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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Tesla’s Solar Roof Market: What’s The Potential?

Solar Roof

Tesla’s new solar roofs could be a huge boon for the company if the product takes off, but how big is that market? The size of the target addressable market (TAM) is a key question for investors considering Tesla or any other prospective stock in the space.

Starting with the basics, the average U.S. house is about 2,600 square feet. Assuming that the average house is 1.5 stories (that is 1 single story house for every two-story house), then that leaves a 1,300 square foot footprint, probably in something like a 24’x54.5’ box (smart builders generally build in increments of 16” so they can maximize efficient use of studs which is the standard construction skeleton in most markets).

Next, given an average roof pitch of 8/12, implies a roughly 14.5 foot rafter length. Adding a 2” overhang takes us out to about 17 foot giving a total roof area of about 1,870 square feet – or about 19 squares.

Elon Musk recently declared that his solar roof will be cost competitive with traditional roofs which one has to interpret to mean shingles. Certainly, wood shakes, terra cotta tile, and slate are all used on roofs, but they are a lot less common (and a lot more expensive) than shingles. So how much does a shingle roof cost?

Roof shingles are sold in bundles with 3 bundles to a square, and a typical bundle usually costs anywhere from $25-$40 depending on shingle quality and style. That means the material cost for an average roof covering 57 bundles (19 square), is anywhere from $4,275 to $6,840. Of course that does not count labor, but it’s unlikely Musk was including labor cost in his estimates either. Related: OPEC’s Matrix: If 1 Million Bpd Are Cut, Oil Will To Rally To $59

So the average roofing material cost of perhaps $5,500 for a single house. Assuming, a roof is good for about 20 years, that’s the equivalent of about $275 per house per year. And about 100 million homes in the U.S. means that the total TAM in a given year is about $27.5 billion.

Clearly that’s a significant figure, but the question is how much market share could solar tiles really capture? That’s a harder determination to make. There are about 5 million houses worth of solar panels in the U.S. as of late last year, so it might be that solar tiles could never capture more than about 5 percent of total roof share. That’s total speculation of course, but it’s a reasonable place to start.

Even if solar tiles don’t amount to more than 5 percent of roof share over the next few years, the nascent market could add significantly to Tesla’s topline (as well as any other firm that chooses to get involved in the space of course). 5 percent of $27.5B is $1.375B. That’s more than a third of Tesla’s total revenue last year ($4.05B). In other words, the new roof tiles could move the needle for Tesla over time.

At this stage, it’s very hard to get a sense for what the profit margins on roof tiles would be. Panel margins are not great for the most part (though they vary widely between firms), but roof shingle margins are much better (~around 30-40 percent), and wood shakes and terra cotta tile margins are similar. The key here is economies of scale and consistent continuous production processes. If efficient economics are applied to solar tile production, the market is probably worth at least $400M in annual profit. Investors should take heed and consider what players may come out on top in the end.

By Michael McDonald of Oilprice.com

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Leave a comment
  • Alaa on November 24 2016 said:
    You forgot to add the Powerwall 2. For every roof that Tesla will do they will most certainly sell a Powerwall 2 that is worth more or less the same as the roof tiles. So that doubles your numbers.
  • Sean Newman on November 24 2016 said:
    Might want to check your math on the material cost.

    57 bundles * $40/bundle = $2,280 (upper range)

    I think you multiplied by 3 (3 bundles/square) one two many times....the 57 already included the 3x (as in 19 squares * 3 bundles/square = 57).
  • Colin on November 24 2016 said:
    Rather large omission is failing to account for opportunity costs... you know 30 years worth of power generation if you choose another dumb roof?
  • Joe on November 25 2016 said:
    Michael, you didn't factor in the fact that solar panels oriented to the north and east are almost useless. You need to cut your roof area numbers in half. Even west facing panels are not that great.

  • Joe on November 25 2016 said:
    Michael, you didn't factor in the fact that solar panels oriented to the north and east are almost useless. You need to cut your roof area numbers in half. Even west facing panels are not that great.

  • Markp1950 on November 25 2016 said:
    Elon said that the roof would be cheaper without factoring in the electric generation.
    So separate the 2.
    Making the roof cheaper makes the solar a freebie.
    1. buy the roof, being cheaper and more longer lasting.
    2. now you have the free solar on the roof. Then calculate the cost of hooking up the electric part.
    I like the looks of the roof. It will pay even without hooking up the electric.
    Roof would last longer than I will be on this earth.
  • Chris on November 25 2016 said:
    $6000 worth of materials for a shingle roof that lasts 20 years.

    Musk has stated that his solar roof will last twice as long. So $6000 x 2 = $12k

    The roof could sell for $12k or less and he could still say its cheaper than a reg roof over its lifetime.

    And, we don't know if he's counting the 30% of tax rebate on solar products. (He probably is)

    My guessimate is $15k for a tesla solar roof before install. Tax rebate takes it down $4500 to $11,500. Divide it by 2 (because it lasts twice as long as a shingle roof) and you get $5650
  • Joe on November 26 2016 said:
    Re: Chris. Please make sure you understand a tax rebate. A 30% tax rebate doesn't mean you get 30% of the price refunded to you. It means you don't pay federal income tax on 30 % of the cost. For instance if your marginal federal tax rate is 28%, you would reduce your tax by 28% x 30% x the cost of the solar roof. Therefore, the cost would not be reduced by $4500, it would only be reduced by .28 x $4500 or $1260.

  • David Hrivnak on November 27 2016 said:
    Joe as some who has installed solar and have taken the rebate, you do get 30% back off the purchase price. Rough numbers we paid $30k for our solar but got back $10k when we filed our taxes making our net cost about $20k. It works well powering our house and both cars with a little to spare. Our electric bill is now $14 (the connection fee) and that covers the Houston including heating and about 1000 miles of driving in our EVs.

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