Tesla's Solar Price Cut Makes Sense for Battery Sales

My previous blog highlights Tesla's announcement in the New York Times. Tesla will reduce its solar prices and consumers are the winners from this change. They can get cheaper solar systems and cheaper electricity; however, Tesla’s 41% reduction could have significant, and potentially negative, effects in the residential solar industry and the power industry.

Is Tesla Shooting Itself in The Foot?

Why would Tesla decided to dramatically cut prices if that could damage its solar business.

On the one hand, Tesla does not have any significant advantage in the residential solar market other that its scale and brand recognition (solar shingles are an interesting product but need to be proved at scale). This should be enough to keep the business running but, as in any commoditized market, margins will tend to be low.

On the other hand, Tesla has significant brand, technology, and cost advantages in the battery segment.

Solar Is the Main Driver to Battery Adoption

Battery adoption is closely linked to new residential solar adoption. This is especially true in regions where legislation has reduced the value of net metering—most old installations have net metering, neglecting the need for batteries. While Tesla’s price cut might be bad for the solar industry margins, it can certainly drive more adoption, which in turn could drive the adoption of residential batteries.

The company could benefit from cutting its solar system margins if it can recoup losses by selling Powerwalls attached to those systems. Tesla’s position as a leading battery OEM means that some of its competitors in the solar market will use Tesla’s batteries in their own installations. This is especially true of local and regional players integrating other company’s products and not developing them in house. From this angle Tesla’s solar price cuts could benefit Tesla by putting low quotes for solar systems in the hands of solar customers that also end up purchasing batteries—even if other installers do the job. With those batteries installed, Tesla could become a virtual power plant like it already is in Australia, or as Sun Run has done in California. This would allow Tesla to capture even more value from the battery sales on a long-term basis.

There are still a few barriers to Tesla’s strategy. First, Tesla would need to have enough Powerwalls available to meet demand, something that has caused problems in the past. It also needs to show that the cuts are reaching customers if it wants to stir the competition.

By cutting solar panel prices Tesla is anticipated to flip the US residential solar industry upside down. This catalyst could be the tipping point for the mass adoption of an integrated distributed energy resources approach.