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How the solar business became an afterthought for Tesla

David Robinson

These are dark times for Tesla Inc.'s solar energy business and the Buffalo factory that state officials built for it.

At the time, the administration of Gov. Andrew Cuomo hoped it was catching lightning in a bottle by spending $750 million in taxpayer money to land what then was a fast-growing business in a hot, environmentally friendly industry that promised to bring nearly 1,500 jobs to job-starved Buffalo.

Now it looks like it was Tesla's solar energy business that got struck by lightning.

Tesla's solar panel factory in South Buffalo is affected by a big drop in deployments. (Derek Gee/News file photo)

This is how bad it has gotten:

• During the first six months of this year, Tesla has deployed enough rooftop solar to generate 76 megawatts of electricity. That's 53% less than during the first half of last year and only 3 megawatts more than it deployed in just three months at the end of last year.

• Tesla CEO Elon Musk said this spring that he expected the solar business to turn around during the second half of the year. But there is no sign that the steep three-year decline in the solar business is ending. In fact, the pace of the decline has accelerated. The 29 megawatts of generating capacity Tesla installed during the second quarter were the fewest for any quarter since at least 2013 and 65% less than a year ago.

• Just three years ago, Tesla's solar energy business – then SolarCity – was seven times bigger than it is now. It deployed 211 megawatts of generating capacity in the second quarter of 2016. At that 2016 pace, it would have taken less than 13 days to install the 29 megawatts of rooftop solar that Tesla deployed in the second quarter.

• That decline means that Tesla has gone from being the undisputed market leader in rooftop solar – with a commanding market share of more than 33% as recently as 2015 – to being just another installer with a 6% market share. It's now the nation's No. 3 residential installer, behind Sunrun and Vivint Solar, according to analysts at Wood Mackenzie, and its market share is sure to drop further after the second quarter plunge in deployments.

The solar business, it seems, has become an afterthought to Tesla, which is focusing most of its attention on building its electric vehicle business – the key to the company becoming profitable. While Tesla's vehicle sales set a record in the second quarter, the company still posted a $400 million loss that was far worse than analysts were expecting, sending Tesla's stock down by more than 10% on Thursday.

In fact, Tesla devoted just two sentences to the solar business in the four-page letter to shareholders on Wednesday.

"We are in the process of improving many aspects of this business to increase deployments," Tesla said in the letter without elaborating. Not a single word was said about the solar business during an hour-long conference call with analysts Wednesday night.

"It seems that they don't want to invest in their residential solar business anymore," said Michelle Davis, a senior analyst at Wood Mackenzie. "The impression Tesla gives in its letter to shareholders and its conference calls is that they just don't care about their residential solar business."

The problem for Tesla's solar business is that it's never been profitable and its hefty debt load is a drain on the company's cash.

To save money, Tesla has made big changes to the solar business since it bought SolarCity three years ago in a $2.6 billion deal that critics said was a thinly disguised bailout of a company chaired by Tesla CEO Elon Musk and run by his cousins. It stopped selling rooftop solar door-to-door, an effective but costly way of gaining customers. It launched – and quickly ended – a relationship to sell rooftop solar at Home Depot stores.

"They've been cutting any investment in residential sales channels that work," Davis said.

Instead, Tesla started putting solar energy displays in some of its electric vehicle stores, but then said it would scale back its store network in favor of a model that relied heavily on online sales. It limited the ability of customers to customize their rooftop solar systems. And it cut prices.

But Tesla's installations keep dropping fast.

The company had hoped that its solar roof would energize its solar energy business, helping it stand out from the competition by offering a product that looked like a conventional roof but has solar modules inside to generate electricity. But Tesla still is working on the third version of the long-delayed solar roof and hasn't put it into high-volume production yet in Buffalo.

"It’s quite a hard problem, and then making it easy to install , getting the cost low," Elon Musk said last month.

The solar roof also is expensive, costing two to three times more than a conventional roof, although Tesla says the electricity savings could eventually make it the difference.

Davis isn't sure, since Tesla has installed so few of them so far.

"It definitely is an expensive thing to install," she said. "The commercial viability is up in the air."

All the while, the clock is ticking on Tesla's promise to the state to create 1,460 jobs at the Buffalo plant by April 2020. The plant had 730 workers in mid-April, which means the company would have to double employment there – at a time when its solar sales are in a free fall – in just 12 months.

If it doesn't hit its job target, Tesla could face a $41.2 million penalty from the state.

To beef up its workforce in Buffalo, Tesla has started bringing other products to the Buffalo plant. It now makes electrical components for its batteries and its electric vehicle charging stations at the South Park Avenue factory.

But that's not what the Buffalo factory was supposed to be about. It was supposed to give Buffalo a foothold in a fast-growing business that would bring other good-paying jobs to the region. Instead, Tesla is paying entry-level production workers for around $16 an hour and its declining installations mean that the cavernous 1.2 million-square-foot factory that was built for growth is nowhere near full.

For $750 million, you expect more.

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