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At the heart of the SolarCity-Tesla merger: batteries

For SolarCity, it’s all about the batteries.

Behind Tesla Motors’ $2.6 billion bid to buy SolarCity is the conviction that the next big thing in solar energy will be to combine solar panels with battery systems that can store that electricity until it’s needed at night or when it’s cloudy.

Battery storage currently is too expensive to be practical, but with Tesla building the world’s biggest battery factory in Nevada, both companies are betting that prices will drop fast enough to make batteries a standard part of all rooftop solar arrays within three to five years.

“That’s the next phase of the company,” said Lyndon Rive, SolarCity’s chief executive officer. “It’s going to be very clear that this combination of solar and storage will be able to provide energy at a lower cost than traditional forms of energy.”

But not yet. Home batteries currently cost thousands of dollars, so they don’t make economic sense for most homeowners who are putting solar panels on their roofs.

While some analysts are worried about the time and investment it will take to develop the technology and manufacturing efficiencies that will make battery storage more affordable, Rive and his cousin, Tesla CEO Elon Musk, believe the electric vehicle maker’s battery “gigafactory” in Nevada will change all that in just a handful of years.

For now, though, combining solar energy systems with battery storage only makes financial sense in a few places, such as Hawaii, where electricity prices are sky high and so many solar arrays already are in place that it is putting a strain on the state’s power grid.

But as more people switch to solar power and Tesla finds ways to lower the cost of its lithium-ion batteries – partly through economies of scale and partly through closer collaboration with SolarCity on system design – the economics of adding battery storage will improve, Musk said during a conference call this week to discuss Tesla’s $2.6 billion bid to buy SolarCity.

Rive thinks that within three to five years, all solar energy systems that are installed will have battery storage.

That may be too ambitious for some analysts.

One analyst asked Musk during the conference call if Tesla wouldn’t be better off waiting to make its move into solar. After all, the company already is juggling two big operational challenges. The launch of Tesla’s mass-market Model 3 sedan next year and the big jump in production that will come with its more than 370,000 preorders that will need to be filled would stress most companies. But Tesla also is gearing up to open its 5,000-employee battery gigafactory.

Musk said Tesla can’t afford to wait.

If batteries are going to become an integrated part of solar, then it will take time to develop and refine those storage products so they’re ready to hit the market in a few years, when costs are more affordable.

“This is really long-term thinking here,” Musk said. “This is an action now that is anticipating several moves ahead.”

Still, solar and storage has a long way to go.

SolarCity, for instance, just launched a demonstration project last month with Pacific Gas & Electric in San Jose, Calif., to coordinate solar with battery storage at up to 150 homes.

A June report by GTM Research predicts a rapid expansion of battery storage within the residential market, but not the all-inclusive acceptance that Rive foresees. GTM Research forecast that battery storage would rise from virtually nothing today to about 300 megawatts of capacity within three years and around 600 megawatts by 2021. That would only be about two-thirds of the 950 megawatts of solar generating capacity that SolarCity expects to install this year.

But battery prices are dropping. Between 2008 and 2015, the price of Tesla’s electric vehicle battery packs was cut in half, while the capacity of those batteries jumped by 60 percent.

If prices keep dropping as Musk predicts, then battery storage could become a strong selling point for solar power.

For now, homeowners install solar panels to tap into lucrative subsidies that can reduce their electric bill if they live in a place with high power costs. Plus, it’s renewable energy that doesn’t add greenhouse gasses to the atmosphere. With batteries, a solar power system also becomes protection against blackouts and power outages.

“Today, the primary motivation for going solar is that it’s environmentally friendly and it saves money,” Rive said. “Once you add storage to the equation, you add backup.”

With Tesla’s $5 billion battery factory now under construction, a SolarCity-Tesla merger will make it easier to integrate batteries into solar designs in a way that wouldn’t be possible if the companies were separate, Musk said.

It also would give Tesla greater control over the solar product line.

Rive recalled that when SolarCity started out 10 years ago, the company relied on subcontractors to install its rooftop solar systems. But Rive quickly decided it was better if SolarCity did that work itself, allowing it to control not only costs but the entire customer experience. Adding financing options further expanded that control.

Batteries are the next step to come.

“What we’re talking about is one brand and a complete solution,” said Jason Wheeler, Tesla’s chief financial officer.

“You’ve got to vertically integrate the products, as well,” Rive said. “I’m really excited about this next phase, and I think, together, we can really accelerate the adoption of solar energy.”

What no one can say for sure, though, is when that will happen.


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