The impressive progress of the much-derided energy storage project for Tesla (NASDAQ:TSLA) in South Australia emphasizes the huge potential for the company. As the world moves rapidly to renewable energy, Tesla is better placed than any of the simple auto companies to reap huge advantages in both energy storage and EVs. Australia is not a large market by world standards, but an example of the way the wind is blowing.
The world's largest battery being constructed at Jamestown in South Australia seems well set to meet the demanding schedule of operation by 1st December. Some of the PowerPacks already on site in September are illustrated below:
Those Tesla bears who have been questioning what the Tesla Gigafactory in Nevada is doing now have their answer. The PowerPack 2 is scalable from 200 kWh to 100+MWh and matched with Tesla inverters. Probably the main reason why Tesla got the contract, apart from speed of supply, is that their inverters are considered to be the lowest cost, highest efficiency and highest power density of any on the market.
Elon Musk's recent visit to the site emphasizes once again the importance of energy storage to the company. As my article in June pointed out, Musk stressed at the stockholders meeting then how he saw energy storage as the biggest growth area for the company. What is starting to happen in Australia for the company shows the advantages of the company's economies of scale and vertical integration.
The recent analyst report from Nomura predicted a near-term stock price rise to US$500 (It was US$342.94 at the time of writing of this article) and revenue of US$58 billion by 2021 (it was US$7 billion in 2016). Their optimism is predicated primarily on an increase in auto sales and hardly at all on energy storage.
The 100 MW installation that is a three hours drive from state capital Adelaide will have the capacity to power 30,000 homes for a period of eight hours. It will be linked to the Hornsdale Wind Farm operated by French company Neoen to store excess energy and reconcile intermittent supply. The state derives over half of its energy from renewables.
This project is part of a mammoth investment by South Australia of A$550 million (US$429 million) into renewable energy solutions to power needs. This follows a heatwave last year that led to huge spikes in energy usage with which the existing grid was unable to cope. As global warming bites, Australia knows it is vulnerable to both heatwaves and more powerful storms. The race is on to provide energy needs to meet these threats.
It is calculated that the whole of Australia could have its energy needs met by 1890 square kilometers of solar panels and 7 square kilometers of batteries. That is not likely to happen of course, but much investment will undoubtedly happen in the coming years.
As my article back in March pointed out, Morgan Stanley recently reckoned that the energy storage market in Australia would rise to a value of US$24 billion. No wonder Elon Musk thought the South Australia project was worth his time and personal intervention.
Tesla and Energy Storage Revenues.
On the Q2 2017 earnings call, the company again reiterated their drive for vertical integration and industry disruption. Elon Musk noted this included also to retail:
"We talked about the importance of integrating energy, production, storage and EV transport. And what we said is coming true. It's really working well together. We're actually able to leverage our existing stores to generate even more sales per square foot.... it's like stupidly high."
This is linked now by a downloadable app:
"The new integrated app.... the status of your car, your Powerwall, and your solar, and see at any given time of the day how much energy is coming from the sun.... from the Powerwall, what your house is consuming."
Effectively this provides some insurance against disruption of the utility system.
For Tesla there are two ways to increase revenue from energy storage. In the case of South Australia, the State Government is purchasing batteries from the company. In the case of other projects such as at Kauai in Hawaii, the company gains revenue from selling energy to the utility. Some recent interesting calculations reckon the company will get an annual cash flow of about 10% of the up-front cost at Kauai. There is an internal rate of return of 6.2%. What these projects show is that Tesla is correct in that combining solar panels with energy storage makes economic sense. The profit numbers will only improve as renewable energy costs fall both absolutely and comparatively.
The latest high-profile opportunity for Tesla has come in Puerto Rico. The Governor Ricardo Russell has publicly asked for help from Tesla. The vulnerability of fossil fuel plants and long-distance transmission lines was vividly illustrated by their almost completely destruction in the recent hurricane.
As the article here details, change and adaptability of companies is key for survival. It cites the Oxford Leadership study showing the average lifespan of large companies has declined from 60 years to 18 years. Companies such as Amazon (NASDAQ:AMZN) are illustrating this constant adaptability, and Tesla is similar. What Big Data and AI have done to tech, so Tesla and others are doing to utilities and transport.
Australia's Solar and Energy Storage Market.
It is hardly surprising that Tesla is making such a big push into the Australian market. Nor that the world's other big vertically integrated company in this sector, China's BYD Auto (OTCPK:OTCPK:BYDDY), is doing the same. Distributed solar energy (that is, for residential usage) in the country is expected to triple this year to over 18,000 installations. Already at the start of the year over 6,500 households had solar and energy storage installed. Only 500 households had such systems installed as recently as 2015. The highest concentration of this was in the state of Western Australia, perhaps the sunniest state of a sunny country.
Solar power is calculated to cost an average of A$110 (US$85) per MWh. This compares to the historically dominant coal-powered cost of A$160 (US$124 million) per MWh. It is also more efficient. The traditional baseload of coal power stations are not efficient where demand is not consistent. This has led to an inefficient hub and spoke system. In time this will be replaced by distributed power from renewables and stored energy.
Solar is the cheapest from of large-scale power generation in the country. All the forecasts leave no doubt that the cost of solar power generation will only come down further. The cost gap will widen in a country where electricity tariffs are high. Electricity tariffs have increased by an average of 120% in the last decade. As my article in October last year detailed, 15% of Australia's 8.4 million households have solar panels installed. This year Tesla has had success in marketing its Powerwall residential batteries both to individual householders and to developers building new projects
On a commercial level, the country has a very substantial number of solar power plants planned, as illustrated below:
The substantial increases coming into effect of renewable energy power should lead inexorably to a boom in energy storage. However, it should be noted there is a potential negative in terms of possible pending legislation. Draft battery standard no.ASNZ5139 is proposing a ban on lithium ion battery storage within residential homes and garages. The standard would insist on specially built enclosures for the purpose. This is still undergoing a consultative process and is actively being lobbied against by the Energy Storage Council. They point out that such legislation has not come into play in Europe where such storage is deemed safe and not a fire hazard. So this is a developing story to follow.
Charging EVs in Australia.
Australia is a huge country with large distances between its major cities. This makes the charging infrastructure of the utmost importance.
Tesls'a current network locations are shown below. Blue = superchargers, Green = Public Chargers, Yellow = patron sites, Red = chargers linked to AirBNB.
This is set to change rapidly. The current 13 superchargers will be extended by a further 12 currently under planning and construction. Effectively now the major population centers of Australia are connected for Tesla drivers. That is to say, links between Sydney, Melbourne, Brisbane, Adedaide and Canberra. Perth in Western Australia is closer to Indonesia's capital of Jakarta than to any major Australian city so no one really drives there from elsewhere in the country .
State capital Adelaide has the ambition to be the first carbon-neutral city in the world. The city has seen a partnership between local utility SA Power Networks, Mitsubishi and Tesla are providing super-fast direct current charging stations around the city. Nneteen of these stations will be up and running by the end of November. A further 25 will be in place by mid-2018. EV drivers in the city are now linked with Melbourne and Brisbane.
A Tesla Supercharger station in Adelaide is pictured below:
The Queensland State Government is inaugurating its "Electronic Super Highway" with charging stations linking Brisbane with Cairns (a distance of 1682 kilometers).
In Western Australia Tesla has just inaugurated its first Supercharger station, pictured below:
This opens up the southwest of the state from the main population center of Perth. Additionally the state's biggest retailer, Syngenta, is setting up over 70 standard charging points in the next few months, with encouragement from the state government.
An example of how Tesla can thrive all around Australia is their recent agreement with Australian retail giant Stockland. The retailer (not Tesla) is investing A$200,000 in installing Tesla Destination Chargers at 31 of their shopping centers across the nation. These are of course not as powerful as Tesla Superchargers which provide 270 kilometers of range in 30 minutes. They do however provide 110 kilometers range from one hour of charging. That one hour spent in a shopping center is the carrot for Stockland.
Of course charging at home is the cheapest option. This is a popular option among Tesla's Australian users as people generally live in houses with plenty of space. However a recent survey in Western Australia was interesting. It found that using roadside commercial charging stations, the cost of a 100 kilometer trip was:
EV = A$4.50.
Petrol Auto = A$16.65.
Diesel Auto = A$7.50.
So even charging on the road provides huge cost savings compared to petrol or diesel autos. The drive in demand for EVs in Australia is coming from the bottom up, from consumers and from state governments.
Australia's EV Market.
Apart from range anxiety, the EV market in Australia has been somewhat hamstrung by a lack of government incentives. This is partly due to the strong fossil fuel lobby in this resource-rich country. There is still a debate at central government level about the level of renewables the country needs. There is less of a debate at state level.
The Australian Electric Vehicle Association (AEVA) reckons the average motorist wants a car with a 250-kilometer range before they will consider buying. This of course is advantageous to Tesla against the competition. The Nissan Leaf and BMW i3 being offered on the Australian market have a range of between 170 kilometers and 200 kilometers. Tesla models far exceed that.
There are 18 million vehicles on the road in Australia, but the AEVA reckons EVs will only become a majority of the total sometime between 2032 and 2039. It is estimated that there are somewhat over 2,000 Teslas in the country. Sales have ramped up substantially this year. That is out of a total of about 5,000 EVs on the road in total. The small quantity should not, in my opinion, be seen as a negative factor but rather a positive one. It shows the potential to be fulfilled.
Government incentives are likely to be the key element in whether EV growth speeds up. The measures being adopted by state governments are key here. Even if the federal government drags its feet, the powerful state Governments may well accelerate the process. Something similar is being seen in the US. States such as California are putting in place measures to meet consumer demand against a federal government in thrall to fossil fuel interests.
In the US the conventional auto companies and the fossil fuel industry have historically been able to influence the federal government against new energy vehicles through their strong lobbying power. In Australia there is no longer a domestic auto industry to lobby the government, and individual state governments are powerful. What has started in South Australia looks set to get extended to the other states quite rapidly.
Those who doubt the energy storage market potential worldwide should take note of the new initiative being launched by the EU. This specifically cites Tesla and their partners Panasonic (OTCMKTS:OTCPK:PCRFY) and Samsung (OTCMKTS:OTC:SSNLF). The EU is proposing putting forward a sum of up to US$2.6 billion toward a European entity for large-scale energy storage. This is seen as a "strategic objective." It has the close backing of German Chancellor Angela Merkel. The EU has a long-term target to attain 70% of its energy from renewables.
As long ago as 2006 Elon Musk stated that he saw EVs as only the first step toward a renewable, clean energy future. What's happening now in Australia is just one example of how his plans can come into play. The almost limitless dollar potential of this is what makes Tesla still such a good investment opportunity in the long term.
Disclosure: I am/we are long TSLA, BYDDF.
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.