Markman Capital Insight

Why Tesla's unbridled ambition is a really big deal

One of my key thoughts this year is that increasing economic competitiveness of solar panels relative to fossil fuels will result in a surge of new installations by private homeowners and utilities.

A similar dynamic is underway in complementary battery technology. Not only are these lithium-ion cells used in electric cars, but they are necessary for the at-home solar system installations being pushed by companies like SolarCity (SCTY), a company I highlighted earlier this month. Right now, these installations still require hookups to the mains to provide electricity when the sun is down, obscured by clouds, or demand is too strong for the photovoltaic panels on the roof.

Cheaper, more powerful battery technology will allow folks to be truly energy independent: Not only can they tell OPEC to shove it by driving a Nissan Leaf around town, but they can also tell their power utility to take a hike by harnessing and storing solar energy.

This was the takeaway from presentations at the Bloomberg New Energy Finance’s Future of Energy Summit 2015. As the chart above shows, lithium-ion battery costs are falling as fast as solar panels as production ramps up. Already, prices are down 60% from 2010.

Tesla Motors (TSLA) is a big player here as it moves forward on the construction of its new Gigafactory , which is expected to produce 35 gigawatt hours of cell capacity per year when it opens in 2020 — exceeding total 2013 global production. The building site, near Reno, Nevada, has already been cleared and leveled. Basic steel framing is underway.

This is a big deal. Let’s put Tesla on our list of highlighted MegaTrend companies. Shares are by no means cheap or safe, but they at least pulled back 25% from their 2014 high, which constitutes a decent correction for a high-growth story stock. And it’s not so much the stock itself that I want to commend but rather Tesla’s role in the coming transformation in transportation away from expensive, dirty, unsafe fossil fuels and toward cheaper, cleaner, safer electricity-powered autonomous systems.

Estimates put the drop in battery prices associated with all this capacity coming online at 30% or more. If so, analysts at Sanford Bernstein estimate battery-powered cars should start becoming competitive to conventional gasoline-power vehicles without government subsidies. Just like the drop in solar panel prices, the holy grail of encouraging demand is by making clean-tech not just edgy or cool or trendy but cheaper than fossil fuel options.

Other factors, such as regulation of carbon emissions, higher government fuel efficiency standards, and the increased distribution of charging stations will help as well.

The company recently unveiled a home utility battery costing just $3,500. Not only will this help further push down future battery costs by accelerating cumulative production but it will help increase the options available to solar-at-home buyers. Given the existing focus of the current Tesla-SolarCity home battery pack pilot program, these could also be offered to regular homeowners as a source of backup power during emergency outages.

Here’s the fun part: As a non-solar customer, you can charge the battery during non-peak hours and then sell the energy back during peak demand. Gains from this means the monthly payments are pretty much covered.

As battery prices get cheaper, new and innovative uses like this will become feasible, further driving down the cost and opening up even more uses. It’s a positive feedback loop. And it’s great news for consumers, investors, and anyone who enjoys clean air.

-- Jon D. Markman

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