Blog Post

For energy tech, the boring stuff (business model innovation) will be key

Tesla (s TSLA) fan boys might be left scratching their heads after the electric car maker’s “big announcement” on Tuesday afternoon.

It wasn’t a new electric car model, new sparkly paint colors for its Model S or more planned locations for its Super Chargers. Instead, Tesla announced a new financing option for its Model S electric car that includes a sort-of lease/ownership hybrid, where customers can pay a monthly fee, get 10 percent off the car with funding from a couple banks, and then have the option to sell back the car after three years.

In essence, Tesla is attempting to innovate around its business model. The financing option could make the car more available to potential customers that don’t want to pay anywhere between $62,000 and $100,000 upfront for a luxury car. Tesla said the monthly payment could be as low as between $500 to $600, though many were quick to point out that the monthly payments could be much higher.

Tesla logo on the Model X
Tesla logo on the Model X

Traditional car companies offer these types of car lease deals all the time, but the problem is that because the market for electric cars is so new, it’s hard to know how to value an electric car as it ages. Electric car batteries — which make up the bulk of the value of the car — typically have a warranty for about ten years and degrade substantially over time. Picture how long your laptop battery lasts — Tesla uses the exact same type of batteries in its cars.

Given the battery uncertainties, it’s still unclear how much a five or 10 year old electric car would be worth after its batteries have degraded substantially. But with the three-year buy-back guarantee, Tesla is betting that it can determine the value of the car after three years, and that the value will remain high — around the price of a Mercedes S Class — at year three. Tesla’s CEO Elon Musk said both he (personally) and Tesla will guarantee the value of the car.


Another company that counts Musk as an adviser has also been trying new approaches to energy financing with significant success: SolarCity (s SCTY). SolarCity helped pioneer leases for solar panels for rooftops. The company gets a bank to cover the costs of the upfront solar system and then the customer pays a monthly bill (usually less than a utility bill) over a set time period, like 15 or 20 years.

The third party-owned solar panel business model has proved to be so successful that three fourths of the solar panels installed in 2012 were owned by third parties, rather than the home owner themselves. Solar financing companies are also one of the areas of the solar market that are becoming quite successful, in contrast to the solar cell makers that are increasingly being squeezed.

SolarCity held an IPO in December and is trading at double its IPO price. Sungevity has been growing steadily and raised a whopping $125 million in a combination of equity and project finance. Power giant NRG Energy is even considering getting back into the solar lease space.

Bloom Energy

And it’s not just Musk-associated companies that are delivering energy market innovation. Fuel cell maker Bloom Energy launched an electricity-as-a-service model for its fuel cells, enabling data center builders to pay for the fuel cell power over decades, rather than the upfront cost of the fuel cell farm.

In the energy world, new technology takes a long time to develop. But once those innovations become commodities — like solar cells or traditional lithium ion batteries for electric cars — it takes a business model innovation to get those technologies to market.