Tesla is an energy company, this has been true for over 12 years now. In 2006, Elon Musk even wrote a blog post outlining Tesla’s vision for a sustainable energy future. At the time, Tesla’s car ambitions grabbed all the headlines, but a closer look at the last paragraph of Tesla’s Secret Master Plan reveals Elon Musk’s early awareness of how important Tesla Energy would become.
In short, the master plan is:
- Build sports car
- Use that money to build an affordable car
- Use that money to build an even more affordable car
- While doing above, also provide zero emission electric power generation options
Don’t tell anyone.
By 2016, Tesla had checked all the boxes above, setting the stage for Elon Musk’s ‘Master Plan Part Deux‘.
- Create stunning solar roofs with seamlessly integrated battery storage
- Expand the electric vehicle product line to address all major segments
- Develop a self-driving capability that is 10X safer than manual via massive fleet learning
- Enable your car to make money for you when you aren’t using it
This blog post will focus entirely on the first point, solar roofs and battery storage. I’m working on 3 more blog posts for each of the other Tesla Master Plan items. Sign up for my weekly tech update so you don’t miss them.
Stunning Solar Roofs
The Tesla Solar Roof was first unveiled in 2016, alongside the Tesla Powerwall 2 as a system to fulfill Tesla’s promise of accelerating the world’s adoption of sustainable energy. The solar roof generates electricity, the Powerwall stores it, giving the home and car on-demand access to consume it. That’s the idea.
But the solar roof is also designed to make solar energy appealing - in the same way that Tesla made electric cars appealing. To do that, Tesla needs to succeed on a few different levels.
Tesla cars are succeeding because they’re too good to ignore. Compared to gas-powered cars, Teslas are:
- More spacious
- Less expensive to maintain
It would almost be irresponsible to not drive a Tesla, and that’s by design. For solar roofs to be successful, Tesla must copy their own playbook once again. To beat traditional roof shingles, solar roofs need to beat typical roofs on the following categories:
- More beautiful designs
- Longer lifespans
- Lower production, installation and maintenance costs
If Tesla can accomplish all that, how could any customer ever decide against a solar roof? It may sound simple, but this is no easy task. While merging solar cells with roof shingles has been done before, it’s never been done profitably, and at scale.
Solar Roofs Are Hard
Fully integrated solar shingles are often referred to as Building-Integrated Photovoltaics (BIPVs) in the solar industry. Perhaps the most notable example of BIPV success came from the short-lived ‘Powerhouse Solar System 2.0’ from Dow Chemical.
About 10 years ago Dow was awarded a multi-million dollar grant from the US Department of Energy to create beautiful and fully integrated solar roofs. 5 years later, in 2016, they shut down the division. Since then, no major company has solved the challenge of creating fully integrated solar roofs for the masses.
Repeating The Tesla Playbook
To me, today’s solar roof market appears very similar to the electric car market in 2005. By the early 2000s, General Motors had proven it was possible to create electric cars for regular people, but their EV1 only ever became a niche product, one that lasted only a handful of years. GM EV1s were ugly and had short range, a big problem since supercharging stations didn’t exist. But even though General Motors didn’t quite succeed, they laid an electric car framework for Tesla to build on top of.
As Isaac Newton once said:
“If I have seen further it is by standing on the shoulders of giants”
This was Tesla’s exact strategy, and still is today. Tesla stood on the shoulders of General Motors in 2006 when Elon Musk laid out Tesla’s Secret Master Plan. They saw what General Motors did wrong with the EV1, and ultimately succeeded in correcting GM’s errors. Now the company is standing on the shoulders of Dow Chemical, as Tesla attempts to solve the BIPV problems Dow Chemical couldn’t. So what are the big problems with solar roofs today?
Building The Tesla Solar Roof
Tesla’s solar roof is beautiful, no critics attempt to deny that. But there are a handful of unanswered questions that remain.
- Are Tesla’s shingles more resilient than traditional shingles?
- Can their PV cells efficiently generate energy for many decades?
- How much do installations cost?
- How easy is it to retrofit Tesla’s solar roof shingles to existing homes?
Tesla’s launch announcement hinted at answers to some questions, but Tesla hasn’t released much more info since then. Either way, solving these questions will lead Tesla to the ultimate product. One that is so affordable, beautiful, and integrated that homeowners would be crazy not to buy one. But clearly, Tesla isn’t there yet.
Year Of The Solar Roof (And Powerwall)
Elon Musk claimed 2019 is the year of the Tesla Solar Roof and Powerwall, but 3 months in, not much has happened. I hope Tesla’s earnings reports through 2019 shed light on progress, but until then my solar roof expectations are low. There’s a good reason no company is making BIPVs at scale yet, it’s a very tough problem to solve.
I do think Tesla will eventually deliver solar roofs for the masses, but timing the exact quarter of a production ramp is an exercise in futility. It’s never been done before, how could anyone truly know?
The solar roof will be ready when the solar roof is ready. And you’ll know it’s ready when the trickle of customer reviews on YouTube and Twitter becomes a flood. Social media has always been a near real-time indicator of Tesla’s product ramps.
The Market Size For Tesla’s Solar Roof
How big could this ‘flood’ be if Tesla pulls off the solar roof? Well, there are 5 million roofs installed in the US each year. A typical 2000 sq.ft. roof requires 1750 12”x36” shingles. That means the US roofing market uses almost 9 billion shingles each year. That’s a lot of glass and a lot of solar cells.
Since the average roof replacement in America costs between $10,000 and $20,000, let’s say that roofing is a $75 billion/year market in America (5 million x $15,000), and much larger internationally.
That makes the global roofing market large enough to meaningfully contribute to Tesla’s business for years. But the best part is that if Tesla can get their solar roof prices in line with typical roof costs, they will own a far larger share of the roof market than their car market share.
All car manufacturers give people the ability to move from location A to B, but no roof makers can offer their customers a roof that produces both energy and cash every single day. Tesla’s Solar Roof is in a class of its own.
Ramping Up The Solar Roof
That being said, I expect Tesla’s roofing market share to ramp up over years, not months. There are many issues that might limit Tesla’s market size from day one. Lack of sunlight, regulations, and training an installation team to work with an unfamiliar product, to name a few. I also expect early adopters to live in California, where Tesla has better unit economics compared to typical roofing options.
In the meantime I expect Tesla to continue winding down solar panels while solar roofs begin to ramp up. This is in line with the downward solar panel deployment trend since Tesla’s SolarCity acquisition in 2016.
Solar panels are commodities with horrible margins, and they’re impossible to distinguish. Tesla’s brand is built on products that make you stop and stare. When you see a Tesla car on the street, it’s unmistakable. There’s nothing quite like it. When you see a Tesla solar roof, you’ll get the exact same feeling. Just don’t expect to see one in 2019.
Seamlessly Integrated Battery Storage
Batteries are the final piece of the Tesla Energy puzzle. With batteries, solar roofs, and Tesla cars all working together, Tesla will have 3 moats to keep competition away.
Many analysts predict how long it will take for competition to make awesome EVs, solar roofs, or integrated battery packs. I wonder if that will even matter.
If you own a Tesla car, you’re already halfway to buying a solar roof. Energy generation has a clear use case for car owners, lower driving costs. And once you’ve entered Tesla’s ecosystem, why would you ever leave? With a Tesla car and a solar roof, the Powerwall becomes the world’s easiest up-sell. One app, one supplier, one experience.
Understanding The Tesla Powerwall and Powerpack
In 2015, Tesla announced the first generation of their Powerwall and Powerpack. At the launch event, Elon Musk also shared Tesla’s motivation for building them. Batteries sucked. Just like EVs in 2003 and BIPVs in 2016, battery solutions existed, but they weren’t very good. Batteries were expensive and unreliable, with poor integration and short lifespans.
Tesla’s plan is to build beautiful, seamlessly integrated battery solutions for people, governments, and businesses around the world. For consumers, the Tesla Powerwall can charge Tesla cars, store energy from a Tesla Solar Roof, and optimize energy usage through the day. Achieving a full energy production-consumption cycle means homeowners can transition most of their daily energy usage to solar.
For larger operations, Tesla is building Powerpacks to reduce load on energy grids, provide instant backup power in case of power outages, and to store solar energy being generated by large solar farms. Tesla Powerpacks are mailbox sized blocks stacked with 16 Tesla battery packs inside. The innovation here is that each Powerpack can be combined with more, the system is infinitely scalable.
Progress On The Tesla Powerwall and Powerpack
Tesla doesn’t split up battery revenues into separate line items, but the combined growth of the Powerwall and Powerpack has been promising.
It helps that Tesla’s batteries contain fewer parts than their other products. Cars and solar shingles have each been through production hell, and various product SKUs make the process even worse. Since Tesla’s batteries are all made of the same cells, manufacturing them is far more efficient.
Products that are easy to make can be scaled much faster, but they also invite competition and a pricing race to the bottom. This is why Tesla’s Solar Roof and cars are so important. I think early Powerwall enthusiasts will only buy if they already have an EV or a solar installation. This helps protect Tesla from pricing competition, as other battery producers don’t make either one.
Market Size For Tesla Battery Storage
At the 2015 Powerwall event, Elon Musk said that with 2 billion of Tesla’s original Powerpacks, the entire world could completely transition off fossil fuels.
Since that announcement, Tesla’s Powerwall and Powerpack have both seen major upgrades. Powerpacks now have a 210kWh capacity, and Powerwall capacity doubled as well. Today that means 1 billion Powerpacks are needed for a fully sustainable world.
I’ve found estimated costs trending around $400/kWh for Powerpack customers, so let’s round off and assume each Powerpack costs $100k. That makes the global energy market worth $100 trillion. Clearly not a constraining factor for Tesla.
Lowering Tesla Powerpack Costs
Just like Tesla’s Solar Roof, the addressable market for batteries sits on a spectrum from ‘very unlikely customer’ to ‘very likely customer’. There are a few applications (quickly growing) that make sense for Tesla battery packs today. It will be many years before Tesla’s battery solution makes sense for all energy producers and consumers. But as battery costs decline, Tesla’s realistic market size will continue to expand. Today, Tesla’s battery systems only make sense for particularly expensive energy operations.
It’s also worth noting that Tesla’s Powerpacks will likely be sold in multi-year sales cycles. Large companies and governments often can’t just buy a collection of Powerpacks spontaneously. Sometimes it’s possible to speed up the process (The famous South Australia project is a good example), but that’s likely an exception to the rule. While I believe Tesla’s batteries will eventually become cost-competitive around the world, utility pack orders will only be a lagging indicator of success.
Final Thoughts on Tesla Energy
To me, Tesla Energy remains a speculative project, but one that may have an under-appreciated impact on Tesla’s business. On the one hand, Tesla needs to truly innovate to bring their solar roof to markets beyond California. They also need to continue improving their battery systems to be cost-competitive for typical energy use cases. Tesla’s Solar Roof, Powerwall, and Powerpack are not yet efficient enough to be adopted all around the world.
On the other hand, innovation is what Tesla does best. Tesla’s entire product line-up is made up of products that were laughable only a few short years ago. Elon Musk has a pulse on the limits of technology, so his continued promotion of Tesla Energy tells me that big improvements are possible in the near future.
That being said, it’s important to keep expectations in check. Tesla guided a doubling of energy storage deployments in 2019, but didn’t provide any solar roof guidance. We don’t know how the ramp-up in solar roofs will affect their declining solar panel business.
If both parts of Tesla Energy double revenues this year, the business line could do up to $2.7 billion in sales. That would make Tesla Energy a significant contributor to Tesla. I expect the entire company to do $30-33 billion of revenue this year.
But the real long-term value for Tesla will arrive once Powerpacks, Powerwalls and solar roofs can work together for less than $0.10/kWh.
Basically half the world has access to energy between $0.08-$0.12/kWh. Producing and storing energy for less is the ultimate challenge for Tesla Energy.
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