[U18] Tesla: what's next after electric vehicles?
Virtual Power Plants scale into a distributed global utility, but more is possible.
Dear Reader,
I’m writing this update in Product | Strategy | Innovation to look beyond the transition of transportation away from internal combustion engines (ICE) to alternatives like electric vehicles (EVs). This will take more than a decade, but as the transition starts to accelerate with exponential growth around 2025, other opportunities will emerge for sustainable energy. These opportunities would not only decrease carbon emissions, but also use market demand for sustainable energy to enhance customer experiences that new technologies and designs can offer.
EVs offer a proxy for what is possible. When early EVs focused on marketing superior energy efficiency, they underserved the user experience compared to conventional vehicles. When Tesla built the original Roadster, the objective was to leverage the electric motor performance for comparison to more expensive ICE sports cars plus a business model to enable direct to consumer sales to further improve the customer experience. As Tesla launched additional models, it continued to leverage the unique advantages of electric motors, car design, user interfaces and the direct to consumer business model to enhance the customer experience. Disruptive innovation will play a key role to displace or change the priorities of incumbents in regulated energy markets with companies like utilities.
What follows is a progression of objectives to build on the transition to sustainable energy with electric vehicles and further accelerate the transition with additional innovation. In some cases, the innovation can build on the transition already underway to leverage a demand flywheel. In other cases, the innovation will require some initial momentum, but would eventually leverage the same demand flywheel to scale.
Build a sustainable EV business with a beachhead market to survive. Expand into adjacent vehicle markets to thrive.
Many incumbent ICE vehicle manufacturers will be challenged to survive the transition to EVs, but pure EV companies have used and will continue to use the capital markets to fund their development to disrupt these incumbents. Most of these new ventures will fail, but some could create the future and consolidate a fragmented vehicle industry. The opportunities are substantial.
Tesla’s core EV business created a sustainable beachhead with the launch of the Model S luxury sedan in 2012. With the Model 3 mid-size sedan and Model Y mid-size SUV, Tesla is building a profitable business while scaling production to 3 continents while simultaneously investing heavily in Capex to optimize manufacturing and expand its global Super Charging network.
Tesla’s recent Q2-2021 quarterly earnings highlighted in Fig. U18-2 show strong growth across many key financials, but the report also shows strong operating leverage with profits, income from operations, and earnings per share growing more for each incremental gain in revenue. Tesla’s Q2-2021 Capex includes the construction of Giga Berlin, Giga Texas and ongoing improvements at Giga Shanghai to improve logistics with more manufacturing on the same continent as sales.
Tesla’s Capex advances manufacturing with Mega Machines to die-cast large parts as one piece like front and rear underbody segments. This saves time and reduces the number of robots required to join multiple parts together. Tesla’s Capex is driving full automation to mass produce the new 4680 lithium ion battery cells with 100+ GWh of annual battery cell production on-site.
Tesla’s Capex also covers internal development of autonomous navigation with Tesla Vision and artificial intelligence / machine learning (AI/ML) using the growing Tesla fleet. Tesla EVs are manufactured with the hardware already installed for full-autonomy called Full-Self Driving (FSD) to drive future revenue.
Commercialize high margin subscription revenue with full-autonomy to an expanding fleet of EVs. Robotaxis with EVs further reduce the need for ICE vehicles.
Tesla is piloting FSD with about 2,000 Beta users among their EV customers over the last year. FSD 9.0 Beta was released about 2 weeks ago based only on cameras for 360 degree Tesla Vision. FSD 9.1 Beta is scheduled for release to these same Beta users this weekend. FSD can be purchased with new vehicles (currently $10,000). A monthly subscription option currently priced at $199 will also be available.
It is assumed FSD will be widely deployed to Tesla vehicles with an active subscription and version FSD 10 or FSD 11 release later this year. FSD still requires supervision by the operator, but should greatly simplify the driving experience on highways and eventually all roads. FSD with generalized computer vision for any driving condition and road is probably one of the most ambitious engineering projects ever pursued. The objective is to save lives from motor vehicle accidents due to human error and to improve the driving experience.
Tesla FSD with adequate regulatory approvals also expands advanced robotics to include automated ride-sharing as a robotaxi. This will likely start later this year at the Vegas Loop where human operators currently drive about 60 Tesla vehicles in tunnels underneath the convention center. The Vegas Loop will expand to include hotels on the strip and eventually the airport, but the current controlled environment opens the opportunity to provide the first robotaxi experience for Tesla. Waymo (venture of Alphabet) also provides robotaxis in some very limited use cases like a geofenced area in Chandler, Arizona. Other robotaxi platforms in development include Cruise (General Motors), Motional (Hyundai and Aptiv) and Zoox (Amazon). ARK Invest estimates the global robotaxi net present value of future cash flows at $12 trillion when priced at $0.50 per mile.
Scale production of lithium ion batteries to unblock the primary constraint to producing more EVs and energy products. Augment mining of original raw materials with recycling to recover raw materials.
Battery supplies with the optimum chemistries cannot meet the demand across all of Tesla. Scaled production of 2170 and new 4680 battery cells from as many as 5 sources (Tesla, Panasonic, LG, CATL, Samsung) should provide significant relief starting in 2022.
Tesla is prioritizing lithium iron phosphate chemistries for stationary battery storage and many vehicle models and is reserving nickel-based chemistries for the Tesla Semi and Cybertruck due to the need for higher energy density. This is due to more abundance of iron and more limited supplies of nickel. Vale and BHP are working to bring on new nickel supplies, but will likely need long term contracts from cell manufacturers like Tesla to significantly increase nickel supplies. Indonesia has the largest nickel reserves.
Tesla can take all batteries that can be supplied to scale Tesla Energy battery storage (Powerwall & Megapack) if actual supply exceeds production capacity for EVs. This allows Tesla to make significant short-medium term commitments to iron-based battery cells. The grid-scale Megapack is sold out through the end of 2022.
Another unique feature of lithium ion battery cells is the sustainability of the raw materials like lithium, iron and nickel. The recovery rate exceeds 90% for most of the materials. Redwood Materials is based near Tesla’s Giga Nevada. Its co-founder and CEO is JB Straubel who was also a co-founder and CTO of Tesla. Redwood Materials just raised $700 million to scale the mining and recovery of raw materials from recycled lithium ion batteries.
Implement Virtual Power Plants to eliminate the need for gas-fired peaker plants.
Abundant residential battery storage (Tesla Powerwall) with Tesla Solar Roofs and Solar Panels enable a local community to pool resources through Tesla to form a Virtual Power Plant (VPP). Tesla then arbitrages the supply and demand of grid energy between home owners and a Utility company using AI/ML with Tesla AutoBidder software.
When the demand for energy spikes on hot days and with air conditioning use the price for energy also surges. This is when energy can be sold from home owners to the Utility and supplied by the Tesla Powerwalls. The need for a gas-fired “peaker” energy production plant is eliminated when the Virtual Power Plant reaches adequate capacity to always meet the local demand for energy without the peaker plant.
Tesla is piloting a VPP in South Australia with a target of 50,000 homes participating in the project. The project has already been able to meet the demand with a temporary failure of a peaker plant in South Australia. Tesla recently announced a VPP (Beta) program in California for PG&E, SDG&E and SCE residential customers. California anticipates recurring energy needs throughout 2021 that cannot be met by the grid.
As Tesla creates more VPPs around the world it will become a distributed global utility. This is somewhat confirmed in the UK where Tesla is already approved as a utility with a license issued to generate electricity. And this is the result of Tesla selling physical products so it can then arbitrage the supply and demand of energy in a market with its own software. The software is mostly automated by AI/ML algorithms that learn about patterns to forecast the supply and demand behavior. Tesla CEO Elon Musk has stated that Tesla Energy could outgrow its automotive business in the future.
Implement combinations of solar, wind and grid-scale battery storage for utilities to provide more electricity with sustainable energy sources.
Tesla Megapack grid-scale battery storage is sold out through the end of 2022. Tesla has achieved product/market fit, but battery supply chain constraints are limiting production. Megapack production can scale to meet demand as the battery supply strategies mentioned above scale. Grid-scale Solar and Wind are available from multiple suppliers. Tesla Autobidder software can also be used by Utilities to arbitrage the energy market. Utilities can sell energy to the grid when demand is high, adequate battery storage and low cost energy generation to store energy when the demand is low.
As the price of sustainable energy generation reaches price parity with conventional sources and production capacity can meet the demand, a remaining catalyst to accelerate adoption is an initial off-grid energy market. Sustainable energy sources are often located in remote areas. Creating an initial market for early energy generation can generate revenue while additional capacity is built and the batteries are connected to the grid.
Bitcoin mining provides a scalable need for sustainable energy without the grid when operated onsite. This can also help drive the scale of sustainable energy generation with a 24-7 onsite energy need and also serves a key need for the cryptocurrency community. This model is also efficient since the energy can be generated, stored and consumed onsite as DC power without energy loss converting to AC. As the energy generation and storage scale and connection to the grid is realized, energy can also be diverted to the grid. The energy market can then determine where the energy is directed. As Bitcoin scales it will also drive more efficiency for financial services. Tesla currently holds Bitcoin, but could get more involved with the technology in the future.
Replace conventional heating-ventilation-and-air-conditioning (HVAC) with state-of-the-art electric heat pump and ventilation systems
Conventional HVAC systems use about half of residential energy and can spike demand on the energy grid particularly on hot days. Electric heat pumps work well with Tesla Energy solutions. But Tesla can drive HVAC innovation to take on another key growth opportunity. Tesla has already made significant advances in heat pump and air purification technology for Tesla vehicles. The Model S and Model X use HEPA filters to reduce fine particles from the air inside the vehicle. And the HVAC system in a Tesla vehicle optimizes the temperature anywhere in the vehicle through the on-board computer user interface and a network of ventilation circuits that feed into manifolds with coolant, refrigerant, heat source and an octovalve. A key objective for the system was to also reduce weight to improve the driving range.
Tesla is already working with certified installers to install the Tesla Solar Roof and Solar Panels. Expanding to sell and install HVAC systems could leverage these business operations with an expanded range of installers. The product development could also leverage Tesla engineering resources used to develop the vehicle HVAC system. The global HVAC system market is about $127 billion and growing about 6% a year. This could be an attractive business expansion for Tesla Energy to accelerate the transition to sustainable energy. And the cost to acquire customers would be negligible since the Tesla demand flywheel would generate leads with existing customers. But it also seems like a small market for Tesla compared to other options.
Dandelion Energy provides another option and was spun out of Alphabet’s X moonshot factory when the Foghorn Project did not meet a new fuel price target, but the geothermal technology survived to heat and cool homes starting in the northeastern United States. Dandelion’s Founder and President Kathy Hannun was also a Product Manager at Alphabet where she led the Foghorn Project. The project was killed, but its Product Manager carried the scraps forward to found a new venture. Dandelion uses a heat pump, but also uses ground loops as a heat sink in the summer to cool a home and as a heat source in the winter to warm a home. Dandelion geothermal technology is estimated to be about 47% cheaper than fuel oil per year and 14% cheaper than natural gas heating systems.
Manufactured homes that include HVAC systems could be of interest. These could centralize the installation of Tesla Solar Roofs, Powerwalls and HVAC with automated manufacturing on a Gigafactory scale. Tesla CEO Elon Musk is reported to stay in a $50,000 manufactured BOXABL Casita when he is working at SpaceX in south Texas. BOXABL is building their own manufacturing facility in Nevada. Tesla could mock up a design, test and iterate with a pilot community at SpaceX or Giga Texas where additional housing will be needed. If Tesla builds a winning combination they could just acquire BOXABL to scale. If not they would be able to at least trial some new HVAC system designs and build needed housing for some employees.
Elon Musk is also interested in home construction and HVAC systems for SpaceX. Space travel require advanced HVAC systems. And inhabiting deep space will require efficient residence construction that will also require extreme HVAC systems as life support. This could be the reason for Elon’s interest in boring tunnels. These might be the best way to inhabit deep space with additional finishing and HVAC systems to make them into homes.
The objectives presented in this update lay out how Tesla is accelerating the transition to sustainable energy with electric vehicles, battery storage, solar electricity generation and beyond. The battery supply chain is the primary constraint, but is being addressed by Tesla and multiple companies over the next decade to provide relief. Immediate results should be seen over the next 18 months with commercialization of the Tesla 4680 lithium ion battery cell design and then scaled production by multiple companies including Tesla. This will unlock production constraints for the Tesla Semi, Cybertruck, Megapacks and Powerwalls and scaled production for the current Tesla vehicle models. Bitcoin mining, new HVAC technology and maybe even scaled production of manufactured homes will further accelerate that transition to fulfill Tesla’s mission.
Best,
Stephen
Nothing in this post is intended to serve as financial advice. Do your own research. I’m long TSLA, VALE, AMZN and GOOG mentioned in this update.