Burning of fossil fuels (coal, oil and gas) for transportation purposes is responsible for 26% of GHG emissions in the US. Tesla’s Co-Founder, Chairman and CEO Elon Musk responded by proving the world that electric cars can be better than gasoline-powered cars. Tesla develops, manufactures and sells electric vehicles. The Company was founded in 2003 and is headquartered in Palo Alto, California. Tesla sells its products through a network of Tesla stores and galleries, as well as through Internet. The Company’s mission is ‘to accelerate the world’s transition to sustainable transport” and in 2015 reported revenues of $4 billion. Owners of Tesla vehicles will never have to spend money on gas and enjoy the benefit of charging their vehicle either at home or at one of Tesla’s many supercharger stations located throughout North America, Europe and Asia Pacific.
However, “Tesla is not just an automaker, but also a technology and design company with a focus on energy innovation”. Company has begun to expand into other areas and recently Tesla started, in partnership with Panasonic, the construction of a gigafactory in Nevada that by 2018 will produce more lithium ion cells than all of the world’s combined output. More importantly, the factory will also produce battery packs intended for use in stationary storage. Similarly, in August 2016 Tesla announced its intention to acquire solar panel installer Solar City for $2.6 billion in a move to create the world’s “only integrated sustainable energy company” which is “capable of developing, producing, selling, installing, and servicing these products in the most seamless way possible”. SolarCity provides homeowners, businesses and government organizations with solar energy through a vertically-integrated offering that covers module manufacturing, mounting hardware, software, sales, installation, financing, monitoring, and maintenance. Transaction is pending final approval from shareholders, who are set to vote on November 17th.
Fossil fuel consumption for electricity is the largest contributor (approximately 25%) of GHG emissions, therefore major investments in renewable energy, resource efficiency and clean technologies have been made. Particularly, solar energy technology has dramatically improved in recent years. Photovoltaic electricity costs declined by 99% between 1977 and 2016, experts have suggested that by 2020 solar will be the cheapest electricity on the planet, and in some areas such as Southwest US and North Africa utility-scale solar PV is already cost competitive with coal and natural gas. The US government has set the goal of transitioning to 100% clean energy by 2050, of which approximately 45% should be supplied by solar. We are already experiencing positive changes, with for example, construction regulation in some locations requiring installation of solar panels on new buildings. Starting January 2017, San Francisco will be the first major US city to require solar panels installed on new constructions.
Currently, one of the major challenges for adoption of solar energy at scale is the requirement for energy storage. Elon Musk is fully aware and he sees Tesla and SolarCity as an ecosystem. The acquisition allows for vertical integration and should capture important synergies. First, households who have SolarCity panels installed in their rooftops will benefit from Tesla’s battery technology. Solar energy will be captured & stored in batteries during the day when households are away from home, and will be utilized during the night when families return (instead of relying on the more expensive electricity from the electric grid which in night time typically commands peak tariff). Second, an increased volume of batteries at the Gigafactory will provide significant economies of scale and potential for innovation in battery design and production (this same approach worked for Elon with Tesla’s first electric cars, with SpaceX’s first rocket launches, and with Ford many years ago). Finally, Tesla’s electric cars will be powered by solar energy.
Climate Change in 2016: Implications for Business (HBS No. 317-032)