Tesla's acquisition of Solar City can be seen as a merger between two companies that can create good synergies. Both companies are targeting environmentally friendly consumers, which are good prospects to purchase their electric vehicles, solar energy systems and backup storage. When looking at the merger from the surface, it looks like a good match for the two companies to combine their clean energy products and expand their reach to eco-friendly customers while cutting costs and increasing sales. However, when taking a deeper look at this from an economic and solar industry outlook perspective, the proposed merger loses some of its shine….pun intended.
Solar City, like many solar panel sellers, is struggling in a competitive and highly regulated environment. Most solar companies are in the red and are hoping to get acquired or they have the risk of ending up bankrupt. Solar City, like Tesla, are capital intensive businesses that are both carrying large amounts of debt and have not turned a profit. Cash flow and capital needs will be a major concern in this deal.
Combining Solar City's solar systems with Tesla's energy storage batteries is a compatible offering which is practical. The solar industry is in many ways dependent on the advancement of energy storage and energy storage management systems in order to make solar more attractive and affordable.
Whether the merger goes through or not there are some major challenges for companies in the solar and energy storage space. First, solar panels and battery storage costs need to come down further on top of seeing technology improvements in energy storage. Second, solar panel sales are struggling due to constant changes in regulations around net metering. Utilities have been pushing back more aggressively on net metering and lowering incentives by decreasing the amount being paid out to solar producers for selling excess power back to the grid.
Lastly, government subsidies are currently propping up the solar industry. The federal solar Investment Tax Credit (ITC), which was extended in 2015, is a 30 percent tax credit for solar systems on residential and commercial structures. This tax credit will help keep solar growing in the in the near term, but there is a lot of uncertainty of solar growth in the future once the subsidies phase out after 2023. When the ITC expires, it is likely that the pace of investment in solar will slow down.
If the merger goes through time will tell if it was a good economic decision for Tesla. There will be some hurdles to get over which include: cash flow issues, regulatory uncertainty, and temporary subsidies which will eventually phase out. And all of that can make this deal an uphill battle from the start.