The Economics of Tesla Batteries

Tesla, Inc. (TSLA) is a U.S. automotive and energy company based in Palo Alto, California. The company manufactures electric cars and solar panels. Tesla's CEO Elon Musk heightened Tesla's visibility in late 2018 by settling an SEC lawsuit. The lawsuit alleged that Musk made "false and misleading statements" about the possibility of taking the company private. Tesla's share price promptly fell by 10% following the news of the lawsuit. Tesla is also failing to turn a profit according to Q2 2018 reports, which recorded the company's biggest quarterly loss.

Investors are jittery about the future of Tesla and its cutting-edge technologies and products, so here's a closer look at the economics of one company's core products: batteries.

Musk built the first viable private spaceflight company, SpaceX, which sends rockets into space to restock the international space station. He is developing a high-speed underground transportation system linking Los Angeles to San Francisco called the Hyperloop, and he is also the founder of Tesla, the world's first independent global electric car company.

When people complained that Tesla's all-electric cars were too expensive for the middle class and that their driving range between charges was too short, Musk promised to work with battery manufacturers to cut costs and improve efficiency. When the progress with its battery suppliers was too slow, Tesla decided to get into the battery making business itself. In 2015, Tesla announced its own line of commercial and residential batteries, called the PowerWall series. (See also: New Battery Technology Investment Opportunities.)

Batteries are solid-state devices that store and release electrical current, powering an array of consumer electronics and other devices. Rechargeable lithium ion (LiOn) batteries have become the most widely used in these applications and are found in everything from mobile phones and tablets to laptop computers to electric vehicles. While microchips and integrated circuits have become exponentially more powerful, smaller and cheaper battery technology has lagged. Improvements in LiOn batteries have been small and incremental. (See also: Lithium-Ion Battery Stocks.)

In a modern smartphone, the computational effort is packed into a tiny portion of the device while the battery takes up most of the available space. The battery is also a large factor in the total cost of the device. For electric vehicles, the problem is compounded: Cars are essentially an array of battery packs on wheels. Tesla's flagship car, the Model S, has approximately 60 kilowatt-hours of electrical capacity, meaning that approximately 42.25% of the sticker price, $35,000 as of 2017, is directly attributable to its batteries. 

Lithium is also an unstable substance, therefore the batteries must be built carefully so that they avoid damage during a typical car accident. Even small amounts of exposure to air or water can make lithium burst into flames. Ensuring that each battery is properly sealed and secured is an added cost. (For more, see: Why Are Tesla Cars So Expensive?)

Tesla is not the only company to develop a commercially available LiOn battery storage solution for the home or business. Tesla has built an enormous battery factory (appropriately named a gigafactory) in the Nevada desert to produce its new and improved battery packs both for its vehicles and for home and business energy storage.

The first-generation Powerwall was launched in April 2015, and an updated Powerwall 2.0 was announced in October 2016 with twice the storage capacity of the original. In 2018, a Powerwall 2.0 battery (not including installation costs) cost $5,900. Additional costs include hardware for $700 giving a total of $6,600. Installation can cost from $2,000 to $8,000, according to EnergySage, a platform that researches and compares solar installation prices and companies.

To install the Powerwall as part of a solar-plus-storage system requires an energy system like solar. An average 5 kilowatt (kW) solar energy system costs between $8,500 to $16,000 depending on the location and the equipment.

Although it might be costlier than other options in the initial stages, installing a solar-plus-storage system can be a worthwhile investment, and the economics depend on how the local electric utility structures its rates.

The Tesla battery pack is sized for day-to-day use in a home and is typically paired with a home solar panel system. When solar panels produce more electricity than a home can use, the excess is stored in the battery pack rather than being sent back to the electric grid. When the panels fail to produce enough electricity, the home can draw from the Powerwall instead of having to buy electricity from a utility company.

Homes with solar panels can currently sell back excess electricity produced to the power grid, but cannot effectively store that energy. This causes unbalanced loads on the grid and makes residential solar power generation less than useful at night or on cloudy days. The electric grid today cannot store electricity, and power is generated and distributed on demand where it is needed.

Unbalanced loads on the grid can occur since solar panels on residential roofs tend to produce the maximum amount of electricity during the early afternoon when the sun is the strongest. The demand for electricity, however, is often relatively low at this point in the day and is most in demand in the early morning when people are waking up and beginning their day. Battery solutions installed in conjunction with solar panels is a step towards solving these problems. 

Powerwall batteries can also provide power to homes during storms or other outages in place of traditional gas-powered generators. 

While the cost of installing a solar panel system to complement the Powerwall is expensive, solar installations have come down in price dramatically over the past few years due to decreasing production costs, more efficient installation processes as the result of increasing economies of scale and generous government subsidies in some places. Tax breaks make solar installation more affordable for households, and solar companies often offer generous incentives to homeowners that reduce upfront costs and can bring down per/kWh electricity costs below grid prices due to net metering.

Of course, the argument can be made that Tesla's batteries and also gas-powered generators are luxury items. But emergency power supplies have gained in popularity following recent extreme weather events like hurricanes Irene and Sandy as well as the massive snowfall that hit the East coast in the winter of 2014 to 2015. It is not the goal of the Powerwall – yet – to take homes entirely off the power grid. Rather, it is a viable alternative to gas generators for backup electricity in times of need.

But the most important economic impact of Tesla's Powerwall system is the increase in cultural capital it will produce. As with most other technological innovations in the last 150 years from gas lighting to smartphones, the more affluent may be first adopters, but their interest creates the possibility of economies of scale that puts new tech into the hands of the everyday user.  

Tesla's Powerwall batteries are an exciting development in energy storage technology. Although they are not reinventing the wheel, they are making existing lithium-ion battery technology more affordable and accessible at larger scales. Powerwall batteries and their successors are likely to become even cheaper and more efficient with competition and ongoing research and development. In 20 years it may not be strange to see such a battery in the basement or garage of every home.