Can SolarCity and Tesla Motors Make Microgrids Commonplace?

SolarCity is now addingmicrogrid services to large solar systems like this one at eBay's headquarters. Source: SolarCity.

SolarCity made a big move this week that could expand its business into microgrids as well as international operations. The product is called GridLogic, and it's a combination of energy storage and smart controls for the grid. SolarCity views it as a way to expand beyond solar systems and is targeting municipalities, campuses, military bases, and remote communities for this new product. It's an interesting addition to the product line, but it's unknown how big the impact will be for the solar installer.

SolarCity is hoping communities like this one will value energy storage and the other microgrid services they'll be offering. Source: SolarCity.

Elon Musk unveils the energy storage platform SolarCity is leveraging its partnership with Tesla Motors for the batteries that will power GridLogic, which shouldn't be a surprise considering how closely the companies are tied. Depending on how Tesla's battery technology and cost structure end up in a competitive battery market the tie-up could give both companies a competitive advantage in energy storage.

What's new for SolarCity is the market this product is targeted at. With GridLogic, SolarCity is going after more than its traditional residential or commercial markets and expanding into more community-related services.

A microgrid aggregates energy production and demand from multiple sources, so SolarCity will be selling into more than small individual customers. SolarCity is angling to make GridLogic a backup source in case of natural disasters, but it's unknown whether individuals, communities, or large organizations will value storage in a disaster, or fail to see the same value as SolarCity does.

What's intriguing is the microgrid for island communities, which often deal with high energy costs and outages when generators are down. SolarCity isn't the first to offer these kinds of services -- the most famous being NRG Energy's microgrid on Richard Branson's Necker Island -- but this could bring more reliable energy to more island communities around the world.

Importantly, this would also serve as a path to international expansion for SolarCity. Thus far, the company has been reliant on the U.S. market, so some geographical diversification would be welcome news for investors.

The biggest question is whether or not large buyers of electricity will value energy storage as a service in the same way homeowners like solar as a service. Source: SolarCity.

Microgrids as a service SolarCity will be able to leverage its financing options, including the $0 down payments that have helped make solar affordable for hundreds of thousands of homeowners. We don't know exactly what the terms will look like, and pricing and financing will likely be dependent on each project, but SolarCity will be able to offer lots of options to customers.

The question is, how will customers value energy storage or back-up power in case of emergencies? This is the core unknown facing energy storage, no matter which company is installing it. There's value in having back-up power, sure, but what is it worth, and how are you going to justify paying for it? Unlike electricity from solar panels, there's no great cost comparison, and the market has yet to figure out how to price storage or microgrid services. We'll see if SolarCity can figure out a model that works.

SolarCity's toughest sell yetWhile this is an interesting addition, it may be a tougher sell than residential solar has been so far for SolarCity. As it has expanded into residential solar, it was competing against utilities that have failed to innovate or keep costs down, and a rag-tag group of installers that had little scale to compete with SolarCity's infrastructure. In microgrid services, SolarCity is going after a market that companies like Siemens and General Electric are targeting, no small competitors for SolarCity to face. Even solar companies like SunPower,First Solar, and SunEdisonseem to be more natural fits in the microgrid space, because they're used to building larger solar systems that many of SolarCity's intended customers would demand.

When you're talking about selling to the military, or communities, or college campuses there will be greater competition for SolarCity to overcome, and we don't know if those customers will even demand their product. There's no doubt that expanding into new products like energy storage and microgrids is a positive for SolarCity, but what impact will it have on the income statement? That remains to be seen.

I take a cautiously optimistic view of SolarCity's and Tesla Motors' move into microgrids, but the impact may not be as big as Elon Musk and his team hope. Selling a microgrid as a service where the main selling point is electricity availability in case of emergencies seems like a hard sell to me.

Time will tell if Elon Musk can beat bigger players to the punch in microgrids like he did in electric vehicles and residential solar energy.

The article Can SolarCity and Tesla Motors Make Microgrids Commonplace? originally appeared on Fool.com.

Travis Hoium owns shares of General Electric Company and SunPower. The Motley Fool recommends SolarCity and Tesla Motors. The Motley Fool owns shares of General Electric Company, NRG Energy, Inc., SolarCity, and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.