Much is written about Tesla’s apparently vastly overvalued stock price. Most commentators are all over the company’s obvious shortcomings—and especially its consistent failure to produce either vehicles or earnings on target.
Many commendators, including me, assess Tesla’s valuation as the product of a simply awesome publicity machine, in the form of a single person—company founder Elon Musk. How else could you explain the chart above, which compares the share prices of a non-profitable automaker with those of a profitable one? The Musk Factor echoes Tesla’s own acknowledgement in its 2017 annual report that its good buzz stems from the general admiration (adulation might be a better word) for its founder.
Some commentators, including Brent Goldfarb in an interesting Vox piece, walk through the company’s various business models and find a lot of things Tesla and its investors should worry about.
Very very few though focus on what I might argue is Tesla’s most important business: batteries and energy. Musk spends a good amount of time expounding on solar energy. To him it’s obvious that solar is the fuel of the future. His blathering in this direction goes generally uncriticized because he’s preaching to audiences who have been conditioned over decades to believe that a fickle, insipid energy source can power computers, elevators, refrigerators, and the Internet, not to mention millions and millions of two- to three-ton motor vehicles, 24 hours a day.
In the 2017 annual report, Tesla describes the storage and energy business:
We developed energy storage products for use in homes, commercial facilities and on the utility grid. Advances in battery architecture, thermal management and power electronics that were originally commercialized in our vehicles, are now being leveraged in our energy storage products. Our energy storage systems are used for backup power, grid independence, peak demand reduction, demand response, reducing intermittency of renewable generation and wholesale electric market services.
And what is the energy to be stored? Solar, of course—the least capital friendly bulk energy source you could possibly find aside from thermocouples. Solar’s capital-hostility is due to its capacity factor, i.e. the percentage of the 8,760 hours over the year when solar panels are actually producing power and thereby the revenue to pay for the capital required to install them. Typically this capacity factor works out to 12–17 percent depending on your latitude. That’s low. It means the capital payback period is longer, meaning capital is tied up for longer, meaning the discount rate is higher. Typically the way around this is to up the nominal or de facto per kWh rate that solar electricity receives, and typical ways to up that rate include high feed-in tariffs, or tax credits, or mandatory portfolio standards, or some combination of the foregoing. How do these rates get upped? Typically through some government action. I’ll get to that in a minute.
We typically use power 100 percent of the time. Clearly a source that only produces power and revenue during 12–17 percent of the hours in a year would have to be extra special in order to warrant the extraordinary expenditures required to both get it into a grid and to store it. Tesla, and Musk, believe there’s something so special about solar that a lot of people will pay big money and jump through major hoops in order to produce and store it. This belief is so compelling that the company wrote it into its business model, right after the battery section:
Sales of residential solar systems enable our customers to take direct advantage of federal tax credits to reduce their electricity costs. Our solar loan offering enables customers to own their solar system with little upfront cost. We also continue to offer lease and power purchase agreement options to both residential and commercial customers. Our current standard leases and PPAs have a 20-year term, and we typically offer customers the opportunity to renew our agreements.
In October 2016, we unveiled Solar Roof, which integrates solar energy production with aesthetically pleasing and durable glass roofing tiles and is designed to complement the architecture of homes and commercial buildings while turning sunlight into electricity. We recently commenced Solar Roof production at our Gigafactory 2 in Buffalo, New York, and are beginning to install them in customers’ homes.
The last point is interesting: as of October 2018 the Solar Roof was still not available—suggesting yet another unfulfilled promise, in yet another of the company’s core businesses. The Solar Roof is, in Goldfarb’s estimation, a way to make solar panels aesthetically more acceptable. I find that pretty dubious. The solar stampede into Ontario’s electricity system which began after the Green Energy Act of 2010 was unaffected by how the panels look on a roof.
But even improved aesthetics, plus the still-unfulfilled Solar Roof rollout promise, is not the thing to take away from all this. The thing to take away is that the Solar Roof, in terms of power production, will have a capacity factor much lower than panels with tracking technology. As I emphasized in “Pipe dream at Moss Landing,” even tracking technology paired with the latest greatest panels gives a capacity factor that is still so low, even in semi arid southern California, as to make a solar-plus-storage scheme nowhere close to economically viable without government support. Tesla knows this, hence the first sentence in the second paragraph in the quote above: “Sales of residential solar systems enable our customers to take direct advantage of federal tax credits to reduce their electricity costs.” That’s bass-ackwards. Federal tax credits enable the sales. Without taxpayer generosity creating a pseudo-market for solar panels, nobody would waste their time and money installing them.
In “Pipe dream” I showed that grid scale energy storage is not just economically ruinous but obviously so—and that this is so obvious that even propoents of grid-scale battery storage projects such as the pipe dream at Moss Landing are careful to refrain from promising grid scale bulk energy from batteries; read carefully between the lines and you’ll see they promise ancillary services only. Add in the fact that this kind of ancillary service is only needed on grids that have significant amounts of intermittent generation, and it’s painfully clear that the actual market for grid-scale storage is minuscule.
In other words, a significant part of Tesla’s business hangs on
- Sales of solar panels, which are dependent on government subsidies to homeowners.
- A minuscule market for ancillary services, in jurisdictions run by governments that are prepared to shoehorn, at taxpayer and ratepayer expense, significant amounts of intermittent renewables into their electricity grids—and thereby risk electoral annihilation similar to that which befell the Ontario Liberal Party in mid 2018.
- People continuing to believe the fantasy that solar energy generated by PV panels and stored in lithium-ion batteries will play a significant, let alone dominant, role in the future.
Tesla acknowledges the risk of depending on government support. But it does not acknowledge the risk of devoting effort and resources to chasing a tiny ancillary services market nor the risk of abetting the general notion that the technology which provides the ancillary services (at huge cost) can provide grid-scale bulk energy.
Tesla has so far more than gotten by with its investors apparently not caring about these fundamentals. This could be their sunny enthusiasm for Tesla’s original offering—cool, fast electric cars—carrying over into the less known, and almost universally misunderstood, energy segment.
The sunny enthusiasm accounts for Tesla’s unbelievable share prices, and the unbelievable prices feed the general notion that Tesla is at the vanguard of a huge wave of disruption. And who knows—maybe Tesla’s amazing branding can carry it through the rough patches en route to establishing itself as a viable automaker capable of generating sustainable revenue. That would be disruptive. And it would kill the solar energy business, as people finally get serious about the sheer amount of additional generating capacity required to run a fleet of electric, not gasoline, vehicles. Suggesting solar will provide that extra energy is even more harebrained than saying it can meet current electricity demand. (Again, see “Pipe dream.”)
The energy and battery businesses are certainly beneficiaries of the enthusiasm for Tesla the electric car maker and the general misapprehension of energy. But those businesses are going to come down to earth at some point and will be evicted from Tesla’s premises—with or without Musk’s acquiescence—if they don’t drag the company into bankruptcy first. They are not sustainable. Tesla did not mention a huge corollary of the government subsidy risk: the risk that all it takes is a government, like that in post–June 7 2018 Ontario, to get elected and with a stroke of the pen wipe out the subsidies and thereby render uninterested an entire customer base.
It may well turn out that Ontario and not Tesla is the vanguard, and that people have finally gotten tired of renewable energy fantasies that an observant five year old can debunk. But it will still be very interesting to see how the collapse of Tesla’s battery and energy businesses affects the car making one, which is the only one with any hope of viability.