What do Tesla / SolarCity + Diablo Canyon say about renewable energy?

Big moves are happening in the Golden State — and no, we’re not talking about trying to sign Kevin Durant. On Tuesday, Tesla Motors made a move to merge with SolarCity in a $2.8 billion deal, an attempt at creating what Tesla / SolarCity founder Elon Musk calls “the world’s only vertically integrated energy company offering end-to-end clean energy products to…customers.” Also on Tuesday, Pacific Gas & Electric Company, the utility giant servicing about 2/3 of California, made an initial move to close Diablo Canyon, the state’s last remaining nuclear power plant, by 2025.

These moves are yet another indication of another push for a stronger and more accessible renewables market. Tesla’s acquisition of SolarCity is more than just a consolidation of Musk’s assets into one company. Tesla has invested in its Powerwall energy storage battery, which stores electricity generated by rooftop solar panels for use at any time — in the company’s words, “bridging the gap between peak solar and peak demand”. With the merger, Musk and Co. aim to streamline the consumer’s transition to personal clean energy, taking advantage of SolarCity’s leasing expertise and ventures into energy efficiency and panel manufacturing. As such, Musk has effectively laid the groundwork for Tesla/City to become the Apple of sustainable consumer energy (iPanels, anyone?). It’s an ambitious idea that has bets heavily on continuing confidence in solar and developments in energy efficiency.

Yet as with any merger, there are concerns. SolarCity has been confounded by impediments from competition, policy risk exposure, and an uncertain growth model. Low barriers to entry to the distributed generation market have offered it little to no economic moat for competitors to cross. Its share price was quartered over the past two years from its peak in February 2014, the latest crippling blow coming from the bizarre decision by the Nevada Public Utilities Commission to ditch net-metering late last year. It has since pulled completely out of the state, laying over 550 employees in the process, and its business model has been questioned as potentially too reliant and exposed to policy mechanisms such as net metering, renewable portfolio standards, and energy tax credits that may expire or be revoked.

Tesla, on the other hand, has gone through a financial explosion since 2013, and is one of the hottest companies in the world. Investors may be right in their concern about a merger with such a distressed company. Jim Chanos, investment manager and founder of Kynikos Associates, blasted the deal, calling it “a shameful example of corporate governance at its worst” and SolarCity’s depleted reserves “a burden that now Tesla shareholders will have to bear.” But they might also be short-sighted in their pessimism: merging with Tesla may grant SolarCity the financial flexibility to operate given their existing impediments, and shareholders realize could realize value down the road.

PG&E’s decision to shutter Diablo Canyon’s two 1,100 MW reactors is, on the surface, an entirely different situation. Cheap natural gas and increasing renewable generation have begun to crowd out the reactor’s nuclear generation, which provides 9 percent of the state’s electricity. To mitigate the costly effects of the “duck curve” (see this piece from Vox for a great explanation), PG&E decided to shut down the reactor and replace its production by cutting electricity demand and adding 2,000 GWh of renewable generation to its output, ramping up its renewable generation share to 55 percent (it is currently at around 27 percent) by 2030. It’s an ambitious and serious commitment to renewables, and a nod toward the environmental risks of nuclear generation.

But there are concerns here as well. As noted by Vox, the electricity generation by the two reactors closed in 2013 at the San Onofre nuclear power plant were largely replaced by natural gas generation, not renewables. If fracking continues and gas costs continue to drop, it may be difficult for PG&E to justify replacing the lost nuclear production with renewables. And even if the Diablo Canyon’s output is replaced completely by a renewable source like solar, Bloomberg Intelligence estimates that it could cost an expensive $15 billion. Pro-nuclear environmentalists at institutions like The Breakthrough Institute, a think-tank, have also decried the proposal as a risk to climate progress and increasing emissions. The closure is reliant on renewables continuing to penetrate the market’s power mix at competitive costs and accessible adoption.

Is it just me, or does that sound like what Mr. Musk is trying to push forward? Despite concerns, private investors have poured money into renewables: $243 billion in 2014, and an estimated $329 billion in 2015. With the extension of the Investment and Production Tax credits, there is policy stability for the US renewables industry to securely finance a pipeline of projects without the risk of tax equity advantages disappearing. The continuance of many of these strides is dependent on the outcome of this fall’s presidential election and the fate of President Obama’s Clean Power Plan; however, there is still strong confidence in renewables as main player in our energy economy.

The public appears to be questioning whether or not either development goes through:the market responded poorly towards the Tesla/SolarCity merger (penalizing the otherwise flourishing carmaker 10% of its share price), and the cost estimates and opposition to the Diablo Canyon proposal are not in PG&E’s favor. But both developments signal that the private sector, utilities, and government all have their eyes set on renewables as a main energy source of the future, and are strategizing their business around that forecast. With costs of renewable generation falling fast and staying competitive with fossil fuels, it is an opportunity that the general public (and particularly investors) should begin thinking more seriously about.