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The recent news that Tesla (NASDAQ:NASDAQ:TSLA ) is ramping up huge production at its Lathrop facility in California has not been much remarked upon. I had touched on the possibility of this in an article I wrote in November. Now the full scale of this is becoming clear. The new direction bears out what Elon Musk had said at the Annual Shareholders' Meeting in October last year.
The volume Lathrop is targeted to produce in quite a short time span has huge consequences for Tesla's revenues. The significance extends to autos as well as to energy storage. The 2 years' worth of orders Tesla has stacked away just for the "Megapack" could amount to $4 billion based on the current production run rate. This figure probably comes to $6 billion if one includes the other energy storage products. These will be met by supply from Lathrop. Its annual capacity potential should rise tenfold to reach $20 billion worth of potential capacity by the end of 2023 from the current $2 billion. It will be the largest manufacturing facility devoted to energy store in the world.
This is primarily significant because it shows the company will now be able to focus more on its energy storage business. The company has stated numerous times that energy storage is targeted to represent 50% of turnover. A clear path to achieving this is now opening up. Tesla's sophisticated software links the auto, battery and energy storage divisions through natural synergies.
In addition, Lathrop will have significant impact on having battery capacity available for the Semi and for autos, not just for energy storage. The Semi program has been slowed due to the huge battery capacity required for supply and operation of a Class 8 truck.
The facility's plans suggest that the company is not expecting any battery supply shortfall for its auto division. This is despite the breakneck speed at which its auto sales are growing. Auto sales will be able to grow at an even faster speed should Tesla not have any battery constraints.
This is now planned to provide a startling 40 GWh annually of battery capacity by the end of next year. That would be equivalent to about 580,000 Model Ys. The 40GWh number is actually a conservative figure. Internally in the company it is expected that the production will hit 20.73 GWh by the end of this year and 47.48 GWh by the end of 2023. That compares in a startling fashion to the 4GWh annual production currently coming out of Nevada.
The illustration below from the company's Q3 2021 report illustrates what is happening:
The new ratio between supply availability and forthcoming revenue growth is startling. The impact on Tesla revenues should be similarly dramatic.
Production at Lathrop is primarily for the large-scale Megapack utility product. It will additionally provide supply for the smaller "Powerpack" commercial product and the "Powerwall" residential product. The latter has always been supply-constrained and is not even offered for sale in most markets. My November article gave some of the history on that. This can enable both the utility and the residential products to be opened up to a world market hitherto almost untouched.
Its Megapack product is sold out until the end of 2023. For the first time the company now provides an online price-list. The list price for the Megapack is $1,389,000 each but there are presumably discounts for volume orders. Currently they are only supplying orders for projects in California, Nevada and Texas as they start to ramp up production. The Megapack is not currently available for export according to this list.
Standard Megapacks are currently 23 ft x 5 ft. It is rumoured that Tesla is about to produce 3 additional sizes including one at 40 ft. The current standard model MP1 is itself being replaced by a new MP2. Exact differences in specification have not yet been released. A current project is illustrated below:
It is expected that the cells will continue to be prismatic LFP cells supplied by the world's largest battery manufacturer from China, CATL. This company is already supplying to the Shanghai plant. The new contract is rumoured to be for 40 GWh to 45 GWh of LFP batteries. 40 GWh would require about 40 tonnes of lithium which would represent about 9% of lithium demand last year. Even CATL cannot meet up with demand. They have stated they expect to be well short of meeting demand for lithium ion batteries for vehicles by 2025.
Tesla itself is lining up direct contracts with lithium miners for its own future battery supplies. Megapacks are cobalt free lithium iron phosphate and require lower energy density than batteries for autos. It has also reportedly signed up via an Australian mining company for its own graphite supplies. It is in talks with mining interests in New Caledonia and in Indonesia for the supply of nickel.
It does not need to be underlined how vital the supplies of batteries (and chips) will be for the revenues of Tesla in the coming years. So far they seem to have handled this better than their competitors, such as Ford (NYSE:F) who again were closing down some production in the USA this week. This could be seen as another example of the foresight of Musk.
Tesla is also discussing with various Authorities its plans for expansion of its own battery manufacturing which will go hand-in-hand with outside suppliers. There were reports at the end of last year of discussions on this for instance with the Government of Quebec.
Further details may well be announced at the upcoming earnings announcement for the fiscal quarter ending December 2021 which are due this week.
Figures on energy storage growth will be interesting. In Q3 2021 energy storage deployed rose 71% to 1190 MWh year-on-year. Revenue increased from $558 million to $803 million. Total revenues for the company as a whole rose 57% year-on-year during Q3 2021. Similar growth for Q4 can be expected although the rate of growth will be subject more to supply than demand.
Megapack orders are backed up until end-2023. These are currently being shipped out of the Nevada facility. Recent drone footage showed approximately $300 million worth of Megapack being assembled there for shipment out to customers.
Based on Tesla's current production capability it could be estimated that the energy storage orders in hand add up to at least $4 billion on this timeline if Tesla suddenly had all the production available. That is for Megapacks alone. That does not include the smaller size commercial "Powerpack" or the residential "Powerwall" which is not even being offered in most markets because of supply constraints. They would bring the order figure up to about $6 billion.
The Q4 2021 results event may well have some updated news on the #4680 battery Tesla is developing, as well as on progress at Lathrop. An opening up of mass production of the #4680 battery would enable more of Tesla's other supplies from outside sources to be used for energy storage. Unconfirmed reports indicate that some of the #4680 structural battery packs have been sited at the soon to open Austin plant. These would be used for the Model Y, but early iterations of the Model Y from Austin may still use the #2170 cells. The #4680 allows for software visualisation and control of cells, a key advantage.
This month it was announced by Panasonic (OTCPK:PCRFY) that they would be investing $704 million in a new factory in Japan. The #4680 battery will be produced there. It reinforces the fact that rumours of a breakdown in relations between Tesla and Panasonic are incorrect.
The company is still ramping up operations with other suppliers. I had detailed this in an article in February last year. These include Panasonic, LG Chem (OTCPK:LGCLF) and new arrangements with BYD Auto (OTCPK:BYDDF). It is likely the "Blade" battery from BYD Auto will be a one-off purchase before the #4680 production fully ramps up. It is interesting to note that BYD Auto, which is the major EV supplier in the world alongside Tesla, has also ramped up its energy storage operations. The two companies have similar vertical integration and synergies. It could be argued that BYD Auto is more seamlessly developed in this than Tesla.
The Lathrop facility is not crucial just for the production of batteries. It fits in with the whole picture of the Tesla Energy vertically integrated. My article in September explained the developments from Tesla in its push to be a power utility. It is becoming an electricity generator in various localities, including the U.K, Germany and the State of Texas. The company can trade energy it does not need to generate or store. Through its VPPs it can undercut utility rates but long term the company will become the utility itself.
One can see why Musk was so keen to set up as an electricity generator in the U.K. The government is full speed ahead with decarbonising the grid. Its target is for it to be decarbonised completely by 2035. Wind and solar have now overtaken traditional coal generation. Nuclear is being phased out. A 25% rise in offshore wind capacity is predicted by 2030. As the renewable energy portion increases, so must battery backup. The country is currently facing an energy price crisis which has become known as a crisis of the fossil fuel economy as Putin uses natural gas supplies for political purposes.
The "Tesla Energy Plan" in the U.K. operates to households on solar panels and batteries. It offers an even lower tariff if a Tesla vehicle is added to the solar panel and Powerwall and claims a potential 64% reduction in fuel bills.
This is effectively a VPP in the same way as has been successfully created in South Australia where the aim is to hook up 50,000 homes. The Tesla Energy Plan in the U.K. aims to link up homes throughout the U.K. It will need increased production of Powerwalls if the promise is to become a reality.
Utility scale adoption using Megapacks used to be seen as the fastest way to mass adoption of battery energy storage. Residential was seen as the icing on the cake offering higher profit margins. However supply through residential product supplied via VPPs gets to the same place. With EVs usage increasing so rapidly, residential will also increasingly become part of the whole package.
Tesla has a qualitative edge through its "Autobidder" software. This is pictured below:
Along with the other software programs such as "Powerhub" and "Microgrid Controller", it gives Tesla a qualitative edge over the competition. The huge savings made at the Hornsdale Power Reserve in South Australia using this software are well recorded. They show how Tesla's autonomous control software and always improving machine learning and own commercial storage give it the edge.
Those participating in the South Australia VPP (virtual power plant) enjoy the lowest residential electricity rates in the State. This is up to 21% lower than the base utilities rate. Tesla's involvement in past and current projects in South Australia means that the State is close to becoming totally independent of fossil fuel generation. Other Australian states have noticed and are following suit.
The inter-operability Tesla offers ties in closely with U.S. Government bodies, calls for holistic energy systems. This comes amidst what these bodies predict will be massive growth in energy storage systems as renewables replace fossil fuels.
VPPs using Powerwalls are an essential piece in the jigsaw which very few other companies can replicate. Such VPPs have previously been a side issue for Musk. He has admitted he had to cut back for years on Powerwall supply to prioritise the Model 3. That was for reasons of both battery and chip shortages. This can now be a problem of the past.
Despite the problems the company did in November announce it has supplied 250,000 Powerwalls. At approximately $100,000 per Powerwall this comes to revenues of about $2.5 billion. This is set to accelerate. The new improved product with 9.6kW output has been well received. The company has also been able to increase prices and sees no apparent diminution in demand. Musk sees the product as central to his aim to replicate "giant distributed utilities" around the world. In time Tesla cars may become part of the VPP with VTG (vehicle to grid) supply. Indeed, one car would probably equal about 5 Powerwalls in this function but this may still be a few years down the line.
My article in November had summarised some of these contract wins. These keep coming thick and fast from every part of the globe.
* The Dunamenti Power Plant in December is a first such project in Hungary. Although only 4 MW/8MWh it is the first in the country with more expected to follow.
* The 100 MW battery at Angleton in Texas is now being commissioned while Tesla has become a registered electricity utility in the State. It was confirmed in November that Tesla Energy Ventures was now officially a certified energy provider in Texas. This is seen as ironic by some as it is taking place on the home patch of the U.S. fossil fuel industry. It shows that the times are indeed changing.
* The 50 MW/100 MWh Bouldercombe Battery Project in Queensland, Australia will reportedly use 40 Megapacks. In December Tesla and Genex Power signed an Autobidder Offtake Agreement for a period of 8 years. During that time Tesla will operate Autobidder itself. This will then be subject to a licence agreement between the two companies. This is another example of how those critics who say Tesla cannot make good money from energy storage are likely to be mistaken. A similar source of continuing revenue-sharing has been seen at the Hornsdale project in South Australia. Such details will allow company profit margins from its energy storage division to rise quite rapidly as more and more projects come under the management of Tesla and its partners.
* The 300 MW/450 MWh "Victorian Big Battery" in Geelong was fully commissioned in December. This is the latest in a series of mega-sized projects in Australia that Tesla is working on in conjunction with its close partner, French integrator Neoen.
* The Chapel Farm and Jamesfield Farm projects in the U.K. were recently announced. These two 50 MW projects are in conjunction with Tag Energy with whom Tesla now has three projects running in the U.K. They will utilise Megapacks and Autobidder together. They fit in with a tremendous surge in Tesla business in the U.K.. This incorporates being an electricity generator, operating energy storage projects, and seeing the Model 3 becoming the second best-selling car of any type in the country in 2021. The synergies are clear.
* The San Diego VPP project announced in January will provide 165 MW/336 MWh. It is being supplied by various providers, including Tesla and BYD Auto. It is significant to have a project involving the two largest and most integrated new energy/new transportation companies.
* Arevon & Tenaska Energy Storage facilities in California. They will be providing 9 energy storage facilities around the State in conjunction with Tesla. Various reports I have seen expect this to provide anywhere between 1000 MWh and 2000 MWh when completed. Whatever the final total, and it will anyway probably increase in future iterations, this is a very substantial increase to the California storage. The fires last year in the State show how much this is needed.
* The Elkhart Battery for PG&E (NYSE:PCG) is a 182.5 MW project which should be commissioned this year. Tesla has a close relationship with PG&E. This utility is likely to be the source of very substantial orders in the next few years as PG&E is committed to a large number of energy storage projects.
The Semi product seems to be finally starting to get up and running. A delaying factor had been the battery production capability. The charging facilities for the order for 15 Semis at the Frito-Lay facility for PepsiCo (NASDAQ:PEP) is now being set up, as reported here. It appears they will be charging at a revolutionary 1.5 MW speed.
This is another project in fact in which Tesla and BYD Auto are both involved across a slew of products. Tesla and BYD can be seen as the two world leaders, and main competitors, in the brave new world of autos and energy based on the renewable energy future. This is coming upon us more rapidly than almost anyone had predicted.
It can be seen that the charging for Semis will be using Megapacks. This would be far more economical than charging off the grid, even if such capacity was available. Four Megapacks are being installed in the first instance at the Frito-Lay facility. Rumours continue that the first 18 Semis will be delivered to Pepsi by the end of this month.
Tesla has been using Powerpacks on a mobile system for charging its own Semis at its Nevada facility. This is illustrated below.
It evidences how the Powerpack or the Megapack can be used wherever appropriate, and that the Semi launch is nearing as activity mounts.
It is estimated that approximately 1 MW to 1.6 MW will be required to operate the Semi "Megachargers". So the Lathrop facility seems to have become in addition a major direct driver for the Semi programme finally to get up and running. The size of the revenue that will add to the Tesla revenue figure is dependent upon whether one is a bull or a bear on the whole Semi programme.
Indirectly, Lathrop is undoubtedly a major driver in Tesla being able to ramp up its auto production still further for all types of vehicles. This will allow the company to get closer to meet the twin peaks of demand for its autos and for its energy systems.
The financial consequences for Tesla are clear. In 2020 the company's revenues totaled $31.5 billion. Energy storage accounted for $1.9 billion, about 6% of the total. If the Lathrop facility could immediately supply outstanding orders, these would comprise about $6.0 billion, or allow energy storage to represent almost 20% of company revenues. If the Lathrop facility hits its target of an approximate tenfold increase in production, that would provide about $20 billion of annual capacity available after the next two years.
Megapack orders alone today awaiting completion by Tesla can be approximated at over $4 billion, plus other energy storage products. That does not take into account new orders for which the company has dialled back because of supply constraints. Nor does it take into account opening up markets around the world for the Megapack and for the Powerwall. My article last year detailed the huge potential for Tesla's energy storage business in Asia. This is a market it has not started to address yet, apart from cherry-picking a few mega projects in Australia.
Increased energy storage as a percentage of revenue would in the short run lead to a decline in gross margin for the company. The energy storage business margins will increase this year markedly. It will not however compare to the very high gross margins Tesla makes on its autos of around 30%.
However, margins are improving and the company's battery costs are falling whilst its prices to customers are rising. At the same time, as the company increasingly trades energy, the Autobidder software has very little cost to Tesla. That will lead to soaring profit margins in the same way FSD is touted to do for autos in the future. The continuing software revenues from mega-projects such as the Hornsdale Power Reserve will contribute to a markedly high profit margin.
It is not just the total new outlook for the company the energy storage division will represent via the Lathrop facility. It also bears witness to the conclusion that Tesla will not be battery constrained for autos or Semis this year and next. That points to allowing substantial auto revenue growth to meet the known demand as Tesla gets less supply constrained. It points to continuing strong growth and increased synergy across all the divisions of the company, with the fastest growth coming from energy storage.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of TSLA BYDDF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.