Last Friday, Elon Musk announced plans for Tesla to begin manufacturing “solar roofs”, a unique fusion of solar cells with tempered glass tiles designed to replace solar panels and traditional roofing. The publicity event came just weeks before Tesla shareholders are asked to approve the company’s $2.6 billion acquisition of SolarCity. Tesla and SolarCity have not released any pricing details on the proposed solar roofs, so for now we can only speculate on their economic viability.
To date, home solar systems have been buoyed largely by tax subsidies. In particular, investment tax credits have made it possible for companies like SolarCity to provide homeowners with affordable home solar systems. In order to do so, these companies have relied on complex tax equity financing structures designed to allow a “tax equity partner” to use the income tax benefits associated with renewable energy production. Under these structures, the tax equity partner retains ownership of the solar energy system and the homeowner makes payments either under a lease or a power purchase agreement (“PPA”). Tesla recently stated that the majority of SolarCity’s solar power systems are installed under leases and PPAs.
But will this model work with Tesla’s proposed solar roofs? Unlike home solar systems that are attached to existing roofs, Tesla anticipates these solar roofs to replace existing roofing. It seems unrealistic to think that savvy homeowners would agree to long-term leases or PPAs under which the penalty for non-payment would be the literal removal of the roof over their heads. The idea of purchasing an interest in homeowners’ roofs would likewise be a non-starter with most potential tax equity partners.
For these reasons, if Tesla does bring its solar roofs to market, it will likely be depending on outright sales to homeowners. Partly because of the lack of tax equity financing, Tesla will need to increase prices on these sales. In some states, these sales may also come at a greater sales and use tax cost.
In certain states, solar systems are only exempt from sales and use tax if used to generate electricity that will be sold to customers. This is the case in Texas, for example, where the state’s manufacturing exemption is available for machinery and equipment used to generate electricity for sale, but not for machinery and equipment that homeowners use to generate electricity for their consumption. Texas’ exemption would be available for solar systems used to generate electricity under a PPA, but not for solar systems leased or sold outright to homeowners. In other states, such as Massachusetts, outright sales of solar systems to homeowners are exempt. These sales and use tax issues are among the many factors that Tesla will need to consider in pricing its solar roofs.
Will Tesla’s solar roofs be economically viable? Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn.
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