Musk seeks to build $1trn green giant


July 4, 2016

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We have just witnessed the birth of a $1trn company.

Or at least that is what Elon Musk, the billionaire founder of PayPal, wants us to think. Two weeks ago, Musk announced that Tesla Motors is looking to acquire one of his other firms, solar power company SolarCity, for $2.8bn to create a renewable power giant. The idea is to marry Tesla’s home battery storage system Powerwall and electric cars with SolarCity’s solar panels.

There is a long way to go if this business is to reach a valuation of $1trn. To put things in context, the two largest publicly-listed firms now, Apple and Google, are worth a combined $1trn; and, even at its peak, Apple was worth $750bn. But it is good to see that Musk is keen to build a renewables company with global ambitions. Wind could yet enter his plans as the domestic wind market grows.

That is no guarantee he will succeed, though. Far from it.

Crucially, the deal is not yet done, and there are big questions from investors and analysts about whether it should even happen. SolarCity has been facing major problems due to the huge amount of financing it requires to build projects, and the weakening of its share price, which is currently around $24.30 — or less than half of the $56.90 in December.

If this deal goes through then it could put even more pressure on the finances of Tesla, which is looking to start volume production of its Model 3 model in late 2017. The firm reported first-quarter losses of $283m in February, which were larger than expected, and then had to raise a further $2bn in May to help it meet its ambitious production goals.

In short, both firms have been facing financial challenges.

In the end this will come down to the decision of two SolarCity directors: Donald Kendall, chief executive of investment manager Kenmont, and Nancy Pfund, founder of venture capital firm DBL Investors. The boards of Tesla and SolarCity are so intertwined that there are only two SolarCity directors with no connections to Tesla. For the record, Musk holds significant minor stakes in both companies: 22.2% in Tesla and 22.5% in SolarCity.

But let’s assume the deal goes ahead.

Here, we reach another big challenge. Fast growth in the combined business will only happen if it can make breakthroughs in the commercial viability of lithium-ion batteries, which it has not yet done. Tesla has set up a $4bn factory to produce these batteries for its cars and Powerwall products but, until they make commercial sense, solar and storage is not going to be a viable proposition for most people. This will stifle growth in the business.

And finally, the big question for those of us in the wind sector is whether Musk sees a role for wind power in his $1trn company.

The answer is: no, not yet. On announcing the Tesla and SolarCity deal, he said he thinks “we can solve the problem [of renewable energy’ with the giant fusion reactor in the sky, called the sun”. This is understandable given that he has already invested in the solar sector and wants to make the most of that technology.

Equally, he did not rule out getting into wind in future, and it would be no surprise to us if he looks to pair up Powerwall with domestic wind turbines in future. This is still a relatively new market, and it could be another one that Musk looks to shake up.

If anything, wind could be a bit dull for eccentric billionaire Musk, unless he sees a way to radically re-engineer turbines. This is a man who is already investing in space travel — but first, he needs to get his renewables empire off the ground.

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