Tesla Underestimates Supercharger Expenses

| About: Tesla, Inc. (TSLA)
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Summary

Tesla assumes free-for-life Supercharging costs $500 per car.

Electricity alone will cost far more.

Company does not disclose total Supercharger costs.

Supercharging is a hallmark feature of the Model S. Tesla (NASDAQ:TSLA) includes it in the base price if you get an 85kWh car, but it costs $2,000 to activate it in the 60kWh. This has led to many calculations on how much electricity they could pay for with $2,000, how many Superchargers, and so on.

The problem with all this number crunching is that Tesla is not allotting $2,000 per car, but one quarter that figure.

Digging into the 10Q

In Tesla's earnings reports from this year, if you go to page 8, you can see Supercharger expenses under Revenue Recognition. I cannot find references to this expense from 2012 and 2013, though the 2014 10Qs state how much had been spent by the end of the latter year.

It works like this. When Tesla sells a car, it gets all the cash upfront, but some services will require expenses over a number of years. For this reason it doesn't recognize all the revenue on delivery; part of the revenue is deferred, and recognized over the time the service is provided.

Here's the math. I've rounded up (or down) car numbers to the nearest 50th for simplicity, and I've assumed 95% of Model S can Supercharge.

  2012 and 2013 2014Q1 2014Q2 2014Q3 TOTAL
Deliveries 25150 6500 7600 7800 47050
SC enabled 23900 6200 7200 7400 44700
Deferred revenue $10.3M $3.6M $4.4M $3.6M $21.9M
DR per car $432 $583 $609 $486 $490

The small caveat is that Tesla only gives the revenue deferred at the end of a period, which we can compare with the same amount at the end of the previous quarter. However, as revenue is slowly recognized we're in fact underestimating 2014 expenses a bit. Still it doesn't affect the math; say $500 instead of $490 and we're fine.

What do you get for $500?

It's safe to say Tesla isn't including capital and land costs here. The company has never disclosed those.

There is also maintenance, repairs, customer support, and the general administrative work related to looking for new locations, getting permits, etc. The company acknowledges that its Selling, General and Administrative (SG&A) expenses include Supercharger costs, but doesn't say exactly which or how much.

I contacted the company and they very politely told me they don't disclose this kind of information, so there's that. In any case, $500 is such a small sum we'll assume it only pays for electricity.

How many kilowatts is that?

The Supercharger network consumed 2GWh in October. Tesla hasn't made it clear whether this is AC taken from the grid or DC delivered to the cars (the difference would be about 10%), but I'll assume it's the former.

For the sake of round numbers I'll also assume Tesla delivered 2,600 cars during the month, which means that on average there were 46,000 SC enabled cars: the 44,700 already on the road at the end of the quarter, and 1,300 delivered in October (I do the average because a car delivered on the 31st obviously couldn't consume much).

This means in the most recent month with available data the average Model S consumed 43.5kWh, or 522kWh on a yearly basis. It must also be noted that the network has grown very quickly and it only broke 1GWh in June. At the end of that quarter there were 37,300 SC enabled cars, and assuming 3,000 were delivered in June itself, the average for the month was 35,800. This means average usage was 27.9kWh, or 335kWh on an annualized basis. Therefore, consumption has grown 56% in only four months.

Tesla has repeatedly stated that the Superchargers are free for life. The average car on the roads in developed countries is 11.4 years old, and people don't scrap their cars en masse when they turn 12. The 260 million autos in the US (divided by some 15 million in yearly sales) tell us the typical car is kept for 17 years.

Hence, at a minimum, we would expect the typical Model S to consume 522kWh x 17 = 8.874MWh. In order to meet these expenses with $500, Tesla would need to pay 5.6 cents per kWh.

Almost nobody pays that.

US residential rates are about 13 cents per kWh, while commercial and industrial are around 10 and 8 cents, respectively. Perhaps some big consumers next to power stations or those using onsite generation can get down to 5-6 cents, but Tesla is not one of those; wholesale rates are 4 cents so this gives you a clue how unrealistic the implied Tesla price is.

Of course, power outside the US is generally much more expensive (above 30c/kWh in several European countries). And Tesla's demand is extraordinarily peaky and unpredictable, as most of its locations have a power draw of exactly 0kW most of the time, but need to provide 360kW in the event three cars arrive at once (and they need this ability 24/7). So I don't think Tesla is getting "favourable" rates from the utilities.

How much will this electricity actually cost?

First of all, expecting a luxury sedan to last the same as the average car is unrealistic. People keep their expensive cars longer than their junk mobiles, and the Model S is not subject to wear and tear like, say, a pickup truck in the countryside. So let's increase its average life to 20 years.

Second, the Supercharger network is still absent in many countries and spotty in the rest. Even California still has major gaps (San Diego, parts of the interior). Obviously consumption will grow as the network expands and links different regions; remember that usage doubled within 4 months.

So let's say usage grows to 1,000kWh/year (about one fillup a month). Then the typical model S would consume 20MWh over its lifetime, needing a minimum of $2,000 at $0.10/kWh. Which, I insist, is probably an underestimate.

What about solar panels and batteries?

They're irrelevant. They're not even an element in the equation.

Solar panels have been installed at a handful of Superchargers for marketing purposes. I have never seen any evidence that they actually work, i.e. no reports of crews washing them or replacing a microinverter. And the math has been done before, so I won't repeat it here, but they can only generate negligible amounts of power. Tesla would need to add lots more panels somewhere else...at which point the question becomes, why not just buy from the grid?

As for batteries, they're so expensive they only make sense in very specific situations. To give you some context, let's assume Tesla is getting batteries for $200/kWh (cheaper than the ones inside its cars). With the entire amount it has deferred so far for Supercharging, about $20 million, it could pay for 100MWh. For additional context, the Supercharger network consumes about 70MWh an average day.

Then again, there is no evidence that Tesla is actually installing batteries at Supercharger sites. There are reports of what looks like batteries at a handful of sites but the company itself has never confirmed these.

Is this relevant for Tesla's finances?

In terms of cash, no. The expenses are spread over 20 years and don't threaten Tesla's cash pile. At least when it comes to electricity.

On the other hand, if we assume the average Model S will spend $2,000 on electricity over its lifetime, Tesla has underestimated the necessary revenue by $1,500 per car. With 44,700 SC enabled cars on the road at the end of last quarter, that's $67 million. It's not a lot, but it represents 7% of the company's $950 million equity.

Of course, the $2,000 estimate assumed Tesla was paying 10 cents per kWh, whereas in fact we have no idea how much it's paying. We also have no idea how much it costs to pay for construction, land, repairs and so on. And the company won't say.

So we know the company is understating costs, but we don't know by how much.

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

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.