After Earning Tens Of Thousands Of ZEV Credits, Tesla Has Built Zero Swap Stations

| About: Tesla Motors (TSLA)


Tesla has been earning extra ZEV credits thanks to the battery swap since October 2012.

It seems they will continue to earn these extra ZEV credits until December 2017.

Such extra ZEV credits are worth hundreds of millions.

No swap station has been built and the company is nearly mum on the issue.

Media reports about Tesla losing the extra ZEV credits are inaccurate.

Let me begin by saying ZEV (Zero Emission Vehicle) credits remain financially important for Tesla (NASDAQ:TSLA). Last quarter's adjusted income of $2 million would have been a $74 million loss without these credits; GAAP net income of -$75 million would have been -$151 million. The credits require no maintenance or R&D or any other expense worthy of mention, so obviously there's an incentive in amassing as many as possible.

There is no problem with ZEV credits per se. The thing is, they are supposed to reward zero emission vehicles on two fronts: range and refueling time. On the first front Tesla excels, but the fast refueling requirement (95% of range within 15 minutes) seems achievable only for hydrogen vehicles.

Or is it?

The Tesla Model S: a changing vehicle

In June 2012, the first Model S were delivered and the car was classified as a Type III ZEV, deserving 4 ZEV credits per unit. Type IV and V requires fast refueling with, respectively, 200 and 300 miles of range; the Model S didn't meet the requirement.

But by October of the same year it did! The California Air Resources Board (CARB) reclassified it as a Type V ZEV, and since then Tesla has gotten 7 credits per car. Well, the 60kWh version is a Type IV and thus gets 5 credits, but it makes a minority of the sales.

Without burying the reader in details, let me say that Tesla is getting these credits because of the Model S' ability to do a fast refuel. Which is not based on some subjective notion of what "fast" is. Like I said, it's the ability to refuel 190 (Type IV) or 285 (Type V) miles within 15 minutes. If you don't agree with the law, well, tell CARB and tell the California governor; ask them to change CCR 1962.1 which is the regulation that controls the whole thing.

The Superchargers don't come even close to this, so Tesla has been getting the extra credits (1 for the 60kWh car, 3 in the 85kWh) thanks to the battery swap.

I asked the person who signed the executive orders reclassifying the Model S, thus giving Tesla the extra credits. Her name's Annette Hebert and she's a division chief at CARB. She basically says that yes, Tesla demonstrated the feature in front of agency employees, but everything else is business confidential so no meaningful detail can be released.

Tesla initially stated the first swap stations would open in the SF-LA corridor before the end of 2013. Then in February 2014 it would be "in the next few months" (33:40). Then it would be perhaps before the end of the third quarter. A few months ago we started to hear December. Well, it's December 1st and I don't see any swap station open, but let's wait 30 days to see what happens.

Virtually the only communication from the company on the swap front is what I just linked to, though amusingly they copy & paste the following extract in every 10Q:

our capability to rapidly swap out the Model S battery pack and our plans to develop specialized public facilities to perform such swapping

What does it matter? Didn't Tesla lose the battery swap credits?

No. Perhaps you got that impression from the repeated public comments made by CARB staff, who said that the battery swap didn't qualify. But all the time they were talking about changes to rules that were slated to take place in 2015. The rules for 2012-2014 have always been that Tesla can keep earning the extra credits, so the situation is ongoing.

Isn't this old news? They're not going to earn these extra credits anymore, right?

So I thought. Here's a document from April, detailing the new requirements for fast refueling. Basically, carmakers would need not just to demonstrate that their vehicles were capable of fast refueling, but to show how many miles had been driven that way - and they'd earn the extra credits only for those miles. Seems reasonable.

1. Documentation of fast refueling mileage and events

a. For each specific model year vehicle ZEV type for which a manufacturer claims fast refueling credits, the manufacturer must submit documentation of total fleet miles attributed to fast refueling use in a 12 consecutive month period and total fleet miles in the same 12 month period.

b. To support a manufacturer's claimed number of miles attributed to fast refueling, that manufacturer must provide documentation of each fast refueling event. For each refueling event, the manufacturer must provide documentation of the date of refueling, street address of the
refueling facility used, and vehicle identification number of the vehicle refueled. Fast refueling credit applicants shall retain this documentation for a minimum of three years from the date it was created and provide the documentation to ARB staff upon request within 3 business days.

2. Calculation of fast refueling credits
Fast refueling credits shall be calculated as follows:
Fast refueling miles / total miles = M
4 credits = ZEV credit per each Type III ZEV
4 + (NYSE:M) x (1 credit) = ZEV credit per each Type IV ZEV
4 + x (5 credits) = ZEV credit per each Type V ZEV

3. The fast refueling data submission requirement in this paragraph does not apply to manufacturers of fuel cell electric vehicles.

But in October everything changed:

1. Issuance of Fast Refueling Credits for Model Year 2015, 2016, or 2017 Type III, IV, and V ZEVs.

a. To obtain fast refueling credits, the ZEV manufacturer must apply to ARB's Executive Officer for such credits. No credits shall be granted without Executive Officer approval of the application. Each application shall be specific to Type III, IV, or V ZEV vehicles of a single Model Year. Each application shall contain the documentation specified in subdivision 1962.1(d)(5)(B)2.No later than 15 days before submittal of the first application in a calendar year, the applicant shall provide written notice to the Executive officerOfficer of its intent to conduct fast refueling for its Type III, IV, or V ZEVs in that calendar year.

b. Fast refueling capability shall be assigned to the number of Type III, IV, and V ZEVs of a given model year that have been fueled by an actual fast refueling event during the year initial 12 month period following vehicle placement in California.

i. The total number of a manufacturer's Type III ZEVs assigned the fast refueling capability for a given model year, based on actual fast refueling events during the initial 12 month period following vehicle placement in California, shall not exceed the manufacturer's total number of Type III ZEVs sold in California for that model year that are capable of fast refueling (i.e., the sum of those Type III ZEVs that were fueled with an actual fast refueling event and those Type III ZEVs that are able to be fast refueled but were not actually fueled using any fast refueling).

ii. The provision in subdivision 1962.1(d)(5)(B)1.b.i. also applies to Type IV and V ZEVs in the same manner described for Type III ZEVs.

iii. Only the first 25 fast refueling events performed on any individual Type III, IV, or V ZEV, during the initial 12 month period following vehicle placement in California, shall count towards the total number of fast refueling events, respectively.

iv. The frequency at which fast refueling credits are issued shall be based on the frequency of records and documentation submitted to support a claim for fast refueling credits. For example, a manufacturer that submits records of fast refueling events on a monthly, quarterly, or yearly basis shall be issued fast refueling credits on the applicable monthly, quarterly, or yearly basis.

Let me decipher it for you: all Tesla needs to do is get 1 out of every 25 cars to do 25 battery swaps, and then 100% of its cars will qualify for fast refueling.

Thus, if Tesla sells for instance 5,000 cars next year in California, they just need one swap station servicing 200 cars. As long as each of them does 25 swaps, all 5,000 Model S will get the extra credits. Given that the swaps take 90 seconds, they can do this in a few days.

The rules mentioned above apply in 2015-2017. Most critically, Type V ZEVs will get 9 rather than 7 credits during this period, making the fast refueling feature even more desirable.

How many credits is Tesla sitting on?

No way to know. CARB publishes a yearly balance, but as far as I know it doesn't include transfers to other states so it's not very useful.

(This also means that, by not reporting its ZEV balance, Tesla is actually understating assets).

How many credits has Tesla earned through the battery swap, and what is their financial impact?

Impact of the battery swap itself is limited, as most of the ZEV credits are not earned this way. Still, since they can sell this stuff any time from now until 2025 (which is the timeframe of the ZEV program) there is no doubt they will find buyers.

Assuming a 25/75 mix between 60kWh and 85kWh cars, Tesla is getting an extra 2.5 credits for every Model S sold. Conservatively, I would put Model S registrations in California at 12,000; therefore it seems Tesla has already earned about 30,000 ZEV credits thanks to this feature. So far they've made about $4,000 per credit so potentially this is worth $120 million, though it seems most of the "extra" credits have not been sold yet.

And yes, I know that the additional credits earned by Tesla depress the individual credit price, just like minting money makes each dollar worth less. This is only an estimate.

Looking to the future, if Tesla earns 5-9 credits per car in 2015-2017, and again assuming a 25/75 split, the company will get an extra 4 credits per car. If California sales remain at a modest 5,000 per year, we're looking at an additional 60,000 credits.

In other words, we're conservatively looking at 90,000 credits and $360 million generated by the battery swap feature.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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