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Energy Storage Moves Up The Agenda For Tesla

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About: Tesla, Inc. (TSLA)
by: Nick Cox
Nick Cox
Long/short equity, value, Growth, growth at reasonable price
Summary

New emphasis on energy storage for the company shown at Q3 analyst call.

Energy storage growth an inevitable consequence of renewable energy growth.

Tesla well placed with new products and exciting battery developments.

Rapid battery technological breakthroughs benefiting Tesla and other companies focused on energy storage.

Energy storage has always been high on the list of priorities at Tesla (NASDAQ:TSLA). In the short term, the company has however had to focus production on the huge demand for its autos. As I have written in several past articles, energy storage is a source of huge potential growth for the company that most observers greatly under-appreciate.

At the Q3 analyst call, company executives emphasized energy storage as an essential driver of future growth. This is in contrast to the Q2 analyst call where it was hardly mentioned. As so often with Tesla, the company has been supply constrained rather than demand constrained in its already fast-growing energy storage business.

In recent months, resources have been concentrated on getting the Model 3 up and running. Now we can expect focus to be placed on the existing "Powerwall" and "Powerpack" and new "Megapack" products.

Q3 Analyst Call

Tesla has always emphasized that they expected 50% of revenues to come long term from non-auto business. Most observers have not taken this literally. As my article in August detailed, such observers are wrong to ignore this trend from Tesla. The ramp-up in products makes the company's intentions clear.

As Elon Musk stated at the call:

"I think there is a lack of understanding or appreciation for the growth of Tesla Energy... In the long term I expect Tesla Energy to be of the same or roughly the same size as Tesla's automotive sector. This is the most under-appreciated group."

The shareholders letter confirmed that energy deployments reached a record all-time high of 477 MWh. Executives confirmed that deployment of Powerpacks and Powerwalls had increased 15% in the quarter. This was a slower rate of growth than the previous quarter. This was because the company had focused on getting the Model 3 out to meet the huge demand for that car. Now resources are being switched back to the energy side. The company will be addressing the substantial order backlog of Powerwalls for residential users. The recent fires ravaging California and the subsequent power cuts from utilities there can be seen as another boost for the business.

Musk referred at the call to:

"Our overarching strategy here which is effectively to become a giant distributor of global utility on the energy side."

This aim has always been cited but somewhat ignored by analysts.

It is interesting to note that at the Q2 results, when energy storage figures again were good, there was little mention of energy storage at the analyst call. The focus was all on meeting Model 3 demand. At the Q3 call it was energy storage that was emphasized by Musk and his executives.

Energy storage revenue for the 3 months to 30th September came to US$402 million. As per the 10Q, the cost of revenue for this was US$314. So gross margins on the energy storage are a lot better than cynics have opined. Total automotive revenues are running at about US$20 billion per annum. So if the long-term aim of matching the automotive figures comes to pass, there is huge revenue upside for Tesla being targeted by management. Analysts have certainly not factored this in.

Current Energy Storage Business

My August article summarized this. It gave details of the 3MWh Megapack. This will be pre-assembled at the factory as a single unit. Deliveries will begin in Q4 according to the Q3 shareholders letter. It is illustrated below:

Tesla

With deliveries set to start in Q4, this has the ability to take the energy storage commercial business to a whole new level. Increased volumes and increased margins should be obtained compared to the current Powerpack business. The current business based on Powerpacks and Powerwalls only grew 15% in Q3 because of supply problems. Panasonic (OTCPK:PCRFY) are said to be ramping up their joint venture production at GF1 to try to catch up with demand. The figures from the Q3 8K charted below illustrate growth trends:

Tesla

Panasonic and Tesla have an excellent collaborative arrangement. Panasonic has been adding capacity strongly this year at the Nevada facility. They are aiming to get capacity up from 24GWh to 35 GWh by the end of this year. At present they are only working at 30% of GF1's capacity.

In Q2 energy storage had grown 81% year-on-year. Energy storage only accounted for a small proportion of revenues in Q3. In 2018 it accounted for 9.88% of the whole. The target is for it, and the related solar business, to become 50% of revenues. With production freed up and demand ever increasing, this proportion should grow rapidly. If energy storage were to get to just 25% equivalent of the auto business, on current figures that would equate to revenues of US$5 billion and adds gross profit to the company of at least US$1.5 billion per annum from energy storage.

The company states it has supplied over 50,000 Powerwalls in locations around the world. In comparison, German rival Sonnen claims over 40,000 projects with their residential products. Faster expansion for Tesla though has been held back by supply constraints.

In another sign that these constraints should soon be a thing of the past, the company is opening up new international operations. One interesting example came in October with the announcement of Powerwall retail operations coming up for Japan. Energy storage is a promising market there. Japan is a country which suffers from high energy import costs and an increasing incidence of natural disasters caused by the warming of the world's oceans.

With Tesla, it is not just a matter of shifting manufactured resources to energy storage. It is also a matter of shifting management time and focus to energy storage. Moves such as this one into Japan suggest this re-focus is now happening.

Future Energy Storage Orders

My August article gave details of some of the current pipeline. Business has continued to develop since then.

In October the company received its largest order yet for Europe. This is for the deployment of a 12.6MW/22 MWh system in Slovenia. At a value of US$16.5 million it is the first of what is expected to be a succession of orders with Slovenian company NGEN.

This order followed one earlier in the month for the island of Nantucket off the coast of Massachusetts. This will comprise a large array of Powerpacks as back-up to the island. It was confirmed by National Grid as being a substantially cheaper option (about one-third the price) than building a third cable to the island.

Island usage for energy storage batteries is a continuing application for Tesla around the world. The assistance to Puerto Rico after the island was crippled by a storm is the most high profile case in point. Projects have been supplied in many islands around the world, including American Samoa, Fiji and Hawaii.

Telecommunications installations are another target market for Tesla. There is a rich potential for these even in less affluent and badly run Third World countries. Zimbabwe is a case in point. Tesla received an initial order recently from mobile provider EcoCash to overcome the problems of an unstable grid and the use of polluting diesel generators. An initial order for 520 Powerwalls is likely to be just the start of backing up base stations across the country.

Phase 3 of the virtual power plant network in South Australia is starting to kick in. This could comprise a massive 250 MW/650 MWh over the next few years. As this article shows, the virtual power plant network enables customers to save substantial amounts on their energy bills. Indeed, examples are cited where the utility passes credits to individual homeowners. It should be noted that this rapidly expanding distributed power project is not just targeted at affluent home-owners. It is also being applied to low income Housing Trust areas.

Tesla is currently engaged in a similar, but smaller scale, virtual power plant network in Vermont with Green Mountain Power Corp. (NYSE:GMP)

Australia has a very high usage of solar panels. This makes it a natural and expanding market for Tesla. The government of South Australia has a target of achieving 75% renewable energy by the late 2020s. Pictured below is a picture of the Tesla product being used in a resort setting at Amileka Resort:

Bloomberg

A report issued in August named Australia as one of the world's worst polluters of sulfur dioxide gases from coal-burning power stations. Individual power stations have been emitting pollution way above what is allowed, for instance, in China. Such shocking standards from the Federal government are partly what is driving the initiative for cleaner power from State authorities. The situation is analogous to what is happening in the USA.

US utilities are another growing source of energy storage. Different utilities do however have very differing policies. Tesla has supplied over 2000 Powerwalls to Green Mountain Power Corp. As I have discussed previously, these utilities are likely to move over to renewables at an increasingly rapid rate.

Just recently in August the Hawaiian Electric Industries (NYSE:HE) utility called for the largest renewable energy procurement yet by a utility. This will comprise 900 MW of renewables to cover the islands of Oahu, Hawaii and Maui with concomitant battery energy storage. The target is for this to be up and running by 2022. There's no doubt which way the wind is blowing, even with a Federal government which has been running down the EPA (Environmental Protection Agency).

The Big Picture

My article in May detailed some of the macro developments around the world which are encouraging battery energy storage. Renewables' share of total energy production is increasing rapidly. The means to store energy is increasing at a similar rate. Batteries will be the main way to accomplish this.

Climate change is already ramping up the pace of natural disasters. California has been finding this out with its recent rash of fires across the State. Those with energy storage systems at home have benefited as the utilities have been forced to close down power across much of the State. The State government has decreed that all new houses built after 2020 must have solar panels. That should be a ripe market for Powerwalls in a state where Tesla is strong. California itself has mandated that electricity generation will be 100% based on renewables by 2045. The State will no doubt be a meaningful source of revenue for Tesla for decades to come.

Elsewhere in the USA the drive will probably also come at State rather than Federal level. The ambitious "Green New Deal" from the Democrats is unlikely to get very far in the face of entrenched interests. In 2019 it has been estimated that 10% of electricity generated in the USA will come from onshore wind and solar. This is forecast to reach 30% by 2030. An anticipated surge in offshore wind and hydro could bring that 30% figure up to 50%.

Industrial manufacturing sites are also affected. The need for energy storage applies equally to them as well. During recent tornadoes, Musk's SpaceX "Starship" site at Boca Chica remained up and running due to their combination of solar panels and Powerpacks.

Commercial energy storage currently represents about one-third of the energy storage business in the USA. For individual companies energy storage can provide strong savings by reducing peak demand charges. If they are part of a virtual power plant network, it can cut out the need for high cost peaked plant power. The well-regarded Wood Mackenzie consultancy forecasts that commercial energy storage will grow 14 fold in the USA in the next 5 years. In the energy storage world, one can look at geography or economic sector. Everywhere one sees surging growth.

Solar and onshore wind farms are expanding rapidly. Offshore wind may be another under-appreciated factor in the move to renewables. A recent report by the IEA (International Energy Agency) emphasized the ways in which costs are declining and turbine technology is improving. Offshore wind farms supply only 0.3% of world energy needs at present. This is forecast by the IEA to increase 15 fold in the next two decades. Denmark already gets 15% of its energy needs from offshore wind. The UK, Japan and Taiwan are all examples of countries backing the technology strongly.

A Bloomberg report estimates that about 50% of the world's electricity will be generated by wind and solar by 2050. It opines that battery storage will be the main way of storage. The future market is going to be one of the largest growing markets of any technology in coming decades.

As renewable costs decline and environmental concerns get to center stage, coal use is declining rapidly. Many gas peaker plants are being put on hold. On a positive note for the environment, Murray Energy last week became the 7th coal producer in the USA to declare bankruptcy this year. Utilities are not buying from coal-fired power plants. Such companies are not just able to compete with supply from more competitive and more environmentally friendly sources. This is despite Murray Energy's close ties with the Trump administration and the oxymoronic talk of "clean coal".

Micro projects and mini-grids are increasingly being put together. EV car batteries are increasingly being tested and seen as a second life solution for energy storage. For instance, an agreement was just signed last month between Itochu of Japan and Chinese EV giant BYD Auto (OTCPK:BYDDF). This will offer partially discharged batteries from BYD's used EVs as energy storage devices around Asia. Tesla's vertical integration model will benefit it greatly in this regard as well.

Batteries are getting cheaper and the technology is developing rapidly. This article here gives some of the current research. Scientists are focusing on getting faster charging through high temperature charging. This has always had the drawback of causing passive surface film to form. Rapid charging can cause ions to move from positive to negative electrodes causing the plate-like deposits. Researchers are targeting full charging of lithium-ion batteries within 5 minutes. This year's Nobel Prize for Chemistry went to scientists working on lithium-ion technology.

Rapid battery development should cause the pace of growth of energy storage to accelerate even more. This forecast by Bloomberg New Energy shows just how rapid this pace is set to be. It is no coincidence that Tesla completed the US$218 million deal for Maxwell Technologies in May. Since then it has purchased private Canadian company Hibar Systems. This company specializes in developing high-speed lithium-ion battery manufacturing systems. Maxwell specializes in ultracapacitors for high power density and rapid charging functions, and in the development of dry battery electrode technology. That negates the need for solvents. They are focused on all-ceramic separators to increase battery life.

Unconfirmed reports in June said that Tesla has developed its own secret battery research lab in California. It would seem more likely though that these new battery developments by Tesla would be centered around their Maxwell and Hibar facilities.

One area in which Tesla is known to be working is in integrating cell production and battery packs. They recently lodged a patent for pack parts to be made integral to the cells themselves. This would effectively be a "battery submodule manufacturing plant". They also recently lodged another patent for an "energy storage system" focused on improved battery longevity.

As has been widely reported, an academic paper gave details of a "million mile battery" for BEVs. The same product specification would represent 2 decades of grid energy storage. Patent details for what Tesla are working on are shown here.

Tesla will no doubt be at the leading edge of battery innovation. It is only a matter of time before the company concentrates its battery production around the technology from the Maxwell and Hibar purchases. When it will manage to meet the scale of production needed to meet demand is still an open question.

Panasonic has increased production at GF1 in Nevada this year from 25 GWh to 28 GWh. This has been mainly to keep up with surging Model 3 demand. In a results briefing at the end of October, the company further confirmed plans to ramp up battery production into 2020 at GF1.

The GF3 in Shanghai is believed to be building battery manufacturing capacity in a separate facility next to the auto manufacturing plant. In the short term though Tesla will source the 2170 format batteries from the Chinese factory of LG Chemical (OTCPK:LGCLF). The South Korean giant already supplies some of the company's stationary battery requirements. As this article lays out, LG Chemical would seem to have sufficient battery capacity for Tesla's intended Chinese production in the short to medium term.

Conclusion

Time and again Tesla bears have stated that Tesla's future plans would not happen. We were told the Model 3 would not see the light of day. We were told that the Shanghai factory would never be built. We were told that the world's largest lithium battery would never be supplied on time at the Hornsdale Wind Farm in South Australia. A similar picture emerges in relation to developments at SpaceX.

Musk often does not hit his ambitious time-lines. However product initiatives do happen as predicted. Energy storage is an obvious complementary product to the auto business, taking advantage of Tesla's vertical integration. The fast pace of renewable energy around the world will drive the growth of energy storage.

The energy storage business is the next driver for growth. It is similar to how it used to be with EVs. The rapidly growing market is already there and includes virtual power plants, home residential, and usage by utilities. The products are there. The ambition is there. Energy storage looks to be a strong source of future revenues which has been under-estimated by the market. Comments at the Q3 analyst call indicate that energy storage is finally moving up the list of priorities for Tesla management.

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.