Tesla is reducing prices on its solar installations in an effort to regain its leadership in the residential solar market.* 

Yesterday, a Tesla spokesperson told GTM, "We are making some big changes to the ways we sell solar," adding, "It’s the culmination of a lot of work by the team since the SolarCity acquisition, and pretty significant industry news."

In an effort to reduce the complexity of the sale and the costs of site visits, consumers will be asked to perform tasks typically done by installers by sending photographs of electric meters and other equipment. (This is an attempt to reduce soft costs but could backfire given Tesla's poor reputation for customer service.)

Last month, Tesla CEO Elon Musk said that all of Tesla's resources had to be allocated to Model 3 production in recent quarters — "otherwise we were going to die." But he added, "Now that Model 3 production is going well, we're excited about the solar roof, solar retrofit and Powerwall." Musk contended that 2019 is going to be "the year of the solar roof and Powerwall."

Systems will be offered "only in increments of 4 kilowatts" or about 12 solar panels, according to the New York Times.

Musk wrote in the recent earnings letter that Tesla will be allowing customers to purchase "directly from our website, in standardized increments of capacity. We aim to put customers in a position of cash generation after deployment with only a $99 deposit upfront. That way, there should be no reason for anyone not to have solar generation on their roof."

Tesla's website allows prospective solar customers to take out a loan for a 4-kilowatt system that will generate an estimated "$600 to $800 per year" at a cost of $58 per month for 240 months at a 5.99 percent APR. 

The Tesla website claims, "If you are unhappy with your installation within 7 days, we will uninstall the system."

Allison Mond, senior solar analyst at Wood Mackenzie Power & Renewables, said Tesla's new solar strategy is potentially a game-changer. "But there's no evidence to suggest that it will work," Mond added. 

"Historically, selling solar online has been just a fraction of total residential solar sales," Mond noted. "Selling solar door-to-door and in retail stores has been so popular because it works."

For many consumers, overall savings from a solar system is more important than the upfront sticker price. And it's not clear yet that Tesla's new pricing will deliver savings comparable to that of its competitors, Mond said.

It's not even clear that Tesla's new approach solves a "real problem" for the industry, she added. "Installers we talk with cite difficult [net energy metering] policies, intense market competition, and lack of urgency as the reason consumers don't go solar — not that the product itself is too complicated for consumers to understand."

The new solar strategy, for now

Tesla has made a number of sharp strategic turns in in its solar business.

In 2014, SolarCity was the largest residential solar installer in the world. CEO and founder Lyndon Rive had set a goal of reaching 1 million solar customers by July 4, 2018, and SolarCity's green trucks filled the streets of solar-friendly states.

That dream is dead. Elon Musk's car company acquired/rescued his cousins' troubled firm in late 2016 for $2.6 billion in stock and the assumption of approximately $3 billion in debt.

Since then, Tesla's solar sales strategy has been a moving target.

SolarCity's door-to-door sales channel (with an average customer-acquisition cost of $4,500, according to Wood Mackenzie Power & Renewables) was dropped, as was its in-store partnership with Home Depot (with its customer-acquisition cost of $7,000). Tesla laid off 9 percent of its workforce in June of last year and shed even more employees in subsequent layoffs.

The visible remains of SolarCity were relegated to a few square feet in low-foot-traffic areas in those Tesla automotive dealerships that remained open. Tesla was selling solar (and energy storage) exclusively at its retail locations and online. This path was taken under the leadership of the recently hired Sanjay Shah, Tesla's senior VP of energy operations, formerly of Amazon.

At the time, Tesla said it expected solar volumes to remain "relatively stable" despite having completely changed its sales strategy.

But solar volumes were anything but stable.

Tesla, and before that SolarCity, has not deployed as low a figure as Q1's 47 megawatts in more than five years — when solar was considerably more expensive than it is today. Data from WoodMac shows that Tesla's residential installation volumes nearly halved from 650 megawatts in 2016 to 352 megawatts in 2017, and fell again last year, landing at 208 megawatts.

Solar installations plunged at Tesla, as did the company's market share. Sunrun replaced SolarCity as the leading third-party-ownership financier.

While Tesla suggested it would focus more on margin than revenue, gross margin of the solar and storage business in Q1 of this year dropped to 2.4 percent. And customer satisfaction is not necessarily improving. 

Can giving customers a lower-cost solar roof with just a $99 down payment reverse Tesla's rapidly deteriorating solar business? We'll learn more in the coming quarters.

*Correction, May 2: The original version of this article incorrectly stated that the reduction in Tesla’s solar installation cost was 38 percent when it is actually closer to just 5 percent to 16 percent. The article mistakenly compared Tesla’s net cost to SEIA’s national average, which was in gross cost, and did not factor in the federal investment tax credit. We regret the mistake.

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