Tesla Motors (NASDAQ:TSLA) and SolarCity (NASDAQ:SCTY) will inevitably cross paths many times in the coming years, just as they have in the past. Not only do both companies share the same chairman of the board, Elon Musk, but the two CEOs, Musk (Tesla) and Lyndon Rive (SolarCity), are cousins. Last weekend, the two companies announced perhaps their biggest dual plan yet.
Solar panels and batteries belong together
The biggest drawback to solar panels today is that they are only useful when the sun is shining -- unless, of course, these panels are paired with batteries. This is why SolarCity has already partnered with Tesla in select markets to provide lithium-ion batteries that can store solar power to be used when the sun isn't shining. Without this important partnership, businesses and homes using solar are still destined to tap into the grid to get power when the sun doesn't shine.
SolarCity contends that batteries and panels together will be a disruptive force in the energy business, as the company hands over to consumers the power of choice in an industry that is often dominated by regional monopolies.
But several things will need to happen before panels and batteries together can be a truly disruptive force. First, SolarCity will have to expand its battery-panel offering beyond the selected California markets to the entire country. Second, electric car-maker Tesla needs to finish building its Gigafactory, a factory purposed to produce more lithium-ion batteries on an annual basis by 2020 than were produced in the entirety of 2013, in order to bring the economies of scale needed to take this duo to the mass market.
Fortunately, both of these key strategic moves are just around the corner.
Within five to 10 years, every solar-power system that SolarCity sells will come with a battery-storage system, Rive said at a SolarCity event in New York last week. By pairing batteries with solar panels, the company will address intermittency issues and possibly ignite the beginning of an age in which people can actually disconnect completely from the grid. Most important, Rive and Musk asserted that the combination will help SolarCity produce energy more cheaply than what is available from the local utility company.
Musk said that his company will supply at least some of the batteries that SolarCity will need to offer this service.
Where the partnership began
The two companies first announced their partnership in December 2013. The technology, explained in the press release announcing the deal, may hint at what we may see on a broader scale five to 10 years from now.
SolarCity has unveiled a smart energy storage system to address two major pain points for business: rising utility demand charges and increasing grid outages. SolarCity DemandLogic can allow businesses to reduce energy costs by using stored electricity to reduce peak demand, and can also provide backup power during grid outages. Developed with advanced battery technology from Tesla, SolarCity DemandLogic storage includes learning software that automates the discharge of stored energy to optimize utility charge savings for customers.
Investors in either company should hope that the partnership does, indeed, play out in the future. The strategic move would play an important role in bringing the costs of both solar panels and batteries down, making mass-market adoption more likely.
There is significant risk for both SolarCity and Tesla in aiming for such a lofty goal, as both companies will need to build massive factories to help achieve the needed economies of scale to make this partnership feasible. While the narrow focus of both companies may aid them in rapid execution, innovations in competing technologies in energy and the automotive business could present a major setback for them.
Daniel Sparks owns shares of Tesla Motors. The Motley Fool recommends and owns shares of Ford, SolarCity, and 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.