Tesla Motors (NASDAQ: TSLA) CEO Elon Musk has big plans for the first Gigafactory. The battery factory will have 35 GWh of annual production capacity and the capability to assemble another 15 GWh of battery packs each year, bringing the total annual capacity to an astounding 50 GWh of finished products. That will be more than enough to supply batteries for the company’s stated goal of 500,000 electric vehicles, so the additional capacity is being dedicated to a growing portfolio of stationary energy storage products for home (Powerwall) and utility (Powerpack) customers.
The energy storage market is still in its infancy today, as technologies mature and companies iterate business models that work as seamlessly as possible within the complicated ecosystem of power distribution. While the economics work only for a small niche of individual customers, Musk is hoping that an integrated Tesla Powerwall plus solar panels from SolarCity (NASDAQ: SCTY) will generate more interest and value over time. The economics are slightly easier for utility-scale deployment of Powerpacks in the near term, but only after state and federal incentive programs are factored in. Success in the nascent industry is more difficult to achieve than it looks.
Some speculate that Tesla is willing to take on short-term pain to grow market share, establish relationships with key customers, and build its brand. That, the argument goes, should position the company for long-term success as battery prices fall and the kinks are ironed out of financing models. After all, Tesla has substantially more capital to deploy than nearly all other energy storage manufacturers and wields the largest battery manufacturing facility on Earth.
There’s just one problem: Lithium-ion batteries probably aren’t the future of home or grid energy storage. Although capital and a Gigafactory provide Tesla with a formidable competitive advantage today, that could evaporate in the next decade as the energy storage market becomes segregated by application.
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