- Energy storage will significantly increase in importance for the company in the next few years.
- Battery cell manufacture and increased battery joint ventures coming to the fore.
- Australia and California continuing to be fertile ground for the company's energy storage business.
- Tesla riding the renewables macro trend on the back of its battery developments.
- News from Battery Investor Day likely to give further positive drive to the Tesla stock price.
Tesla (NASDAQ:TSLA) will be unveiling exciting new battery and energy storage developments in the next few months. This comes on the back of a need to meet rising demand for its auto and energy storage products. Recent further orders from Australia, Europe, and the USA reinforce the urgency of this. Commercial projects, utilities requirements, and residential use all point to huge pent-up demand.
Its position as the leading EV manufacturer in the world will be followed by a position as a leading player in energy storage and battery development. In autos, Tesla leads the dialogue in the transition from ICE vehicles to EVs. It is likely to play a similarly pivotal role for batteries and energy storage even if it is not the largest player.
Battery Developments for Tesla
Technical developments will stem primarily from Tesla's purchase of Hibar Systems and Maxwell Technologies (MXWL). It is expected that the Maxwell purchase will allow for a 20% cost reduction and an increase in cell density from 250 Wh/kg to 500 Wh/kg over a phased period. Maxwell has innovative "dry electrode" technology which has the added advantage of significantly reducing the CO2 level. Batteries are, of course, the leading cost for Tesla's products. Battery cost reductions will be hugely significant for the company's competitiveness and gross profit margins.
Hibar has been specialising in high efficiency lithium-ion manufacturing systems to improve the speed of production of battery cells. They have been working with Canadian academics on the goal of a "million-mile battery". Some of the work being done on this can be seen here. A million-mile battery for autos would equate to a 20-year battery for stationary storage. They have facilities in Europe and around Asia in China, South Korea, Japan, and Malaysia.
Announcements concerning cell manufacture are likely to be made at Tesla's forthcoming "Battery Investor Day". This could be a key moment in the history of the company.
This year, Tesla has been pressing Panasonic (OTCPK:PCRFY) to increase its production at GF1 in Nevada. The potential capacity is supposed to be 35 GWh. It seems Panasonic had increased investment this year. It had hit about 24 GWh by mid-year but Musk is reported to be impatient with the slow progress. Tesla is transitioning to being a cell supplier as well as a battery pack supplier. That may well be why Panasonic has been moving slowly in its ramping up of production at GF1.
In recent quarters, demand has remained strong for the Model 3. At the time of the Q3 results, Musk referred to "record net orders in Q3 and entering Q4 with an increased order backlog". The chart below illustrates this:
The demand for the Model 3 meant that capacity had to be taken away from the pent-up demand for the company's residential "Powerwall" and commercial "Powerpack" energy storage products.
The new facility in Shanghai is likely to see increased battery co-operation with other vendors. This will include the Chinese plant of LG Chemical (OTCPK:LGCLF). The second building in Shanghai is thought to be a battery facility. This is already quite well-advanced in its construction. It may not be coincidental that over 50% of Hibar's revenues come from their China operations. Any public announcement by Tesla on this will be important and may come during the Battery Investor Day.
The GF4 in Berlin has been advertising for staff already who are proficient in battery technology. There seems little doubt that there will be battery cell lines built into that facility on the back of developments from Hibar and Maxwell. In China, the battery lines will probably be supplied by outside vendor LG Chemical in the first instance. Over time, Tesla will institute scale production of their own cells.
Battery Costs Expected to Continue to Fall
If the expected battery costs come down to the anticipated levels of the researchers, this would have a huge effect on Tesla's competitiveness and the whole field of energy storage, in general. The trend of price decreases is likely to increase more rapidly still in the future. The Battery Investor Day will probably be the catalyst for knowing how Tesla's battery costs are falling to the targeted levels.
The oft-cited target is to get below US$100 per kW/h for the complete battery pack. Tesla probably has it at that for the cell level right now. It is general industry consensus that Tesla leads the field in terms of cost and efficiency. Their converters and coating technology extend their qualitative lead. Much commentary has it that US$100 for the complete pack should be achieved by mid-20121. It is reported that Volkswagen (OTCPK:VWAGY) is buying in from various suppliers at just over US$100 per kW/h for the cells. These are being sourced from various suppliers including LG, Samsung (OTCPK:SSNLF), and the largest Chinese battery player CATL. That is for their upcoming ID.3 model.
Such cost reductions would bring the Powerwall up from 13.5 MWh to 24 MWh at the same price. This would enable a consumer to pay off the product within 7 years rather than 13 years (at average utilities rates). Bloomberg has previously estimated that the battery cell cost will halve from present prices by 2030.
I wrote previously about the very promising new "Megapack" with its 3000 MWh of battery back-up. If the expected improvements come to pass, for the same price, the 129 MWh of storage at Hornsdale Power Reserve would be 224 MWh. An already profitable project for all would suddenly become extremely profitable.
Even at present levels of production capacity and cost, commercial storage is a profitable and growing business. The Megapack's first substantial installation will likely be at the 1,200 MWh Moss Landing power project in California. This will be replacing a gas peaker plant. With Megapack, Tesla can install a utility scale storage plant of 250 MW/1GWh in under 3 months. There is an increasing trend for U.S. utilities to look at energy storage.
Tesla has its own "Powerhub" monitoring and control platform. There is also a very innovative machine-learning platform for automated energy trading called "Autobidder". Details of these can be read here.
Products like Megapack could be the much anticipated killer blow for gas peaker plants. Those contemplating investing in gas peaker plants today are contemplating investing in stranded assets. As GE has estimated, the USA will need 20 GW of peaking power capacity over the next 10 years. As gas peaker plants inevitably cease to be built, this represents a huge dollar opportunity for Tesla. It is not built into their stock price.
There is rapidly increasing research into all types of batteries, not just lithium-ion ones. There is much faith in the potential of solid-state electrolyte cells. Some put their money on zinc air batteries. However, such products on a competitive scale seem to be a long way off. Being at the forefront of research should enable Tesla to ride the future advantages of technological change.
The Big Picture of Energy Storage in a World of Renewables
My November article laid out the details as to why energy storage will boom as renewables surge. Solar and wind alone now account for 7% of energy generation. That is a 100% increase from 2013. The International Energy Agency forecasts that figure to reach 35% by 2040. Storage will take over the need to meet energy demands during the peaks and troughs. This will replace the role worldwide of polluting fossil fuels.
Cost will play an essential role in this. Lithium-ion batteries have already reduced in price by 85% since 2010. Investment in battery storage capacity is expected to reach US$9 billion next year. If Tesla can indeed achieve technological leads in such batteries, it is set to get a huge increase in revenues.
The size of the market worldwide is illustrated below:
California will no doubt be one of the lead proponents of this inevitable change. They are committed to 1.3GW of energy storage by 2020.
The decline of fossil fuel generation is happening more rapidly than most had believed possible. It is being accelerated by a number of developments.
- The threat of stranded assets.
- The threat of lawsuits.
- Insurance is becoming more difficult to attain. This applies especially for coal projects.
- Sovereign wealth funds are rapidly pulling out of fossil fuel investments.
- The huge subsidies enjoyed by the fossil fuel industry, detailed here in my article in August, will decline as a result of the above factors.
- Subsidies for renewable energy storage will finally increase as subsidies for fossil fuel industries decline.
The USA may, however, remain a backwater in the short term. This will depend on the result of the 2020 election. Last year, the country's energy department provided only US$28 million in research awards for storage. In contrast, one single tax break for coal royalties provided US$150 million. Those in the USA who state that energy storage can only work on the back of subsidies are being somewhat economical with the truth.
Batteries will, of course, not be the only source of energy storage. Much research is being conducted in other areas. These include hydrogen and gravity-based storage. Cryogenic energy energy storage is one approach that has strong backers. A modular cryogenic liquid air system is currently on a promising trial in the U.K.
All the alternatives to battery storage will have to compete with the advantages possessed by lithium-ion batteries. These can be summarised as reliability, scalability, and ease of use. Bloomberg New Energy Finance remains confident that lithium-ion production is on a long upwards trajectory. This is illustrated below:
The continuing reductions in battery costs also make it difficult for competing technologies to establish a foothold. Against received wisdom at the time, lithium-ion prices have, in fact, fallen by 73% since 2013. Forecasts are almost unanimous that these cost reductions will continue. A switch from subsidies for fossil fuel to subsidies for renewable energy will accentuate this trend.
Australian Projects Continue to Boost Energy Storage Revenues
Australia is, an example, of how initiatives by individual States can overcome the objections of a Federal government that has close ties to the fossil fuel industry. California represents a similar situation. California and Australian States alone can provide very substantial revenues to Tesla for years to come. They will greatly increase the proportion of revenues that come from this division.
I have written before about the plethora of projects around Australia. The extraordinary A$20 billion solar and storage facility to be built in Western Australia is the latest of these. It will provide Singapore with 20% of its energy needs when completed. Technological developments in high voltage cables make this possible. Such exports could be a major business for Australia for supply to Asian countries. Singapore is 3,800 kilometres away from where the solar and storage facility is located.
My article in November gave updates on many Tesla projects, including the virtual power plant in South Australia which is ramping up to a huge scale.
The orders keep coming. In early November, the Hornsdale Power Reserve developer, French renewable energy company Neoen, announced a 50% increase to the world's largest battery supplied by Tesla. This will amount to 50MW/64.5MWh. The first phase has already saved consumers in South Australia A$50 million (US$34 million) in its first year of operations. This next phase is expected to be completed in the first half of 2020. It will give another early and timely boost to Tesla's energy storage revenues and to their new Megapack product which is confirmed for the project. Neoen anticipates that it will eradicate blackouts in the area completely.
The next phase will include the use of battery energy storage to provide inertia to the grid. The CEFC (Clean Energy Finance Corporation), a government finance arm, is providing some financing for the next phase. Their CEO Ian Learmouth stated:
"It is an exciting model that can be extended across the grid to improve security".
It is known that Tesla and Neoen are working together on a range of projects around the country. Neoen has confirmed it is proceeding with an energy superpark in South Australia. This will include 800 MW of battery storage. No announcement has been made yet, but it seems most likely that this contract will also be awarded to Tesla.
On one day in November, over 50% of electricity in Australia was powered by renewable energy. This was quite an event in a country with strong ties to the fossil fuel industry. It is a harbinger of things to come. The Australian Capital Territory expects to be powered by 100% renewable energy by January 1st next year.
A list of the some of the mega projects worldwide like Hornsdale coming up at the moment shows the trend. This is just the start of such projects. Tesla will be one of the key players but not the largest one. As with autos, competition is good for Tesla. It is evidence of the huge growing market that Tesla helped to create.
Tesla's Vertical Integration Advantage
Tesla's position as a manufacturer of EVs and as an energy storage supplier gives it an obvious advantage in this growing market. The new gigafactory in China and the planned gigafactory in Germany are promising indicators that it will have the necessary capital resources and management focus.
Europe, in particular, will be a fast-growing market. A recent report by Wood Mackenzie forecast a five-fold increase in residential storage in the next five years. This would represent 6.6 GWh by 2024. The market is surging on the back of a positive NPV (net present value) in many instances. This is now a sound investment decision for many consumers in Europe.
Germany leads the European market in this. That is where Tesla is building its next gigafactory. The "European Battery Union" project is centred around Germany and aims to match some of the Chinese output. The USA is lagging behind in this process.
Tesla secured its largest project in Europe last month with a contract with Slovenian company NGEW. This is for a 12.6MW/22MWh storage project worth EUR14 million (US$15.4 million). A second phase of similar value is expected to proceed in the middle of next year. Slovenia, not untypically for a European country, gets 32% of its energy needs from renewables. NGEN is planning a series of projects around Eastern Europe. As with Neoen in Australia, this could be another Tesla co-operation that will reap rich rewards for years to come.
On a macro scale, battery usage for storage will piggy-back on battery usage for autos. Bloomberg estimates that by 2040 there will be 4,584 GWh of storage systems installed at a cost of US$622 billion. This will be spread over cars and stationary systems. Tesla, as the world's most prominent EV company, is ideally placed to take advantage of this. Once again its vertical integration model will afford it great advantages over the competition. Other similarly vertically integrated companies will have similar advantages.
BYD Auto (OTCPK:BYDDF), China's largest EV manufacturer, is a case in point. I detailed their progress in my article in July. They have been active in energy storage for some time. For example, they recently secured a 100 MWh deal in Mexico using their lithium-ion phosphate batteries. They have an extensive worldwide network promoting their residential battery packs. Mexico is seen as yet another huge energy storage systems potential market. This is accentuated by a need otherwise to upgrade existing transmission lines. It is further fuelled by consumer discontent at rising energy prices. BYD has a close partnership with Austria's Fronius International for that company's inverters.
Volkswagen is likely to be Tesla's biggest competitor in EVs on a worldwide scale. They have their own plans for a battery plant in a joint venture with Northvolt AB in Germany. It is expected to cost EUR900 million (US$990 million). The company has also been testing energy storage with lithium-ion batteries, mainly through its subsidiary Audi. They seem to have little doubt about the vertical integration model, nor about the fact that they are a long way behind Tesla at this point.
One advantage of Tesla's vertical integration is shown by its recent deployment of Megapacks to beef up auto charging stations, as detailed here.
Another indicator of this is the way in which energy storage is now being showcased at expos focused primarily on either solar products or e-mobility. Companies like Tesla and BYD can offer a full package. Volkswagen is moving in a similar direction.
As an example, Tesla has been selling its EVs very successfully in California. It is additionally ramping up its energy storage projects there. The power of the brand and the marketing infrastructure in place allow this to happen. California is pledged to be 100% renewable energy by 2040. That will mean the end of its two nuclear plants, its gas peaker plants, and its ICE vehicles. The revenue potential in just the one market of California, equivalent to the world's 5th largest country in GDP terms, is obvious. The strong brand of Tesla will be competing for energy storage systems for 40 million people on both a residential and commercial level. It will be competing for autos to replace the 15 million ICE vehicles on the road there today.
Leading Tesla investor Ron Barron has predicted that the non-auto division of Tesla will reach US$500 billion by 2030. That may be somewhat hyperbolic. It is perhaps based upon the size of the total world market rather than a true idea of what percentage of the market Tesla can achieve.
In Q32019 as per the 10-Q, the company had energy storage revenues of US$402 million. This had a cost of revenue of US$314 million. So margins are quite healthy, in striking contrast to what Tesla bears had speculated they would be. Tesla's lead in battery technology is likely to increase these margins in future quarters. This compares to annual auto revenues of approximately US$20 billion per annum. A current run-rate of US$1.6 billion per annum for energy storage is about to pick up substantially and make a real impact on revenues.
Tesla has always said that it will become a "fully integrated sustainable energy company". So far what they have promised they have achieved, if not always within the intended time scale.
Risks to the Business
The Tesla position going forward looks very bullish. The recent upward stock price shows the market agrees. Main risks to the future could be summarised as follows:
- Problems with sufficient capital availability for future investment.
- Ability of management to focus on energy storage as the product portfolio of Tesla, and of Elon Musk, widens.
- Trade protectionism of Trump administration has negative consequences for the business just as it becomes more global.
- Tesla gets disadvantaged by future battery developments which they do not foresee.
Tesla has often cited that Tesla Energy would match Tesla's auto business in terms of revenue. They reconfirmed this most recently at the Q3 2019 earnings call transcript.
Battery development and macro factors in terms of renewables make energy storage an unstoppable and imminent trend. It is a secular growth market almost unparalleled in potential in the modern era.
The best stock picks are those of companies with visionary leaders in strategic growth industries. Tesla meets these criteria. The company has been a great investment return for those who have invested long-term. The company should continue to be a great long-term Buy proposition.
Even at present battery technology levels, Tesla's revenue opportunities for energy storage are transformative for the company's revenues. Expected battery developments make it more than that. The revenue implications are not currently baked into Tesla's stock price. Investors should buy Tesla stock at an effective discounted price while they still can.
This article was written by
Analyst’s 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.
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