Tesla Stationary Storage Investors Thread

[vgrinshpun]

Vgrinshpun, I think you missed my point. I'm not talking about how much profit Tesla may need to price into this. That is the supply side. What I am talking about is the demand side. How big is the market at $800 per kWh? Maybe 1 GWh. How about $400? 10 GWh. $200? 100 GWh. $100? 1000 GWh. I'm just making this up to illustrate a demand curve. So if Tesla wants to address a $4B market $400 is low enough, but if they want to reach a $20B market they've got to press the price down to $200. In the short run, they can go after a small market priced at say $500, but longer term with the gigafactory Tesla will want to sell 15 GWh per year. So the demand question is, how low will they need to take the price? The supply question is whether they can be sufficiently profitable at that price. Tesla has the opportunity to follow an experience curve strategy. As they double their cumulative production they will be able to drive down the cost and price by 10 to 15 percent. As they drive down the price the size of the addressable market grows which sustains the ability to double cumulative production.

This is very much the sort of path that SolarCity is on. They know that as they drive down both their cost per W and the price they offer to customers, they are able to enter new markets. So they are relentless in driving down their installed cost per W, and this is what enables them to keep doubling their customer base every year. It's not just a matter of beating the competition or hitting some predetermined profit metric, it's about constantly expanding the addressable market.

I did get your point. I think that you are seriously underestimating demand - and that was the point I was trying to demonstrate. Stationary storage has many advantages over a gas fired peaking power plant - from the greatly reduced maintenance to a far superior load response time - this could improve stability of the grid, which is s big consideration. So my point is that your assumption that one need to drive cost much lower than break even point ($842/kWh per the EPRI study) might not be correct.

This is similar to a comparison between an ICE and a Tesla EV: once cost parity is achieved, EV inherently wins hands down: "not a fair fight". So explosion of demand does not require cost to be much lower than an ICE. As soon as cost parity is achieved, an EV competes with ICE not by offering lower price, but by offering much superior overal experience.

There are many examples of this. Condider flat screen TVs. As soon as they reached cost parity with tube TVs, the demand went way up: nobody in their mind would buy a tube TV over a flat screen TV given the same cost.

In summary I believe that as soon as stationary storage is available at a cost that is slightly lower than the break even cost, there will be explosion of the demand.

That I believe what JB had in mind. The demand is not characterized by the demand curve - it is more like a step function.

 

[jhm]

jhm, wouldn't the stationary business model resemble the Tesla car strategy? High value, low volume to start and transition into high volume over time? I still wonder if this business won't more resemble Boeing with massive pre-orders booked in advance all at one time.

One of the truly great pieces of cinema...

hudsucker proxy clip - YouTube

There are big differences between auto markets and battery markets. With batteries it pretty much comes down to the economic value that can be created by the device. But with cars there are quite alot of hedonistic value that customers perceive and are willing to pay for. Batteries are also more of a single component rather than a complex system. So it is more comparing the memory in your smartphone to the smatphone itself. So batteries are much closer to being commodities than are cars.

it's a bit ambiguous to say what "higher value" means. Price for the whole system, price per kWh, size in kWh are posible meanings. I don't think that gross size of the application is the right way to look at this. Rather the price per kWh seems to be the key issue determining which applications are economical for the customer. Similatneously we may see small scale and large scale applications. So the range of economical applications at $800 is fairly limited, but at $400 many more applications start to make sense. Once $400 becomes available, however, the $800 applications will use $400 batteries instead, unless there are very special attributes required. So this is very different from autos. Tesla will still sell a lot Model S even after the Model 3 is widely available. With batteries it will be a continuous process of driving prices per kWh down much like we see with producing solar panels.

 

[Lessmog]

I suspect that the price is much higher than $400/kWh. According to the yesterday's Deutsche Bank note "The breakeven point to replace a peaker plant with stationary storage is estimated at $842/kWh (EPRI Study)" So Tesla is in a truly unique position to have a luxury to pick the selling price that optimizes demand and their ability to meet it. It looks like they have a huge window to work with - somewhere between $300 and $800/kWh.

Given that for foreseeable future their ability to generate profit is coupled to their ability to produce/source the batteries, I think that their strategic planning should achieve parity between automotive and stationary profit per kWh.

The best case scenario automotive profit: ASP x Net Margin / Battery Capacity. According to Deepak Ahuja Tesla's goal is to eventually have net margin of around 15%. So potential automotive profit would be: 100,000*0.15/85 = $177/kWh.

Now if we assume cost of the battery pack production at the GF to be $150/kWh, and throw additional $50/kWh to cover R&D and SGA expenses, the total battery pack cost would be at about $200/kWh.

So Tesla needs to price their stationary storage battery packs at $377/kWh, which is well below the $840/kWh threshold. Even is we assume Tesla's all in battery pack cost of $300/kWh, they can still make the same profit as automotive if they sell stationary storage at $477kWh and above, still well below $842/kWh threshold.

So I think that Tesla is about to morph in much, much more valuable company. I believe that in order to account for the stationary storage the stock PT should be multiplied by 50/35=1.43. So if Tesla automotive business is properly valued at $250 per share, to account for stationary storage, one would need to value the company at 250*50/35 = $359.

I'm not sure about the time scales here. At present, GM is somewhere around 25-30% and ASP around 100k (net margin escapes me just now) but what CFO Ahuja was talking about was "eventually", ie after M3, GF and large volumes, right? By then, ASP will be lower due to M3 costing only 1/3 to 1/2 of MS or MX.

In that case, your napkin calculations may need a little tweak. Other than that, I stand in awe, sir! :smile:

 

[doggusfluffy]

There are big differences between auto markets and battery markets. With batteries it pretty much comes down to the economic value that can be created by the device. But with cars there are quite alot of hedonistic value that customers perceive and are willing to pay for. Batteries are also more of a single component rather than a complex system. So it is more comparing the memory in your smartphone to the smatphone itself. So batteries are much closer to being commodities than are cars.

it's a bit ambiguous to say what "higher value" means. Price for the whole system, price per kWh, size in kWh are posible meanings. I don't think that gross size of the application is the right way to look at this. Rather the price per kWh seems to be the key issue determining which applications are economical for the customer. Similatneously we may see small scale and large scale applications. So the range of economical applications at $800 is fairly limited, but at $400 many more applications start to make sense. Once $400 becomes available, however, the $800 applications will use $400 batteries instead, unless there are very special attributes required. So this is very different from autos. Tesla will still sell a lot Model S even after the Model 3 is widely available. With batteries it will be a continuous process of driving prices per kWh down much like we see with producing solar panels.

I was thinking of it in terms of market demand and how much stationary supply Tesla can muster before the GF comes online. If an $800 application is available to order in 2015, it might make sense in a market like Hawaii for example. Even knowing the same battery application might cost $600 in 2017 or $400 in 2020 it would still make sense today @ $800. Maybe high value was the wrong analogy.

 

[jhm]

I was thinking of it in terms of market demand and how much stationary supply Tesla can muster before the GF comes online. If an $800 application is available to order in 2015, it might make sense in a market like Hawaii for example. Even knowing the same battery application might cost $600 in 2017 or $400 in 2020 it would still make sense today @ $800. Maybe high value was the wrong analogy.

Yeah, we're on the same page. It's essentially a bidding process. Start high and drop the price over time as needed to unlock more sales and to keep competitors at bay.

 

[vgrinshpun]

I'm not sure about the time scales here. At present, GM is somewhere around 25-30% and ASP around 100k (net margin escapes me just now) but what CFO Ahuja was talking about was "eventually", ie after M3, GF and large volumes, right? By then, ASP will be lower due to M3 costing only 1/3 to 1/2 of MS or MX.

In that case, your napkin calculations may need a little tweak. Other than that, I stand in awe, sir! :smile:

Actually, after M3 comes into the picture both ASP and kWh will go down, so the result will not change much. Most importantly, though, I was intentionally taking the case of the maximum per kWh profit for automotive segment. The point I am trying to get across is that we have a unique situation which makes stationary storage an absolute killer of a potential profit machine for Tesla. The paradox is that while there is some work to do to drive the price point of the batteries down to make EVs outright cost competitive with ICE, in case of grid storage the price point of the batteries is **already** well below the parity threshold.

It is inertia, **not cost** that keep grid storage from massive large scale adoption. So the grid storage opportunity that lies in front of Tesla is enormous, yet nobody really put a price on it. I suspect that a lot of analysts do not understand it, and those who do just stupefied by the enormity of it and wait in awe and disbelief until somebody provides external confirmation for them, just to make sure that they did not go crazy...

 

[austinEV]

How much money do you have to have to be a hedge fund with it's own analyists? Lets pool some money, get a TMC hedge fund. Then the first call on every earnings call will be "first question is from vgrinshpun at TMC partners, your line is open".

 

[vgrinshpun]

For those not familiar, with EPRI, it stands for Electric Power Research Institute, a very reputable organization created in the wake of Great Northeastern Blackout in November of 1965, and funded by members, mainly electric utilities.

To give some background to the stationary storage vs. peaking plant breakeven price of $842/kWh that was quoted by Deutsche Bank, EPRI did a lot of work in this area and recently released a software titled Energy Storage Valuation Tool (ESVT) in an effort to help utilities to understand the cost effectiveness of utility-scale energy storage deployment.

The benefits of the utility scale storage are many, and it's deployment can be advantageous not only on the basis of cost effectiveness of, say, replacement of the peaking power plant, but because it allows for unique grid enhancement benefits. For those interested in more details, EPRI in collaboration with Department of Energy (DOE) prepared a comprehensive Electricity Storage Handbook available for a no fee download.

- - - Updated - - -

How much money do you have to have to be a hedge fund with it's own analyists? Lets pool some money, get a TMC hedge fund. Then the first call on every earnings call will be "first question is from vgrinshpun at TMC partners, your line is open".

Ha, I am on the telephone for all of the ERs for the past couple of years, and very often had an urge to really ask some questions, but never did...

 

[jhm]

I did get your point. I think that you are seriously underestimating demand - and that was the point I was trying to demonstrate. Stationary storage has many advantages over a gas fired peaking power plant - from the greatly reduced maintenance to a far superior load response time - this could improve stability of the grid, which is s big consideration. So my point is that your assumption that one need to drive cost much lower than break even point ($842/kWh per the EPRI study) might not be correct.

This is similar to a comparison between an ICE and a Tesla EV: once cost parity is achieved, EV inherently wins hands down: "not a fair fight". So explosion of demand does not require cost to be much lower than an ICE. As soon as cost parity is achieved, an EV competes with ICE not by offering lower price, but by offering much superior overal experience.

There are many examples of this. Condider flat screen TVs. As soon as they reached cost parity with tube TVs, the demand went way up: nobody in their mind would buy a tube TV over a flat screen TV given the same cost.

In summary I believe that as soon as stationary storage is available at a cost that is slightly lower than the break even cost, there will be explosion of the demand.

That I believe what JB had in mind. The demand is not characterized by the demand curve - it is more like a step function.

When you look at one specific sort of application (say, peakers) in one electrical market (say, southern California ), then it really is like a stair step demand curve. Do we know how big this is? How many new peakers are installed each year in SoCal? How about peakers in Georgia? That's a different market, so the electricity and real estate prices are different, and there is a different regulatory environment. So all this means there is a different breakeven price for battery peakers plants in Georgia. So there are about 50 different markets just in the US, and they all have their own breakeven price and they are all installing new peakers capacity at different rates. When you put all these little stairs tepid demand curves together for the US, you get a combined demand curve with 50 little steps in it. Open this up to the global market, and you get a curve with a thousand little steps to it, and that is just for one application. Any other sort of application, say, peak shaving at commercial facilities like Wal-Mart or Tesla's factories, and you get a whole new multi-step demand curve. Actually, here it may even be smoother. The current price of a 200 kW unit may be low enough for a Wal-Mart store to install 1, but not low enough to install 2, due to diminishing returns. Next year when the price is lower, that store may find it compelling to install a second unit, but not a third. And so it goes year after year.

So I would be delighted if I have underestimated the demand for battery peakers plants. For the most part peakers plants are a very old fleet, heavily depreciated, and basically kept in operation for occasional use. So the comparison between a new battery peakers plant and a fully depreciated peaker plant comes down to the cost of fuel and operations on the old to a huge capital cost on the new. So if you absolutely needed to add new peaker plants, batteries may win hands down. But if you can make do on your old peakers for a few more years, you'll delay on the new battery plant and wait for the price to come down. So there's a big gap here between operating dollars and capital expenditures. One way to mediate this is for Tesla to build plants and lease them. I'm not sure I want Tesla in that business though. But if Tesla were to become a merchant power producer with full access to the wholesale electricity market, it could do something quite clever. It could equip Supercharger stations with a mini-peaker capacity, say 1 to 5 MW per station. Having hundreds of these throughout a market could supply upwards of 1 GW of peak capacity, and pay for all those "free" charging sessions. But if we are waiting for old peakers in semi retirement to be replaced with brand new battery peakers, my suspicion is we'll have to wait a long time.

 

[The Blue Owl]

Here is Cory Johnson trying, and failing, to find a crack in Tesla's battery storage plans:

Can Tesla Turn Battery Tech Into a Commodity? - Bloomberg Business

 

[eloder]

There could also be a large demand for stationary and mobile energy in military applications.
I can see a big benefit of being able to fly or truck into the battle zone a 30MW system that is
powered up, and ready to go that produces zero sound and emissions.

That's a very, very good point.

That reminded me of the anti-missile laser weapon tests. The only current downside to the laser systems, versus firing expensive interceptor rockets? Power. Ironically a Tesla battery could help power weapons of the future. Rather than having gigantic excess generation available onboard, the battery could be kept charged, and discharged to fire off the weapon. I'm not sure if the Tesla battery could generate enough power for the laser weaponry, but I'm sure it'd be better than whatever system is set up now.

 

[jhm]

Should Tesla become a utility?

Actually, after M3 comes into the picture both ASP and kWh will go down, so the result will not change much. Most importantly, though, I was intentionally taking the case of the maximum per kWh profit for automotive segment. The point I am trying to get across is that we have a unique situation which makes stationary storage an absolute killer of a potential profit machine for Tesla. The paradox is that while there is some work to do to drive the price point of the batteries down to make EVs outright cost competitive with ICE, in case of grid storage the price point of the batteries is **already** well below the parity threshold.

It is inertia, **not cost** that keep grid storage from massive large scale adoption. So the grid storage opportunity that lies in front of Tesla is enormous, yet nobody really put a price on it. I suspect that a lot of analysts do not understand it, and those who do just stupefied by the enormity of it and wait in awe and disbelief until somebody provides external confirmation for them, just to make sure that they did not go crazy...

Vgrinshpun, inertia is a very good term for the problem I see with stationary. So I think we may be closer in our thinking. The practical question for Tesla is how to overcome inertia. Making great products and cutting costs only goes so far in the face of massive inertia in an industry that is heavily regulated and does not want its economics turned upside down. At some point, Tesla may need to contemplate actually becoming a power producer and competing head to head with other producers in the power markets. How would Tesla and SolarCity shareholders feel about owning a JV utility? What would be the smartest way to enter this market and not run afoul of heavy regulations? What are the alternatives that allow Tesla's batteries be just as disruptive as they can be?

Tesla was not able to disrupt the auto industry by designing and producing battery pack to sell to automakers. It had to market the whole car to unlock the potential of a battery electric drivetrain. Likewise selling battery packs to utilities might not suffice to disrupt the utility market. They may need to become a utility to disrupt that market. If there really is, say, $1000 of benefit to be derived from a utility battery, then they can give the industry an ultimatum: you can buy our batteries for $800 and retain the upside, or we will install the battery in our own utility and extract $1000 or more from the power market for ourself. Buy our product or lose marketshare. I think Musk is crazy enough to pull this off.

 

[Lessmog]

@jhm & @vgrin,
Thanks a lot guys! I find this powerful thread very fruitful and meaty, and I hope it will enable us to milk the market and kill some beeers ;-)
The thanks are meant seriously, though.

 

[SebastianR]

There could also be a large demand for stationary and mobile energy in military applications.
I can see a big benefit of being able to fly or truck into the battle zone a 30MW system that is
powered up, and ready to go that produces zero sound and emissions.

I think it is not even about needing power in actual combat but more about saving supply costs: There is a guy that claims the US spends about 20 billion(!) USD on Air Con in Afghanistan alone.
Now, I'm deeply skeptic if that number holds in reality (and then Air Conditioning is not the only need for power) but even if we cut this number in half, we still have a ton of places / applications (i.e. a huge market) where energy storage makes a lot of sense.

 

[Foghat]

Utility company... It all depends on what is the core business of Tesla Motors. Is it cars or batteries? If brand recognition as the most innovative car company gets confused with your local energy provider, this might might a problem it quality lags or market leadership drops in one or the other business. Secondly, batteries are not enough to be an energy provider or utility. They will need energy producing assets. This may be a massively capital intensive endeavor that could take away from the automotive division ability to grow itself.

It appears Tesla may keep its focus on the auto business while selling stationary storage solutions as a piece of its cost reduction roadmap. Sell low margin energy storage in order to preserve/improve automotive margins at competitive retail prices. This low margin strategy also extends to energy storage products for all other modes of transpo(except rockets). Surprisingly, the lowest margins possible will open markets faster and thus fill gigafactory demand sooner as well as give the supply chain greater visibility on orders(which further reduced costs). The end result might be tesla makes far more money as auto company selling batteries rather then if they attempt to be a utility and an auto company at the same time. Also, it might be also advantageous to tesla to allow Solarcity to take on the energy/utility piece as they are deeply involved in producing and deploying distributed energy assets already.

 

[doggusfluffy]

@jhm & @vgrin,
Thanks a lot guys! I find this powerful thread very fruitful and meaty, and I hope it will enable us to milk the market and kill some beeers ;-)
The thanks are meant seriously, though.

Agreed, and I would also like to echo this sentiment. I was feeling a bit of that crazy disbelief to be honest at the sheer magnitude, given how the market has reacted.

 

[Lessmog]

Still 15 minutes to go this week ...
Market is deluded. Unfortunately, market also sets the price. Or fortunately, depending ... :wink:

 

[daniel Ox9EFD]

Hi does anyone know if Tesla talked to utilities yet? from the talk by JB I get they did, but is there any more specific information about what utilities (perhaps Hawaii?),

Also, would Tesla work directly with the utility or through a integration company?

Thanks

 

[Robert.Boston]

When you look at one specific sort of application (say, peakers) in one electrical market (say, southern California ), then it really is like a stair step demand curve. Do we know how big this is? How many new peakers are installed each year in SoCal? How about peakers in Georgia? That's a different market, so the electricity and real estate prices are different, and there is a different regulatory environment. So all this means there is a different breakeven price for battery peakers plants in Georgia. So there are about 50 different markets just in the US, and they all have their own breakeven price and they are all installing new peakers capacity at different rates.

Electricity doesn't understand state borders. In the US most of the electric demand is in one of the seven Regional Transmission Operators' markets, which determines the cash flow to all transmission-level resources. The southeast, northwest, and desert SW are the only areas outside of these markets. By having fewer, more robust markets, we can better price resources like storage.

 

[jhm]

Electricity doesn't understand state borders. In the US most of the electric demand is in one of the seven Regional Transmission Operators' markets, which determines the cash flow to all transmission-level resources. The southeast, northwest, and desert SW are the only areas outside of these markets. By having fewer, more robust markets, we can better price resources like storage.

Thanks, Robert. I still don't get why the RTO level would be the best place to put storage. On the utility side, frequency regulation and distributed storage seem to create more economic value. Intuitively, I don't know why I would want to submit stored energy to transmission losses. Moreover, I want to place some value on reliability of service to end users. So highly distributed storage pays transmission costs when charging, but is reliable and locally available when discharging. It seems that rate arbitrage should work just as well whether centralized or distributed.