How is Tesla selling residential solar for less than $2 per watt?

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From pv magazine USA.

One persistent aspect of the growth of solar as a technology is that it just keeps getting cheaper. Quarter after quarter and year after year the price of installed systems keeps falling, enabling large scale solar to out-compete conventional generation and reducing the payoff times for rooftop solar under net metering.

Reductions in PV module costs have driven much of this decline because soft costs – the non-hardware portions of adding solar including installation, sales, permitting and measures to prevent overheating – have been much harder to reduce. That is not to say soft costs can’t be reduced – sometimes it just takes a new approach.

Screen shot of the Tesla cost calculator

This week, Tesla’s online sales calculator showed the company is selling residential PV systems for $2.85/W in California and Massachusetts, and $2.65 in New York, Texas and Florida – unsurprisingly the largest markets. Assuming the full 30% federal Investment Tax Credit (ITC) is claimed, the cost falls to $1.93 and $1.85/W.

In at least four U.S. states – Colorado, Pennsylvania, Washington and Utah – the price is even lower, at $2.50 and $1.75/W if the ITC is fully claimed (see the screen shot to the right).

Media outlets say this is Tesla delivering on its promise to cut residential system costs by 16%. pv magazine cannot verify that, as this is our first attempt at using the online calculator and Tesla hasn’t provided average system prices on its quarterly results calls.

However, it is a price level significantly below that offered by Tesla’s competitors, with Sunrun reporting $3.17/W in the fourth quarter of 2018, and Vivint $3.18. But Tesla isn’t just undercutting the big third-party solar companies – its prices are also well below the $2.98/W-DC Wood Mackenzie reported as the average residential solar price in the final quarter of last year, and also below the $3.05 reported by EnergySage as the average in the second half of 2018.

So how, and why, is Tesla doing this?

Strategy shift

In the first half of the decade, growth in residential solar was driven by third-party solar companies who deployed teams of often-inexperienced salespeople door to door. That approach, the financing unlocked by the third-party model and an emphasis on growth over profitability allowed SolarCity, Sunrun and Vivint Solar to expand rapidly to become the largest installers in the U.S.

However, after Telsa bought out SolarCity things changed. Headline-hogging Tesla CEO Elon Musk has never shown the interest in rapid growth in solar sales his cousins and SolarCity co-founders Lyndon and Peter Rive did. Musk moved sales off the street and into Tesla stores, as well as towards direct sales and away from leases and power purchase agreements.

Along the way, cash generation increased but quarterly sales volumes and market share fell. Deployment fell further when Tesla started closing retail stores and moving online, reducing Tesla/SolarCity from the largest residential solar company to the third or fourth-largest in the first quarter of this year.

Customer acquisition elimination

However, along the way Tesla was doing something else: getting rid of the cost of selling solar. While Tesla has never published detailed cost breakdowns, other sources, including the U.S. National Renewable Energy Laboratory (NREL), have illustrated how the cost of selling solar – termed “customer acquisition” – is a major contributor to soft costs.

In fact, the NREL’s latest cost breakdown found customer acquisition to be the second-highest cost in the stack, behind only module cost, at a price of $0.35/W for a typical system (see the gray portion of the chart below). That means customer acquisition makes up roughly 13% of total system costs.

Online sales mean far fewer salespeople and a minimal cost to acquire customers. That has likely been a factor in Tesla’s improved profitability and now enables the company to reduce costs beneath those of its competitors.

Whether or not that will permit Tesla to regain market share is another matter. That would require consumers to proactively visit its website to get cheaper solar. But in the long run, with the rise of online solar marketplaces such as EnergySage and Pick My Solar, Musk may be beating his competitors to the punch in terms of the next business model.

This article’s lead, body and embedded image were modified at 2:25 PM EST on May 2, to mention PV systems are available in some U.S. states for as little as $2.50/W and $1.75 after the ITC is applied, lower than the $2.65 and $1.85 figures previously used.