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David Robinson: Tesla's solar troubles send out big ripples

The U.S. residential solar market has a Tesla problem.

After more than a decade of double-digit growth, the nation is expected to install fewer rooftop solar systems on homes during 2017, according to a new report by GTM Research.

And Tesla, the electric vehicle maker that is ramping up a mammoth solar panel factory in South Buffalo, is the biggest reason behind the decline.

The company, which has promised to create 1,460 jobs at its South Park Avenue solar panel factory, has sharply curtailed the solar energy business it acquired through its purchase of SolarCity a year ago.

Tesla executives have said the slowdown in its solar business is intentional as the company reshapes its rooftop installation operations and shifts away from the growth-at-any-price strategy it once followed in favor of a more sustainable approach. Its new strategy, built around a new solar roof now under development, puts a bigger focus on profitability and cash generation.

While Tesla executives and analysts expect solar to rebound, the company's shift now is sending shock waves through the U.S. market.

The nationwide residential solar market is expected to shrink by 13 percent this year – the first-ever decline in the rooftop solar market, according to the GTM report. If that forecast pans out, that would mean that residential installations fell by about 336 megawatts this year.

Most of the decline is because of Tesla.

Through the first three quarters of this year alone, Tesla's total installations – which include an undisclosed number of commercial projects – were down by 32 percent, or 208 megawatts. That doesn't include what is likely to be a substantial decline in its fourth quarter deployments. Its share of the residential solar market has shrunk from 35 percent in 2015 to 14 percent during the third quarter, according to Reuters.

Tesla CEO Elon Musk has repeatedly said the Buffalo solar panel factory remains on track, even as the company's solar business is shrinking. Musk last month said he expected production of the solar roof, which looks like a conventional roof but has solar cells inside, to begin in Buffalo by the end of the year and ramp up considerably throughout 2018.

The company, however, has yet to hold any mass hiring events to build up its Buffalo workforce. Its partner, Panasonic, by contrast, has held several well-attended job fairs and expects to have 300 people working at its portion of the factory by year-end. Panasonic currently makes solar panels at the factory, using solar cells that it imports from its factories in the Far East. It plans to start making solar cells in Buffalo by February.

The GTM report shows just how much of an impact Tesla's shifting strategy at the former SolarCity business is having on the solar market nationwide.

For years, SolarCity's rapid growth supercharged the U.S. residential solar market. Its leasing deals allowed homeowners to install rooftop solar with no money down and SolarCity soon became the dominant company in the residential market.

But that all-out growth wasn't profitable, and SolarCity quickly amassed more than $3 billion in debt, forcing it into the hands of Tesla in a deal that many critics viewed as a bailout. Musk was chairman of SolarCity and his cousins, Lyndon and Peter Rive, were SolarCity's top executives.

Once Tesla took over, it quickly started to remake its solar energy business. It scrapped its door-t0-door sales force in a bid to make it less costly to sign up new customers – a problem not only for Tesla but the entire industry. It also moved away from commercial and industrial projects that weren't very profitable and didn't generate much cash.

"Significant customer acquisition issues remain a challenge for residential solar," said Austin Perea, a GTM analyst.

Tesla now is putting more of its solar sales focus on its network of more than 300 stores across the country, where it also sells its electric vehicles and batteries. Musk believes that will prove to be a more efficient – and cheaper – approach that taps into a customer base that already is interested in renewable energy.

It has backed away from SolarCity's leasing model in favor of one where homeowners take out loans to buy their solar panels outright – a shift that also means Tesla doesn't have to take on debt to front the cost of the installation. Loans accounted for 46 percent of Tesla's solar deployments in the third quarter, up from 13 percent a year ago, and Tesla expects loans to be more than half of its installations in the fourth quarter.

And Tesla is counting on its solar roof to open up sales to an entirely new market – homeowners who need to replace their roofs. The roofs are now being tested on the homes of Tesla executives and insiders, and Musk has said he expects production of the solar roof to ramp up considerably in Buffalo during 2018.

Consequently, Musk expects Tesla's solar energy business to start growing again. So do GTM analysts, who predict that the nationwide residential market will start growing by 10 percent to 15 percent annually between 2018 and 2022, even as the market is clouded by questions over shrinking government subsidies and potential tariffs on imported solar panels, which would be good for Tesla's Buffalo factory but bad for the industry by driving up panel costs.

By the time the market rebounds, Tesla will have lost its once-commanding position in the residential solar market, opening the door for other national competitors, including Sunrun, which has been growing and ranked close behind Tesla in third-quarter deployments.

The question then becomes where Tesla will be able to regain its lost ground.


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