Summary
- Tesla announced last month its newest venture, a home battery primarily built to store energy, but its uses could be expanded to fit in Tesla’s grand plan.
- Tesla is building a Gigafactory that will produce GWh/year in battery pack units in the coming years, with the launch scheduled for 2017.
- Tesla could use SolarCity to integrate its home battery project vertically together with the Gigafactory project and EV charging services.
- Tesla, home battery should be analyzed as a unit in a grand plan, but not an isolated project.
Introduction
In a modern economy, every new venture will have its doubters. Since Tesla Motors’ (TSLA, Financial) CEO and founder Elon Musk announced Tesla’s latest venture of a battery for every home, critics have come out guns blazing citing flaws in economic viability of a solar-powered planet. Yet, according to research there is no energy as abundant as that from the sun.
So why the criticism, and is Tesla’s goal of a solar-powered world really a pipedream? Without a doubt, there will be obstacles, but by taking a long term view, it is pretty obvious that Elon Musk may be on the verge of breaking grounds on something huge for the future. How he and Tesla manage to get there, though, is the big question.
Delving into the details of Tesla’s Home Battery
Tesla’s home battery is typically an energy storage system that can be mounted on a wall to store energy from various sources such as wind and solar.
The battery itself is said to cost $3,000-$3,500, but when you factor in the total cost of installation which also includes an inverter that connects to the power grid at home, the average cost of a fully installed battery is estimated at $7,000.
Additionally, the price of a fully installed battery could yet vary depending on the size of the system. Currently there are two versions, the 7-kWh and the10-kWh. Either of them could actually cost up to $9,000 including installation and accompanying electronics for the consumer. In that case, we are talking of an average cost of $8,000. This is pretty expensive for the average homeowner compared to their current electricity bills, analysts point out.
However, there are a few analysts out there that are optimistic albeit on condition. They say that Tesla’s home battery would become more useful when used to store energy when rates are low, and later use that stored energy when rates are high. This could result in average savings of $2 per day.
This happens because of what is notably referred to as, peak and nonpeak periods, but unfortunately, this does not happen everywhere in the world. As such, Tesla’s home battery could end up being used as a back-up during blackouts, but then again, these do not happen too often.
Last year, Tesla announced plans to launch a battery manufacturing plant dubbed “Tesla Gigafactory” in a bid to expanding its production of EV batteries, and following the April 30 announcement of a home battery “Powerwall” that can also be used in businesses and various enterprises, the picture is finally becoming clearer.
The Gigafactory unit is expected to cost the company $5 billion, but it is now clear that those batteries will not be just for Tesla’s electronic cars. The home business will be part of that client list and even given the expansive nature of the venture, Tesla appears to have well-thought plans on how to eventually turn its newest project into profits.
This project is bound to cost a fortune for the company. In a recent discussion, David Becker, a senior analyst at Trade-24, noted: “the company is ‘burning’ money at a very fast pace now, in order to make billions and change the world in 10-20 years from now. The company will, therefore, have to raise more money so that the dream of storing energy will come true.” In the company’s recent results, Tesla posted a loss of $154 million, which means that it is running out of internally generated cash quite fast.
However, it is also good to point out that after repaying the government loan of $465 million in 2013 and 9-years before the due date, it would be unrealistic to say that no one would be willing to lend Tesla money to finance its massive projects.
Tesla’s Home Battery Fits Well in the Company’s Grand Plan
Now, if you isolate Tesla’s home battery as a single project, the valuation metrics will tell you that it is a project doomed to fail. This is simply because of the heavy investment costs expected compared to a challenging market opportunity.
According to estimates, the average US homeowner experiences just about 2 hours of blackout per year. That makes it 20 hours in a whopping 10 years. This suggests that utilizing the battery as a power backup may not be a worthy investment for homeowners, which would therefore spell doom for Tesla’s Powerwall.
Additionally, as mentioned in the beginning, not every homeowner has variable rate of electricity payment, and therefore, saving during peak/off peak periods would not be applicable. This again limits the company’s ability to milk profits from the project in the near term.
However, looking at Tesla’s Powerwall as a unit of a grand plan, things can begin to make a lot of sense. The home battery aligns well in the company’s vertical integration plan, which would see it manufacture energy from the sun via SolarCity Corporation (NASDAQ:SCTY), where Elon Musk is Chairman, store the energy collected in the Powerwall (Home batteries), and later use it charge the company’s electronic vehicles.
This also brings into perspective the importance of setting up Gigafactory in the first place. Last year Tesla revealed that it was going to allow other auto manufacturers to use its patent portfolio in good faith, in a bid to enticing them to manufacture more electric vehicles.
Other Automakers can now leverage on the company’s innovative technology to venture into the rapidly growing EV industry. This will in turn increase the number of EVs in the next few years, which then would provide expanded market for the company’s home battery.
This is because, while the home battery can be used to power the house, it can also be used to charge EVs overnight, which is comparable to the Blink HQ home chargers set up by the Blink Network. Initially, several analysts had suggested that in time, Tesla might fancy acquiring the Blink Network from CarCharging Group (CCGI, Financial), but following the latest venture of a Powerwall, then Tesla seems set to establish its own home-based charging points for every EV owner.
Tesla plans to have 500,000 EV on the road in 2020, and if other manufacturers top up this number, then we could be looking at around 1 million EVs on the road in the next 5-6 years. Additionally, the company is also optimistic that it will be able to cut battery pack cost per kWh by more than 30% by 2017 when Gigafactory finally launches.
The company also expects to be producing up to 35 GWh per year by the year 2020, which is more than the total capacity of cell production by all manufacturers as of 2014.
In a nutshell, all that is required to make the project work is building a link between SolarCity, the Powerwall, Tesla Gigafactory and EVs. Homeowners may not find value for money if they install the systems exclusively for power backup. However, given the fact that a good number of automobile owners will be having an EV in their garage in the next few years, this project might become more meaningful to them in the near future.
Therefore, Tesla’s dream of a solar-powered world is not a pipedream, but there are realistic obstacles that could lead investors to believing that chances of success are next to zero.
Nonetheless, given the fact that the price of shares of the company have rallied from $230 to $247 per share since the announcement of the project at the end of April, this indicates that investors are being patient with the company and are ready to wait for the grand plan to begin yielding profits.
Conclusion
The bottom line is that Tesla, guided by the innovative entrepreneur Elon Musk, has proved from time and again that that which many call a bluff could always turn out to be a great investment.
The company’s Electronic Vehicles is a good example and now it is in a position where one more additional project could improve the current projects in the future. That is why the company has launched the Powerwall project.
Therefore, this project is not to be viewed as a single unit, but rather as a part of a bigger grand plan.
