Tesla's Subsidy Shuffle: Big Public Costs With No Public Benefit

| About: Tesla Motors (TSLA)

Summary

In ZEV States, total Federal and State interventions and subsidies for 2 kW of PV solar, 14 kWh of energy storage and an EV are roughly $22,000.

In non-ZEV States, total Federal and State interventions and subsidies for 2 kW of PV solar, 14 kWh of energy storage and an EV are roughly $14,250.

Those values equate to $3.67 per avoided gallon of gasoline consumption in ZEV States and $2.38 per avoided gallon of gasoline consumption in non-ZEV States.

On a per MMBTU basis, current Federal subsidies for wind and solar power are greater than the Henry Hub spot price of natural gas.

In mid-November, the stockholders of Tesla Motors (NASDAQ:TSLA) and SolarCity approved a plan to merge SolarCity into Tesla, thereby creating "the world's first vertically integrated, end-to-end sustainable energy company." It was almost enough to warm the cockles of this skeptic's heart. Then I started compiling a list of the Federal and State subsidies and interventions the merged companies will enjoy as they pursue a sustainable future. It was a fascinating exercise.

Before digging into the surprisingly large subsidy numbers, I'll start by describing the model integrated sustainable energy system I've use for this article, a system that combines rooftop solar, energy storage and an EV. To keep the analysis simple, my model system only has enough power generation and storage to support an EV. The numbers will be significantly higher if a consumer wants to serve part of his non-transport energy needs with a Tesla solution.

For a recent article, I calculated that the 170,000 Teslas on the road worldwide have averaged 33.4 miles per vehicle day. While the battery-to-wheels power consumption of a Model S is 3.5 miles per kWh, there's about a 10% round-trip efficiency loss between total charge energy and total discharge energy. So if a consumer plans to collect energy from a solar panel, store it in a Powerwall and subsequently use it to charge an EV, the total round-trip efficiency loss will be about 19%. To get 33.4 miles of range out of an EV, he will need to start by storing about 12 kWh in a Powerwall.

While I've rounded some numbers to keep the analysis simple, 2 kW of rooftop solar panels should be able to provide an average of 12 kWh per day under optimal conditions. Likewise, a 14 kWh Powerwall should provide adequate storage capacity for the first couple years. That being said, a second Powerwall will probably be needed as the storage capacity of the first one degrades. I can't accurately predict the capacity degradation of a "Powerwall 2," but Tesla's January 22, 2016, Powerwall Manufacturer s Warranty Certificate (Germany) used the following graph to summarize the expected capacity degradation for a "Powerwall 1" used in a daily cycling regime.

According to Lazard's Levelized Cost of Energy Analysis Version 9.0, the unsubsidized installed cost of rooftop residential PV solar ranges from $4,100 to $5,300 per kW of capacity. According to Tesla, the estimated installed cost of a Powerwall 2 with all supporting hardware is about $7,100 before subsidies. For a system that includes 2 kW of PV solar and a Powerwall, I think an unsubsidized installed cost estimate of $15,000 is reasonable. A 30% Federal Investment Tax Credit for such a system would be $4,500.

During 2015, Tesla received $168.7 million from the sale of ZEV and other regulatory credits. The $112 million of ZEV credits arose from car sales in California, Connecticut, New York, New Jersey, Maine, Maryland, Massachusetts, Rhode Island and Vermont. The $56.7 million of "other regulatory credits" arose from car sales in all 50 states.

According to Inside EVs, Tesla sold 25,416 cars in the US during 2015, which works out to "other regulatory credits" of $2,250 per car. Based on gross historical data from ZEV Facts, it appears that Tesla sold about 14,400 cars in ZEV States during 2015, which works out to a "ZEV credit value" of $7,750 per car.

Last but not least, each US purchaser of a Tesla received a Federal EV Investment Tax Credit of $7,500.

The following table summarizes the combined Federal and State subsidies and interventions the Tesla/SolarCity combination will enjoy as they pursue a sustainable future.

If you assume an average EV will save 600 gallons of fuel per year during its 10-year useful life, the combined Federal and State subsidies and interventions work out to $3.67 per avoided gallon of gasoline consumption in ZEV States and $2.38 per avoided gallon of gasoline consumption in non-ZEV States. Since I don't want to seem overly preachy or judgmental, I'll let readers decide whether the public benefits outweigh the public costs.

Every time I write about subsidies, some offended reader excoriates me for even raising the issue given the massive subsidies the oil and gas industry allegedly receives. To minimize the subsidy fairness lectures, I'll offer a simple table that summarizes the Federal energy subsidies and interventions paid in FY 2013 as reported by the US Energy Information Agency.

I have excluded solar from this table because the $5.3 billion in subsidies paid during 2013 relate to the installation of new capacity rather than 2013 energy production of 286 TBTU and the calculated $18.63 in subsidies per MMBTU of current energy production could mislead. When the differences between subsidy regimes are reconciled and normalized, I expect net per unit subsidies for solar to be reasonably comparable with net per unit subsidies for wind. Once again, since I don't want to seem overly preachy or judgmental, I'll let readers decide whether public costs of $3.83 per MMBTU of wind and solar energy are reasonable in a world where the Henry Hub spot price of natural gas is $2.96 per MMBTU.

The other favored lecture from offended readers is CO2 emissions reduction at all costs. While I'm not a climate change denier, I am a fatalist because the correlation between global population and global CO2 emissions growth from 1750 through 2011 is one of the best graphic fits I've ever seen.

When I look at the graph I can't help but conclude that population growth has been a major driver of CO2 emissions growth for as long as we've had access to hydrocarbons. There was a sharp uptick in emissions between 1886 and 1910 when oil emerged as a cost-effective fuel for light, heat and transportation. There was a much sharper uptick from 1945 to 1978 as the world got more peaceful and industrialization in North America, Europe and Japan took off. Emissions growth moderated from 1979 through 1990 as a series of oil price shocks made conservation economically compelling. Since 2000, emissions have grown at a blistering pace as China and other countries transition from agrarian to industrial economies.

While few dare speak the inconvenient truth above a whisper, CO2 emissions aren't climbing because of activities in industrialized economies. They're climbing because billions of people in developing economies are increasing their carbon footprints as they try to catch up and every bit of avoided hydrocarbon use in developed economies will simply increase supplies in developing economies.

If the dire warnings of climate change activists are correct, then humanity is in for a tough time and Mother Nature will do as she's always done when populations in a particular species grow beyond sustainable limits. She will ruthlessly cull the human herd until balance is restored. While most will find the cull distinctly unpleasant, humanity will either evolve and adapt or face extinction, just like every other apex species in the history of the planet.

Conclusion

I do not believe a reasonable man can conclude that the Federal and State subsidies and interventions associated with Tesla's integrated sustainable energy solution are appropriate. As a new administration prepares to assume control in Washington DC, I believe basic math skills will become increasingly important. Ultimately I expect Tesla's subsidy trough to be recycled. For the foreseeable future, Tesla is not a stock I'd want in my portfolio.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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