy's biggest challenge
Selling residential solar systems has always been a challenge for the industry. Few consumers seek out solar, so companies have to use more proactive sales tactics like door-to-door sales, telemarketing, and retail partnerships. These strategies are what drove SolarCity's growth -- back when it was growing -- and are now used successfully by Sunrun (NASDAQ:RUN) and Vivint Solar (NYSE:VSLR).
The problem with these high-touch methods is they're expensive, but high sales costs are consistent with industry trends. For example, in the fourth quarter of 2018, Sunrun spent $0.65 per watt on sales and marketing compared to an installation cost of $2.48.
Tesla's answer to this problem will be to move all solar sales online, which will allow it to reduce staff and lower costs. In theory, this will be a great cost-cutting measure that could allow it to shave approximately 20% off the cost of installing a solar system, but the strategy has never been proven. Solar energy systems require a lot of explanation by salespeople, so Tesla is taking a big risk that it won't reach customers with an online-only strategy.
Will standardization matter?
Another change Tesla will make is standardizing the sizes of the solar systems it sells into 4 kilowatt (kW) increments, and only allowing cash and loan sales.
Simplifying the options on system size will allow installers to use more standardized designs and equipment, potentially lowering costs. But it risks alienating potential customers for whom those 4 kW increments would mean choosing between a system that provides more power than they want for their house, or less.
The financing strategy is a big risk as well. Tesla is trying to reduce solar exposure on its balance sheet, but most solar systems are still sold via leases or power purchase agreements. Those options put the financing on the installer, and they are the primary options Sunrun and Vivint Solar use, though they've started offering loans. But loans have not proven to be particularly popular with consumers in the solar market.
Changing the game
Ultimately, the goal of all of these changes is to dramatically Tesla's overall installation costs. If they work, they'll allow it to offer lower prices of $1.75 to $1.99 per watt on its systems, and still turn a profit. The average solar system costs consumers around $3 per watt installed today, so this strategy has the potential to give Tesla a huge price advantage.
What we don't know is if the price is ultimately the driver of solar adoption, or if customers prefer high-touch sales contacts and a solar system more closely customized to their home's needs. Tesla is betting cost is the key, and this gamble is likely the only option it has left. Sales of its solar power systems in Tesla stores haven't gone well, and the Solar Roof made at Gigafactory 2 in New York appears to be a flop at this point. Cutting prices is a bold move by Tesla -- how the consumer market responds will tell us a lot about what customers value in solar today.