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Decrease In Dual-Motor Model S Range Threatens Tesla's ZEV Credits

|Includes: Tesla, Inc. (TSLA)

In a previous article I explained how Tesla Motors (NASDAQ:TSLA) has been earning ZEV credits thanks to the battery swap. This other article looks at the benefits created by the Harris Ranch swap station.

However, a lot of these ZEV credits are threatened by an unexpected development: the dual-motor Model S has less range than the old version.

This is the issue of the moment in both the official Tesla forum and Tesla Motors Club. See here, here and here. Obviously there is a lot of confusion at the moment, but it seems the P85D consumes about 25% more kWh per mile - leading to a range reduction of about 20%.

Of course there are lots of caveats here: range will vary with wheel size, highway vs city driving, etc. But so far, the overwhelming majority of users has reported significantly increased consumption - which, with the same 85kWh available, necessarily leads to reduced range. Drag Times reports 19% greater consumption on the P85D compared to the P85, which would lead to 16% shorter range. I'll update the article if some 'definitive' testing (such as by Car and Driver or other automotive sites) appears.

ZEV requirements affect both refuelling time and range

As I explained in the previous article, the highest ZEV ranking a normal battery-powered car can achieve is Type III (4 credits). The Model S classifies as a Type IV (5 credits) or V (7-9 credits) thanks to the battery swap station in Harris Ranch, which CARB counts as fast refuelling (i.e. refuelling 90% of range within 15 minutes).

However, the Type V category contains another difficult target: 300 miles of range. I haven't found out exactly how CARB determines a car's range, but I know it's independent of EPA and much more generous. The 85kWh Model S counted as Type V (EPA range 265 miles), while the Nissan Leaf (EPA 84 miles) counted as a Type III (which requires 100 miles). While generous, the CARB system is not ludicrous: the 60kWh Model S (EPA 208 miles) does not get to be a Type V.

Now, Tesla states that EPA range for the P85D is 242 miles vs 265 for the S85 and P85. This seems a significant overstatement, as it would imply range is only 8.7% lower than in the single-motor version, or that consumption is only 9.5% higher - at odds with real-world testing.

Of course, the company initially said that dual-motors would actuallyincrease range, and the numbers on its website have changed two or three times since the D event. It must also be said that 'EPA range' is not actually tested by EPA, but by manufacturers who (in theory) follow EPA procedures; those news you see about fines on Hyundai and such come because sometimes EPA does its own testing and finds discrepancies with the 'EPA range' advertised by manufacturers.

In summary, 242 miles is not a definitive figure. It's likely an overstatement. In fact, the P85D very likely has about the same range as the S60 - which would put it in the Type IV category. If that is the case, it should earn 5 credits instead of 7 or 9.

CARB hasn't yet updated its ZEV classification

The California Air Resources Board typically classifies a ZEV as Type III, Type IV, etc. before deliveries are made. So, the 85kWh Model S was classified as a Type III in March 2012 (confirmed in June and reclassified in October), while the 60kWh got its classification inDecember of the same year (confirmed in April 2013).

Given that deliveries of the P85D started three weeks ago, certainly you would expect documents similar to those I linked to showing whether the car stays as Type V or drops to a Type IV, even if the former situation is very unlikely. But I couldn't find such documents in CARB's website, and googling around shows nothing. I've emailed CARB about this issue and will update the article if/when I receive a response.

There are two possibilities here. One is that CARB simply hasn't gotten around to reclassifying the car again, for whatever reason - which would be a major lapse from the agency. The other is that the car keeps its Type V status, thus earning 7 ZEV credits now and 9 in 2015-2017 - and CARB didn't see it fit to issue a new executive order to confirm this. Again, this would seem highly irregular as the new P85D is basically a different version of the car, differing from both old versions (60 and 85kWh in range).

So even if the P85D keeps the Type V status, one would expect to see a confirmation (and an explanation) from CARB.

ZEV losses could be significant

In order to estimate how many ZEV credits Tesla could lose because of the dual motor, first we have to acknowledge what we don't know.

First of all, there is a possibility that in fact the reduced range is due to some serious software bug, and that Tesla will fix this soon. If that's the case, the company will not lose any credits at all

And we don't know how much they'll sell in California, but I'll assume it's 5,000 cars per year. Again, you can tweak this estimate because you think their sales are declining, or maybe you think they're going to explode, etc. For the sake of consistency I'll assume a 25/75 split between the 60kWh and 85kWh versions, as I did in the previous article.

With these caveats, I'll try to estimate the number of ZEV credits earned by Tesla in California, per year, for the 2015-2017 period. If you're wondering why I didn't include the P85, it's because it's been discontinued - and in any case it had the same range/credits as the S85.

So here is how much they make without thebattery swap:

w/o battery swap, w/o dual motor
Car model S60 S85 All
Credits per car 4 4 4
Car sales 1250 3750 5000
Credits earned 5000 15000 20000

And how much they make with it:

w/ battery swap, w/o dual motor
Car model S60 S85 All
Credits per car 5 9 8
Car sales 1250 3750 5000
Credits earned 6250 33750 40000

Then we have the sales mix as far as all-wheel drive (dual-motor) is concerned. For the 85, I will assume 30% are S85, 40% are S85D, and 30% are P85D. (The S60 is only offered in rear-wheel drive, i.e. single motor). Of course we don't know the actual percentages but this gives us an idea of how things could play out.

However, we don't know how this affects the range of the non-performance, dual-motor, 85kWh Model S - that's a mouthful so let's call it S85D. The range issues could be specific to the performance version.

w/ battery swap, w/ dual motor, reduced P85D range
Car model S60 S85 S85D P85D All
Credits per car 5 9 9 5 7.1
Car sales 1250 1125 1500 1125 5000
Credits earned 6250 10125 13500 5625 35500

But if it's a problem with the entire AWD system, then the S85D could also be relegated to the Type IV classification. So I contemplate both scenarios.

w/ battery swap, w/ dual motor, reduced S85D and P85D range
Car model S60 S85 S85D P85D All
Credits per car 5 9 5 5 5.9
Car sales 1250 1125 1500 1125 5000
Credits earned 6250 10125 7500 5625 29500

As you can see, the battery swap will cause Tesla to earn an extra 20,000 ZEV credits per year, or $80 million at the $4,000 per credit they've gotten so far. If the dual motors cause the P85D to turn into a Type IV ZEV, they will lose 4500 of those extra credits, worth some $18 million a year. And if the same happens to the S85D, the lost credits will be 10500, or $42 million a year.

If the company actually sells more than 50,000 cars in 2015, I would expect their California sales to be well above 5,000. So you can consider this a conservative estimate.

In any case, the issue is significant for a company that last quarter posted losses of $75 million with $76 million in ZEV revenue. Let's hope CARB and/or Tesla come clear on the issue.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.