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Australian Venture Illustrates Tesla’s Huge Potential

The impressive progress of the much-derided energy storage project for Tesla (NASDAQ:TSLA) in South Australia emphasizes the huge potential for the company. As the world moves rapidly to renewable energy, Tesla is better placed than any of the simple auto companies to reap huge advantages in both energy storage and EVs. Australia is not a large market by world standards, but an example of the way the wind is blowing.

South Australia.

The world’s largest battery being constructed at Jamestown in South Australia seems well set to meet the demanding schedule of operation by 1st December. Some of the PowerPacks already on site in September are illustrated below:

Those Tesla bears who have been questioning what the Tesla Gigafactory in Nevada is doing now have their answer. The PowerPack 2 is scalable from 200 kWh to 100+MWh and matched with Tesla inverters. Probably the main reason why Tesla got the contract, apart from speed of supply, is that their inverters are considered to be the lowest cost, highest efficiency and highest power density of any on the market.

Elon Musk’s recent visit to the site emphasizes once again the importance of energy storage to the company. As my article in June pointed out, Musk stressed at the stockholders meeting then how he saw energy storage as the biggest growth area for the company. What is starting to happen in Australia for the company shows the advantages of the company’s economies of scale and vertical integration.

The recent analyst report from Nomura predicted a near-term stock price rise to US$500 (It was US$342.94 at the time of writing of this article) and revenue of US$58 billion by 2021 (it was US$7 billion in 2016). Their optimism is predicated primarily on an increase in auto sales and hardly at all on energy storage.

The 100 MW installation that is a three hours drive from state capital Adelaide will have the capacity to power 30,000 homes for a period of eight hours. It will be linked to the Hornsdale Wind Farm operated by French company Neoen to store excess energy and reconcile intermittent supply. The state derives over half of its energy from renewables.

This project is part of a mammoth investment by South Australia of A$550 million (US$429 million) into renewable energy solutions to power needs. This follows a heatwave last year that led to huge spikes in energy usage with which the existing grid was unable to cope. As global warming bites, Australia knows it is vulnerable to both heatwaves and more powerful storms. The race is on to provide energy needs to meet these threats.

It is calculated that the whole of Australia could have its energy needs met by 1890 square kilometers of solar panels and 7 square kilometers of batteries. That is not likely to happen of course, but much investment will undoubtedly happen in the coming years.

As my article back in March pointed out, Morgan Stanley recently reckoned that the energy storage market in Australia would rise to a value of US$24 billion. No wonder Elon Musk thought the South Australia project was worth his time and personal intervention.

Tesla and Energy Storage Revenues.

On the Q2 2017 earnings call, the company again reiterated their drive for vertical integration and industry disruption. Elon Musk noted this included also to retail:

“We talked about the importance of integrating energy, production, storage and EV transport. And what we said is coming true. It’s really working well together. We’re actually able to leverage our existing stores to generate even more sales per square foot…. it’s like stupidly high.”

This is linked now by a downloadable app:

“The new integrated app…. the status of your car, your Powerwall, and your solar, and see at any given time of the day how much energy is coming from the sun…. from the Powerwall, what your house is consuming.”

Effectively this provides some insurance against disruption of the utility system.

For Tesla there are two ways to increase revenue from energy storage. In the case of South Australia, the State Government is purchasing batteries from the company. In the case of other projects such as at Kauai in Hawaii, the company gains revenue from selling energy to the utility. Some recent interesting calculations reckon the company will get an annual cash flow of about 10% of the up-front cost at Kauai. There is an internal rate of return of 6.2%. What these projects show is that Tesla is correct in that combining solar panels with energy storage makes economic sense. The profit numbers will only improve as renewable energy costs fall both absolutely and comparatively.

The latest high-profile opportunity for Tesla has come in Puerto Rico. The Governor Ricardo Russell has publicly asked for help from Tesla. The vulnerability of fossil fuel plants and long-distance transmission lines was vividly illustrated by their almost completely destruction in the recent hurricane.

As the article here details, change and adaptability of companies is key for survival. It cites the Oxford Leadership study showing the average lifespan of large companies has declined from 60 years to 18 years. Companies such as Amazon (NASDAQ:AMZN) are illustrating this constant adaptability, and Tesla is similar. What Big Data and AI have done to tech, so Tesla and others are doing to utilities and transport.

Australia’s Solar and Energy Storage Market.

It is hardly surprising that Tesla is making such a big push into the Australian market. Nor that the world’s other big vertically integrated company in this sector, China’s BYD Auto (OTCPK:OTCPK:BYDDY), is doing the same. Distributed solar energy (that is, for residential usage) in the country is expected to triple this year to over 18,000 installations. Already at the start of the year over 6,500 households had solar and energy storage installed. Only 500 households had such systems installed as recently as 2015. The highest concentration of this was in the state of Western Australia, perhaps the sunniest state of a sunny country.

Solar power is calculated to cost an average of A$110 (US$85) per MWh. This compares to the historically dominant coal-powered cost of A$160 (US$124 million) per MWh. It is also more efficient. The traditional baseload of coal power stations are not efficient where demand is not consistent. This has led to an inefficient hub and spoke system. In time this will be replaced by distributed power from renewables and stored energy.

Solar is the cheapest from of large-scale power generation in the country. All the forecasts leave no doubt that the cost of solar power generation will only come down further. The cost gap will widen in a country where electricity tariffs are high. Electricity tariffs have increased by an average of 120% in the last decade. As my article in October last year detailed, 15% of Australia’s 8.4 million households have solar panels installed. This year Tesla has had success in marketing its Powerwall residential batteries both to individual householders and to developers building new projects

Read full article at Seeking Alpha