The New Tesla: The Elon Musk Medicine Show

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About: Tesla, Inc. (TSLA)
by: Rogier van Vlissingen
Summary

An "Integrated Green Energy Company" it is not.

An amalgam of unexamined beliefs and careless assumptions results in too many points of failure.

"Sustainability" should include a quantification of low entropy and a measure of the transition toward a low carbon future, not a calcification of failure.

All the forces in the world are not so powerful as an idea whose time has come. - Victor Hugo

Elon Musk is counting on your willingness to believe that Victor Hugo was talking about his Tesla (NASDAQ:TSLA) idea. The only problem is that he has not clearly communicated his idea, and the number of contradictions in his business model is growing. The first reality check is bound to be the 4Q16 results, which can be gleaned from discussions of the car sales stats, and early indications are not good.

Appearances may be helped somewhat by SolarCity selling off yet another piece of its portfolio, for $241 million, at undisclosed terms. Given recent trends, we can safely assume it is under water (again) on this deal compared to the management's rosy future of a portfolio valued at a 6% discount rate for the future payments on solar leases and PPAs. For now, it does create an appearance of improved liquidity, just in time for the financial reporting cycle. It bears watching what happens to these fairy tale assumptions in the new reporting for 4Q16.

The market environment

The fact is, solar, wind and hydro are here to stay as "free" energy sources, but how we make best use of them is still evolving, and the number one mistake in solving the problem is to attempt to make the sources of energy greener without making the uses of energy greener, and reconsidering all options. So, what matters is to look at the whole energy economy of my house, which is a real asset, and my car, but keep them separate from one another. For the most part, a car is a consumer durable, and not really an asset, so linking the two is not appropriate from an analytical standpoint. Yet that is what Tesla tries to sell us on, and it is outright misleading. First you need to figure out which energy retrofit adds the most value to your property, and then (maybe) you could figure out if you have the ability to generate excess power for a car. If not, you will be fueling your car from the grid, or perhaps from hydrogen (see below).

From a pure value standpoint the biggest gains are enabled by efficiency, and it needs to be considered in conjunction with potential for on-site generation. SPV (Solar PV) has been overmarketed with incentives, which has clouded its optimal use, and other solutions have been under-represented. Not only that, but we are now seeing a radically new and more competitive solar model about to enter the market (below). Mini-splits and air source heat pumps are sometimes being over-marketed relative to water- and ground-source heat pumps. Right now, the whole heat pump market is facing the loss of tax incentives, which threatens to continue the irrational advantage for SPV. But with proper capital budgeting, many times heat pumps are still financially superior. Fads all around have gotten in the way of financially and economically sound solutions. The TPO (Third Party Owned) solar model from SolarCity and others is falling out of favor, and it is also threatened by rising interest rates because it relies on stretching payments to artificially "beat" your utility bill.

Retrofitting must start with examining the sources and uses of your energy household, and examining every option in light of maximizing property values and minimizing entropy. Intelligent solutions all involve up to 50%, or even more of the solution to come from efficiency and including passive thermal solutions, and the rest can come from renewable solutions in various forms. The mistake of the current solar-as-a-silver-bullet marketing is that the solar sellers simply tend to oversell panels, for they have no interest in reducing your electrical demand, just like utilities don't naturally support efficiency (only with appropriate incentives, they do). Lastly, we should not lose sight of the potential for a hydrogen economy of the future either.

The financial lie

The financial lie in the SolarCity model is about stretching the payments to make it appear like SolarCity's TPO Solar solution "saves money" compared to your power bill. While obfuscating the fact that it is a 20-year liability and a discount to the value of your home, because on average, people move every 7-12 years, and at that time the balance of a 20-year liability must be assumed by the buyer.

The truth is that for most households, SPV currently would drop down on the priority list when using sound economics, simply because other energy retrofits would add more value to the property. Overselling panels is a result of Tesla's sales model.

The financial lie of the cars, now that the Model 3 is imminent, is that somehow or other the total cost of ownership for Tesla's people mover, the Model 3, is lower than the ICE (Internal Combustion Engine) alternative. But already Superchargers won't be free any longer, and last I remember, we pay for power at home too. Clearly the Model S cleverly took advantage of the features of an EV to position it as a sports sedan to beat all sports sedans. But, with more competition, the EV-performance aspect will no longer be unique to Tesla. With a massmarket car, the justification will increasingly become total cost of ownership, not features. Right now, the Chevy Bolt is out there leveling the playing field, and we know more is on the way from many manufacturers. Finally, as the incentives go away - Tesla and GM (NYSE:GM) are going to use up their allotment sooner than later, and eventually all will - we'll have to remember that once electrical cars pay road tax, there is little advantage left.

The environmental lie

The environmental lie of the Tesla company is that all transportation makes up only 13% of our GHG-emissions problem, and EVs make an infinitesimally small difference in terms of life-cycle environmental cost, if any. The fact being that the embedded entropy, particularly in the batteries, is huge.

For the solar part of the business, granted, buildings in general are close to 40% of the emissions problem, and eventually solar PV will become cheap enough to be viable, but again, today there are other measures that reduce emissions more than solar PV. See examples below. Lastly, if you really want to do something for the environment, the cheapest option is to become vegan, since animal husbandry accounts for 51% of emissions, as the Guardian reminded us not too long ago. It will save on medical bills too, so we'll solve the healthcare crisis all at the same time. The Chinese government already gets it, wanting to reduce meat consumption by 50%.

Slowing sales = deal time?

Besides liquidating a piece of SolarCity's deal portfolio, increased loan facilities were being announced, which reflects a deterioration in Tesla's financial position, as Montana Skeptic just pointed out. Meanwhile, Gov. Andrew Cuomo must sigh a sigh of relief over Panasonic (OTCPK:PCRFY) coming into the picture for the Riverbend facility, EnerTuition reliably points out that also this deal clearly underwhelms. The entire Buffalo Billion already stinks to high heaven because of the corruption scandal that substantially spoiled the fun. Blissfully, the next solar fiasco won't start with an S for Silevo or SolarCity, but with a T for Tesla or a P for Panasonic. But... you ain't seen nothin' yet (read on).

In short, with sales slowing down, and uncertainty about the launch of the Model 3, as Paulo Santos analyzes it, the company has a difficult outlook going into 2017. The widely expected delays in the Model 3 launch are potentially opening up a sink hole in the road ahead for Tesla, given that its borrowing ability is falling behind its growth because of continued losses, and some of the new facilities are purely for leasing, which it now has to provide itself since the RVG (resale value guarantee) was discontinued. In short, it is now out there for all to see that it can't raise any more debt, and any next equity raise will of necessity also run in the dilution that has resulted already from the SolarCity deal. The discount for that deal is not fully reflected in the share price yet.

What's with autopilot 2.0?

Being somewhat of a veteran of the IT-wars and the painfully slow transition companies made into an IT-driven world, I have to be a skeptic of the transition to autonomous driving.

For reasons of contemplating these issues, I would refer the reader to a book by former Citibank (NYSE:C) Chairman Walter Wriston, The Twilight of Sovereignty, or to some of his articles on the subject. He was deeply involved in dealing with the cultural changes that were needed to make Citibank an effective user of information technology, including fighting against some people's tendency to defeat systems by hogging information. Besides studying his writings, I also once had the opportunity to discuss these issues with him in depth. An interesting corollary is the work of computer scientist Edsger W. Dijkstra (affectionately known as EWD), who was one of the fathers of structured programming. I interviewed him once in 1985, and he called it the best interview of his life. It was exactly about finding an intelligent balance between what computers do well and can therefore be helpful, and what they don't do well. The challenge becomes how to design good systems that complemented the human operator where he is weak and let him take over where he is at his best.

Dijkstra's thinking on this point was very influential, but has often not been heeded, witness the persistence of computer translation systems, which still don't work after 40 years of trying, as anybody who is bilingual would tell you. Autopilot as a problem set has a lot of similarities with the translation problem. Dijkstra's view was that computer science was a branch of applied mathematics, and that therefore the first order of business was to clearly focus computing resources on problems that were quantitative but resource intensive, where computers are faster than human beings, and then to leverage human skills for the higher order conceptual parts of business operations where the human being tends to be more effective. The experience of aviators is full of discussions about the pros and cons of cockpit automation and the risks of undermining the value of the human decision maker if the pilot becomes disengaged and is no longer alert. This learning process has only just started for driver automation and autonomous driving. One would have to doubt that the transition from Autopilot 1.0 to 2.0 is the end of the transition. More likely it is just the beginning. Pioneering new technology can be tremendously expensive to the pioneers if they scale up and get bypassed by developments when they're at scale. Look at the entire history of computing and other high tech industries for that.

SolarCity: Clip coupons or build more gigafactories?

With the new involvement of Panasonic, SolarCity is not just leveraging the future, but baking its assumptions deeper and deeper into the fabric of the Tesla business model. Since SolarCity traditionally "invested" in the installation, and sold the idea that the payoff was in the payment streams of the leases, with the dwindling leasing market that option goes away, not to mention that the margins have already gone negative in recent transactions.

For a while there, it might have seemed an option to shut down the SolarCity development company and quit hemorrhaging money, just clipping coupons on the installed base. Realistically, however, both the Riverbend agreement for the Buffalo facility with New York State and now the new investment by Panasonic, which comes with a take or pay contract, mean that Tesla is saddled with this failing business model with essentially no way out. Management's answer to this failing business has been and still is to make it up on volume. The unproven solar tiles are barely a convincing solution.

Three very different models

Since homeowners, like most property owners and other businesses, are usually capital constrained. It is of the essence they do retrofits on the basis of the greatest positive NPV and with financing that makes them as near to cash flow positive as possible. More options are coming to market, including a radically new solar model that is ambitiously called Holistic Solar.

- Zonbak and the solar thermal route

In 2017, we'll see the launch of the Zonbak Solar thermal product, which is a particularly powerful solution for homes with forced air heating and offers a cheap retrofit solution for what is still the larger part of the energy bill in the Northern tier: heat and hot water. Hands down, if it is a good fit for your property, this goes after the 70% of your bill that is thermal, and home owners should be able to add tremendous value to their homes. Several efficiency and passive measures could complement such a retrofit and reduce the overall energy spend by 20-50% while at the same time extending the lifespan of your existing furnace.

In short, notice that forced air heat is quite common for home heating, and you have to realize that this is a very high NPV retrofitting option, with a large addressable market. Compare that to solar PV and (again, in the Northern tier), a 10-20% savings on your electrical bills is typically only a 3-6% on the total energy spend. Solar PV would drop to the bottom of the list of retrofits.

- Holistic Solar and the value of hydrogen

Another solution path is suggested in a response from Zoltan Kiss, an SA contributor and a pioneer in thin-film solar for the last 50 years, to my recent Teslaverse article (with minor edits). Zoltan's new company, Holistic Solar (if the link does not work yet, go to Nanergy Solar) offers a radical alternative solar model that brings hydrogen into the equation:

I have also noticed your summary of my REBOX installation in Budapest and the several comments that it generated.

First an acknowledgment for the fact, that I started to focus on thermal energy needs after I read one of your early articles in SA on the subject, some years ago.

Andreas Hopf comments "In Victor Orbán's proto-facist Hungary, residential electricity costs a paltry €0,11 so who in their right mind would spend €35.000 for a puny cost saving?"

If one can afford it, just to help clean up the environment, might be worth the money.

In our case in Budapest, there are several elements of payback:

i) we have established a company in Hungary, Holistic Solar Hu. We plan to start a vertically integrated manufacturing and commercialization activity, SSPV, Self-Sustaining PV industry, to manufacture the REBOX product.
This you might call a "sun-well", the modern high-tech equivalents of oil-wells.
The smallest unit marketed by Holistic Solar 50,000,000kWh H2 generation (1 million kg of H2/year) and storage capacity

ii) This H2 is either generated locally, or it is trucked in from an H2 generating Solar Farm, established by Holistic Solar, from a location of highest insolation (>2500 hours of equivalent peak sun).
The cost of DC electricity in that location, assuming the installed cost of the farm $1.0/W, amortized over 30 years
(the solar panels, the NiFe batteries and the H2 storage all have life greater than 30 years) $1/30x2.5 kWh = $0.013/kWh.
Assuming electrolysis with 60% efficiency, the cost of 1kg of H2 is 38kWh x $0.013/0.6 /kWh = $0.82/kg.
The cost of trucking it from e.g. Jordan to Budapest is less than $0.1/kg. We have 1kg H2 in Budapest for < $1.0/kg
=> 144MJ thermal energy => $0.007/MJ = 2 Forints in Hungary. Today we are paying for Russian gas delivered, 4 Forint/MJ.
HS can deliver clean H2 to burn, at substantially lower cost, than what we are paying for piped in Russian natural gas.

iii) My 7kW PV generates 8,000kWh of electricity per year in Budapest. The 20kWh of NiFe battery is adequate to do the daily load following. My annual electricity bill in 2015 was 320,000 Ft = about $1200 and my heating bill was 7500 Ft = $2,500 for a total energy bill of $3,700. With my new REBOX system, my total annual payments will drop to $700, for the imported H2.
This is not a paltry savings, all distributed energy and I pay no one rent for the sunshine.

iv) The key is that an SSPV will be operating in Hungary. This one factory can deliver every year 5000 x 4kW REBOX systems.
In the 20 years anticipated life of the SSPV factory, 100,000 typical residences will have been served. In Hungary there are 4 million
residences. In this small country alone, to install self generation REBOX in each residence, 50 such SSPV, Sun-wells would be
required, all operating for 20 years, or 10 such Sun wells, all operating until the end of the century.

Key conclusions:

  • The key to lowest cost distributed energy, is to further reduce the cost of SPV electricity by 3x to under $0.01/kWh in areas of > than 2000 hours of peak sun. I believe this is possible by 2030.
  • The lowest cost energy storage will be based on H2, presumably in some liquid form
  • the EV will have primary H2 storage coupled with part battery
  • Anyone with a 20 square meter sunny patch (even on a vertical wall), even in the cities, can be his own energy supplier

The most important remaining development tasks (HS and several other entities are now working on these tasks)
a) with the SPV panels collect at least 60% of the now lost low grade heat
b) As we take out the 60% low grade heat from SPV panels, we want also remove part of the 410ppm CO2 from the atmosphere and
c) develop the most suitable synthetic H2 containing fuel, eg. Formic acid or Methanol, using the SPV energy and CO2,
and this
H2 containing liquid media to be used either with fuel cells or with burning in the future clean EV

In short, this system is indeed a holistic approach that provides a comprehensive solution for both electric and thermal demand. Note that this battery comes with a 30-year warranty. Plus, you should hang on to your Toyota Mirai (NYSE:TM) if you're getting this system. What could be more fun than producing your own fuel, and be able to charge your car at home in three minutes?

This improved NiFe system is not the only battery to offer longevity, and therefore low cost, there is also the seasalt battery, for which manufacturing is now being developed in Europe. There are more interesting battery technologies around, and it all leads to understanding more and more that indeed stationary batteries will not be lithium-ion for long, and the synergy of the battery "gigafactory" in Nevada is questionable in the long run. Automotive batteries put a heavy demand on form factor, and therefore energy density, so that the shorter lifespan of Lithium-Ion batteries became an acceptable tradeoff. For stationary storage, a little more bulk is not a deal killer if it comes with a 30-year (or longer) lifespan, and therefore substantially lower lifetime cost compared to lithium-ion batteries that would have to be replaced at least twice in that period.

- Mini-splits and other heat pumps

The efficiency of heat pumps including mini-splits has improved beyond measure, and reaches as high as 200-250% for air source and 400-500% for ground source. Here is actually the ideal application for solar PV once it becomes cheap enough since electricity here competes against oil and gas, these systems offer tremendous leverage by gaining energy from heat exchange, and if electric rates start rising again, solar panels are a way to put on an energy hedge. Very often, these systems can compete against oil or gas with existing tariffs, so that you can afford to wait for the cost of solar to drop lower. In the Northern tier water source or ground source, heat pumps are generally the best choice, because air source heat pumps don't perform well in cold weather. In general, heat pumps are a powerful solution wherever you can economically use them, for they get a large amount of their BTUs for free by heat exchange, instead of burning fuel you must pay for.

Disintegration of the Tesla dream

Most of these solution paths suggested here offer vastly better economic value than the would-be "vision" of Musk to run on solar power and charge your car at home. As noted, in the long run, solar or wind can be a good complement to a heat pump solution, but you should first get the value of the home right with the right retrofit, and then separately figure out the economics of EV ownership, for you won't sell the car with the house.

Conclusion

With Tesla focused on manufacturing to scale with gigafactories and producing more and more in house, it is creating a company with so many exposures that a simple competitive change can invalidate its choices. Changing horses in midstream is always expensive, and we're about to see the cost of the transition from Autopilot 1.0 to 2.0 that won't work its way through the system until past 1Q17. If indeed several other battery technologies offer order of magnitude improvements for stationary storage, that undermines the powerwall story. As the multi-junction thin film option that Holistic Solar is now starting to bring to market has a better development runway to lower cost solar power than C-Si (Crystalline Silicon), the story of the Riverbend gigafactory in Buffalo is finished. It will be simply another commodity solar panel manufacturer in a market that is already flooded.

In other words, this ever tightening integration of more and more steps of the production process concentrates the risk to a degree that has seldom seen before, as the potential points of failure multiply. 2017 is very likely going to expose some of these weaknesses during the year. The complexity of the operation has often offered opportunities to bring out some kind of good news at just the right moment, the value of which was often hard to judge, but a lot of those cards have been played, and the stories behind them have mostly not panned out. Going short remains tougher than going long at any time, and any investor needs to do their own due diligence, but there is a plethora of potential triggers in the mind-bogglingly complex fabric of Tesla, and every acquisition, including SolarCity, has multiplied the number of risk factors.

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.