Elon Musk is hyper-focused on vertical integration.
Days after Tesla and SolarCity agreed on a $2.6 billion acquisition deal, Tesla CEO Elon Musk revealed that a combined company plans to make solar inverters, an important piece of hardware that attaches to solar panels.
The move shows how Tesla’s penchant for making many of its own parts and tools could translate to its new solar business while also highlighting Musk’s focus on vertical integration.
An inverter transforms the direct current produced by a solar panel into alternating current to be used by a home or put out on the power grid. Batteries, which power electric cars, also produce direct current, which needs to be converted into alternating current to be used by a car’s motor.
Tesla already makes inverters for its electric cars.
During Tesla’s TSLA earnings call on Wednesday, Musk said that “there’s no question Tesla is going to do an integrated inverter,” describing it as “the logical thing to do.”
“We’ve got the most advanced inverter engineering team in the world,” he added. “So it makes sense to, just as we do the inverters for the vehicles, to do it with solar as well.”
Musk also said that Tesla plans to make an “integrated inverter,” which could mean that the inverter is combined with the solar panel, which is a growing trend in the solar industry.
Traditionally, a solar roof system has used one inverter to convert all of the roof’s energy into usable electricity. But some companies like Enphase Energy have built businesses off of what are called “micro inverters,” which are embedded onto each solar panel.
The market for solar inverters is a multi-billion dollar industry. As companies, utilities and home owners buy more and more solar panels every year, inverters will be required for each and every system, or even every solar panel.
Analysts with GTM Research estimate that there will be 60 gigawatts of inverters shipped around the world this year with a market value of $6.3 billion. 60 gigawatts is enough solar energy to power almost 10 million average American homes.
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SolarCity SCTY currently buys other companies’ solar panels and inverters, and then installs the solar systems on rooftops. SolarCity has bought inverters from companies like ABB ABB , SolarEdge Technologies, Fronius USA, and Solectria Renewable. The world’s largest solar inverter makers are Huawei, Sungrow, and SMA, according to GTM Research.
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But SolarCity is in the process of building a factory in upstate New York, where it will make its own solar panels. Taking the next step of designing and manufacturing inverters that could be integrated with those solar panels would make sense and could save the company money.
Musk has said that combining Tesla and SolarCity could save the companies $150 million to $200 million within a year from when the deal closes. Part of those savings will come from the companies figuring how to make and buy parts as cost effectively as possible.
Musk stressed on the earnings call this week that a Tesla solar inverter would “look good,” “not take up a ton of space,” and would be “affordable.”