The energy transition from fossil fuels to renewable power is one of the most talked about topics in today’s discourse, and for a good reason. The world is already experiencing the effects of climate change, whether it be through the increasing frequency and severity of natural disasters, or rising sea levels threatening the entire existence of several Pacific islands, or the increased difficulty of growing crops in increasingly hot and arid regions. Of course, where there is opportunity, there will be entrepreneurs who find a way to capitalize on it. One such entrepreneur who capitalized on the threat posed by climate change is Elon Musk, who helped fund Tesla at its early stages and eventually was appointed CEO after quite a bit of chaos amongst the rank and file of the company. Tesla started out as just an Electric Vehicle (EV) company, but their overall mission has always been to accelerate the advent of sustainable transportation, through their other business ventures, such as solar panels. This was made evident with their merger with SolarCity, operating charger stations, as well as the building of its battery storage capabilities. In general, Tesla has bucked the trend of most auto giants, who mostly outsource to contractors, by increasing its level of vertical integration to 80%, according to a Goldman Sachs analyst. While there have been integration challenges in this regard, the company continues to make progress in becoming a more integrated producer of electric vehicles.
Now, Tesla has done quite a bit to try to bring electric vehicle production in-house. They produce the batteries within their cars themselves, and have also inked offtake agreements with lithium producers, which allow them to have more or less a guaranteed flow of lithium for the years to come. However, there is significant potential for Tesla to take everything several steps further. As of now, Tesla’s main focus is mostly on cementing its place as one of the world’s pre-eminent electric vehicle producers. However, an electrified future relies more on bolstering the electric grid in its entirety, rather than just churning out electric vehicles en masse - this is one of the biggest challenges faced in the energy transition. As this article will show, Tesla can replicate its vertically integrated model to expand to the broader electrical infrastructure industry through its Tesla Energy segment, a space which presents a massive market opportunity for the company to scale up within.
The Declining Power Grid
It’s no secret that America’s infrastructure is falling apart. According to the White House, public infrastructure spending relative to GDP has fallen by over 40% since the 1960s. Moreover, 20% of America’s roads and over 45,000 bridges are in disrepair. A large portion of America’s water supply still relies on dangerous and toxic lead pipes.
Many of these infrastructural concerns apply to the electric grid as well. The average lifespan of transmission lines is 50 years. Most of America’s transmission lines are over 40 years old, and according to Swiss Re, malfunctions tend to escalate during this time. As over 90% of America’s power grid relies on these transmission lines, our reliance on this system does not bode well for the future.
However, this isn’t the worst of it. The data used by the operators of this infrastructure to make major decisions relies on past data which doesn’t factor in climate change, which means that the country’s electric grid isn’t equipped to tackle the challenges brought on by climate change. To make matters worse, as demand for electricity spikes due to the proliferation of electric vehicles, the grid has already shown weakness. A heatwave, which knocked out several power plants in Texas earlier this year, forced Texans to limit electricity from vital services, such as air conditioning. Similarly, California asked residents to stop charging their EVs due to climate conditions at the same time that the state was mulling EV adoption and instituting bans on internal combustion engine cars.
This situation further does not consider another issue laying between the intersection of electric vehicles and the power grid - what good are electric vehicles if the electricity used to charge them is produced from dirty energy? Despite growing interest in renewable energy sources, such as wind and solar power, there remains the issue of intermittency. For example, wind power generates electricity mostly during the earliest and latest hours of the day. Due to poor renewable energy storage infrastructure across the world, this means that excess energy is generated during these times, when there is often less demand, and thus must be “dumped” for free. This limits the ability to actually scale renewable energy; however, large scale battery energy storage solutions offer a solution to this. That being said, actual penetration of BESS systems is quite low across the world, meaning there will need to be significant capital expenditure required on this front.
Clearly, for the energy transition to actually go through, there will need to be trillions of dollars spent refurbishing the country’s infrastructure. Currently, there is already a lot of infrastructure funding surrounding the power grid. President Biden’s Bipartisan Infrastructure Deal outlines the government’s plans to invest more than $65 billion to upgrade our power infrastructure by building new transmission lines and the funding of new programs to support the development of clean energy technologies. In addition to this, this legislation will accelerate widespread adoption of electric vehicles through investing $7.5 billion to create a national network of EV chargers throughout America. This provides huge opportunities for companies with expertise in the area of electric power to obtain billions of dollars worth of contracts to upgrade America’s infrastructure, then accessing massive annuity-like contracts to maintain it. Tesla, by virtue of its vertically integrated nature encompassing power generation, power storage, and manufacturing the end products of EVs, is in a unique position to forge the partnerships needed to equip itself to fill this gap and cement a position for itself within the broader infrastructure space.
Tesla is highly knowledgeable in the electrical industry due to its subsidiary, Tesla Energy. Originally known as SolarCity, Tesla acquired the clean energy company in 2016, where they mainly focused on the sale of solar panels for homeowners. Tesla Energy has since launched three products: the Solar Roof, the Powerwall, and most recently, the Megapack. Functioning similar to traditional solar panels, the Solar Roof is essentially solar panels seamlessly integrated into roofs through combining glass solar tiles with steel roofing tiles. Tesla’s Powerwall is a battery storage solution that allows homeowners to store excess solar energy. Lastly, the Megapack is a similar energy storage product to the Powerwall, just on a larger scale for commercial projects. In fact, energy storage is something that Tesla has begun to hone in on more, with the company’s overall mission statement being “to accelerate the world’s transition to sustainable energy”. In 2021, Tesla began building a production facility that will be able to produce 40 million kWh of energy storage per year in Austin, Texas. An average home in America uses 10,632 kWH of energy a year, meaning that this would be able to power 3762 houses.
In addition to this expansion, Tesla reports that energy storage and solar panel deployment has grown 62% and 13% respectively in the third quarter of 2022. An emphasis on cross-selling solar power installations with the Powerwall and making products more widely available increased Tesla Energy revenues to $1.117 billion, a 38.6% year-over-year increase during the third quarter of 2022. These developments are crucial for Tesla in both solving key problems of tempermental power grids, and in expanding in the energy storage market.
Tesla has used their expertise in energy storage to offer timely support for the US in times of need. For example, in 2021 when Hurricane Ida hit the New Orleans area the power grid was shut down and became inoperable for several weeks. Tesla was able to provide power to over 1,000 people by deploying powerwalls and solar panel disaster relief systems. With proven capabilities in the electrical industry, Tesla can look to provide more long-term energy storage solutions to American consumers, and even more importantly, to renewable energy projects which can make use of Tesla’s capabilities in battery energy storage solutions. By storing excess energy instead of having to dispatch it, the economics on renewable energy development projects will increase, which incentivizes further construction of renewable capacity, which benefits the nation from an energy transition perspective, and the consequent demand for even more energy storage, which benefits Tesla. Currently in Texas, Tesla is piloting a service where selected Powerwall users can sell the energy generated from their solar panels back to the power grid. Furthermore, they have created their own utilities company, Tesla Energy Ventures and gained approval to set up a Virtual Power Plant in Texas. This is a method where Tesla can draw energy from all individual batteries to the grid which eliminates the need for natural gas fire beaker plants during periods of high energy demand. So far, these developments are promising indicators of Tesla’s ability to venture into sustainable energy storage for consumers all over the US.
The Critical Metals
Now, further expansion into this space is easier said than done. If Tesla is to move into larger scale development of energy storage solutions and electric transmission infrastructure, this will mean that its cost structure will tilt towards relatively volatile commodity prices, such as copper. Tesla has already been working on hedging out its risks through offtakes and potentially outight acquisitions of lithium projects. However, the raw materials needed in this proposed transformation would be on a whole different level.
Some of the key metals needed in this scenario include copper, lithium, and nickel. These three all have quite interesting situations. Copper production is most concentrated within South America, the US, and Russia, with a relatively mature production profile. Lithium, on the other hand, is a bit more nascent in the sense that most production occurs in Australia or South America, but there are a massive flurry of development projects underway worldwide, including within the US and Canada. Nickel is another metal which has been receiving increased attention due to its importance in batteries and also within the wind industry - Indonesia is the dominant producer worldwide.
Acquiring battery metal mines is a strategic move that can help Tesla achieve more vertical integration and control over costs. By owning the mines, Tesla can secure a steady supply of critical components, reduce dependence on external suppliers, and increase control over the supply chain. In this section, we will take a look at four key battery metals: lithium, cobalt, nickel, and copper, and examine the potential benefits and costs of acquiring mines for Lithium is a crucial component in lithium-ion batteries, which are used in electric vehicles. As demand for electric vehicles continues to rise, the demand for lithium is also expected to increase significantly. Some of the main lithium mines are located in countries like Australia, Chile, and Argentina; however, there are an increasing number of lithium projects under development in both North America and Europe, which are closer to Tesla’s gigafactories in the US and Germany. Nickel is another important metal for battery production and is used in the cathode of lithium-ion batteries. Mines for nickel can be found in Canada, Russia, and Indonesia, among other nations. Due to the high concentration of production from more geopolitically volatile nations like Russia and Indonesia, it makes sense for Tesla to acquire mines and help finance their expansion to lock in supply. Finally, copper is used in the wiring of electric vehicles and is important for both battery production and broader electric infrastructure. Mines for copper can be found in countries such as Chile, Peru, and China. Therefore, by Tesla acquiring these battery metal mines, it will achieve vertical integration, have a steady supply of key components, and reduce dependence on external suppliers.
Tesla has the potential to leverage its business model to expand to the broader electrical industry through placing bigger importance on its Tesla Energy segment. Tesla, unlike other electrical vehicle companies, has already expanded their operations in the electricity generating and storing industry through their solar panels and batteries. Furthermore, acquiring the mines is a crucial part in furthering their expansions, as Tesla gains significant advantages in reducing the overall costs of production, and increased control over its products and services. Of course, there will be arguments that Tesla does not have the expertise to operate mines - while this is true, it is also mitigated by the fact that Tesla can just keep the same management in place and act as a more passive manager. There are several non-specialized global conglomerates with mining operations, such as Sumitomo, which sets a precedent that non-mining companies can own mines.
Using their expertise, access to valuable materials, and knowing the deteriorating power grid in America, Tesla has significant financial gain to make through forming partnerships to improve and create new infrastructure that will ultimately reduce Americans' reliance on the outdated and faulty power grid system. In conclusion, as the electrical industry continues to evolve with an emphasis on renewable energy supported by the government, and the popularization of electrical vehicles, Tesla is in the perfect position with their resources to be at the forefront of the future electrical industry.