When Tesla (NASDAQ:TSLA) bought SolarCity in 2016, Elon Musk claimed it completed his grand vision for an energy company. Tesla would not only sell electric vehicles and energy storage to customers, but it would also install solar panels and the newly announced Solar Roof shingles. 

A key component to the deal was what Tesla dubbed Gigafactory 2 in Buffalo, New York. The heavily subsidized facility was supposed to produce an astounding 2 gigawatts (GW) of solar panels per year, enough to power about 328,000 U.S. homes and make it the biggest solar manufacturing plant in the country. But Gigafactory 2 never lived up to expectations, and now Panasonic, Tesla's manufacturing partner, has pulled out and the facility is in turmoil again. 

Home with a Solar Roof.

A home with a Tesla Solar Roof. Image source: Tesla.

Panasonic jumps ship

The original plan for the Buffalo factory was to develop solar panel technology that SolarCity acquired from Silevo. The technology wasn't proven at scale when it was acquired in 2014, but in theory, it would lead to lower costs and higher efficiencies than traditional manufacturing methods. 

Tesla quickly abandoned Silevo's technology after acquiring SolarCity, choosing to partner with Panasonic, which has its own proprietary solar cell technology. But after shutting down production in Japan in 2013 because it couldn't compete with commodity solar manufacturers, it was never clear that Panasonic's product was going to be economically viable at Gigafactory 2. It looks like those fears have now become reality. 

The Solar Roof, which Tesla still believes is the future of solar, has reportedly been made with Chinese solar cells since last fall, and Tesla installers have been using non-Gigafactory 2 solar panels for years. So the grand plans for Gigafactory 2 never got off the ground, and now Tesla's biggest technology partner has packed up and left. 

Tesla's solar business doesn't look much better

The solar installation business that Tesla still operates isn't looking much better than its manufacturing operation. Installations in the fourth quarter of 2019 were down 26% from a year ago to 54 megawatts (MW) and are off from a peak of 258 MW in 2015

Solar has simply never been a focus for Tesla, and now that the electric vehicle business is growing and Panasonic is leaving Buffalo, it's hard to see how it turns around. Musk's vertically integrated renewable energy business isn't working out as planned. 

Solar still presents a risk for Tesla

The Buffalo facility is the result of a $750 million subsidy from the State of New York that came with a number of strings. The company needs to have 1,460 high-tech jobs at the manufacturing plant for five years, must employ at least 2,000 other personnel in the state, and has to spend $5 billion on capital and other expenses over 10 years. The original plan was surely to spend much of that on solar rooftop installations, but Tesla's shrinking solar business will make that difficult to hit. 

The slowdown in solar installations and Panasonic's exit from Gigafactory 2 has to be a concern for investors as well, given the New York subsidy. If performance portions of the agreement aren't met, there are program payment obligations that could be $41.2 million per year. That's a big obligation, even for Tesla, so investors should be aware that Gigafactory 2 could continue to be a headache.