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Will the Battery Gigafactory be Elon Musk’s Waterloo?

Elon Musk, Tesla Motors’ CEO, has been on quite a roll. In just the last 15 years, he cofounded PayPal (which now moves hundreds of billions of dollars of currency every year), started up Tesla (which now features a market cap about half that of General Motors [GM]), founded SpaceX (which recently launched the Deep Space Climate Observatory satellite), and was instrumental in the founding of SolarCity (which now holds a nearly 40 percent share of the solar electric market).

At virtually every step, Musk has been denigrated by short sellers, naysayers, and business journalists, but his winning streak continues. According to a headline in a CNET Magazine last year, “Second-Guessing Elon Musk Is Turning Into an Expensive Lesson.” Sooner or later his detractors will be right about something, as winning streaks don’t go on forever. Indeed, is Musk currently charging onto the very battleground on which he stumbles?

Last year, Musk kept the world guessing while he figured out where to locate his company’s battery-manufacturing Gigafactory—which, when it’s completed in 2017, is expected to produce more lithium-ion (Li-ion) batteries than the current combined production of all manufacturers worldwide. By producing at such scale, Musk predicted that Tesla would drive down battery costs by 30 percent. We know now that the Gigafactory will be located near Reno, Nevada, and will cost $5 billion to construct. What we don’t know is whether it will have a similarly outsized impact on the electric vehicle, electric storage, and photovoltaic (PV) markets or whether it will be a monumental bust.

tesla gigafactory risk

The plot thickened a few weeks ago, when Musk announced that Tesla was developing a battery for the home market. Business journalists were quick to note how disruptive those batteries could be to the entrenched utility industry, especially when combined with SolarCity’s PV panels. A few remaining Musk skeptics (okay, just me) wondered whether the Tesla home battery was really a disruptive threat or a sign that Musk is in over his head.

Here’s the skeptic’s take on the Tesla home battery: Tesla is actually under a lot of pressure. Low gas prices can’t be good for electric car sales, even Tesla’s. Competitors that have either announced plans to release models designed to compete with Tesla cars or are rumored to be planning on doing so include GM, Porsche, Audi, BMW, Mercedes, and even Apple. Sales in China have been well below expectations, and Tesla’s chief marketing officer in China quit just a few weeks ago. The handwriting is on the wall, and it says that Tesla is not going to sell enough cars to support the output of the Gigafactory. Instead, Musk needs to find more ways to sell those batteries, and find them fast.

Selling batteries to homeowners is not going to be easy. There’s a good reason why so few of us have large battery banks in our homes, and it’s not because there aren’t any for sale. Batteries are expensive, and the advantages they offer homeowners are few. The majority of homeowners with PV panels get most of the benefits of batteries by hooking up their panels to the grid at little or no cost. For homeowners without solar panels, the grid in most locations is sufficiently reliable that there’s little to gain from having battery backup. If Musk is going to sell those customers batteries, he’s going to have to sell them much more cheaply than current prices, and it’s not clear that a 30 percent cost reduction is going to be enough.

Musk isn’t the first corporate executive to make grandiose claims about a battery product and then be pressured to succeed. On just about the same day that Musk announced the Tesla home battery, Steve Levine, a journalist and an adjunct professor at Georgetown University, released a book titled The Powerhouse. It tells the story of the battery-manufacturing start-up Envia, whose product was touted in 2012 as a major breakthrough by the Advanced Research Projects Agency for Energy (ARPA-E), the federal government’s energy technology incubator. GM even bought into the dream, investing at least $7 million on top of the $4 million poured in by ARPA-E. But it was not to be, and ultimately GM’s engineers determined that the Envia battery could not achieve the performance promised by the company. There were even allegations that Envia didn’t own some of the technology on which its battery was based. By the end of 2013, GM backed out of the deal.

Envia has plenty of company in the overpromise-and-underdeliver club. For another, there’s A123 Systems, the 2005 battery start-up that promised to produce Li-ion batteries with higher power density and faster recharge time. The company received a $249 million federal grant in 2009 but filed for bankruptcy in 2012. Over the past century, a countless number of companies have been making extravagant battery claims and ultimately failing. It was none other than Thomas Edison who was quoted over 130 years ago (originally in the Boston Herald but more recently in an article by Steve Levine) as saying, “The storage battery is, in my opinion, a catchpenny, a sensation, a mechanism for swindling the public by stock companies. … Scientifically, storage is all right, but, commercially, as absolute a failure as one can imagine.”

When I visited the Thomas Edison National Historical Park in West Orange, New Jersey, the guides told me that Edison made more money off the battery than any other of his inventions. He surely understood how many human desires could be met with an inexpensive, light, and compact battery. He must have also understood how resistant battery technology is to making such a product feasible. Many have tried, but few have succeeded at more than eking out small incremental improvements.

Like Napoleon, who led France to victory in multiple wars, Elon Musk is now facing his own potential Waterloo. So far, he has prevailed against overwhelming odds. If he can master the intricacies of the electric battery, he will march on to unprecedented success. Musk may well find, though, that overcoming the inherent resistance of the electric battery to yield great increases in performance, or great decreases in price, is a bigger challenge than even he can overcome.

Original article: http://www.esource.com/Blog/ESource/2-23-15-Gigafactory

 

Jay Stein's picture

Thank Jay for the Post!

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Bob Meinetz's picture
Bob Meinetz on February 26, 2015

Jay, Elon Musk has come through similar challenges before for the simple reason his ego is not bigger than his intellect. His home battery will go nowhere because the sun doesn’t shine enough, in enough places in the world, to make it viable. Even with a battery most consumers would want a reliable grid connection. Unless utility electricity rates skyrocket, why bother with the battery?

The Gigafactory may stumble, but if it does it would be the result of Saudis deliberately dumping oil on the world market to make EVs less viable. That’s a situation which could be entirely avoided by putting a price on carbon now (or at least imported carbon, to start).

Joe Deely's picture
Joe Deely on February 26, 2015

Jay,

Your implication is that Tesla came up with the storage idea because they are worried about slow car sales.

In reality storage has been in the works since the beginning.

Suggest you watch the following to see where storage fits in Tesla thinking.

Keith Pickering's picture
Keith Pickering on February 26, 2015

Home batteries will only find a very small niche market, but the Gigafactory will make up for that in auto sales. As you yourself noted, everybody and his brother is getting into the electric car business, and they will have to get their batteries somewhere. 

Joe Schiewe's picture
Joe Schiewe on February 26, 2015

It looks as if Saudi Arabia is the current new punching bag.  Saudi Arabia hasn’t significantly increased its fossil fuels production since 2002 and only 5 – 10% since 1981.  I believe that Canada is one of the few countries that has a carbon price on fossil fuels and the US current administration just punished them by vetoing a pipeline connection with them. Mark Twain wrote, “Never let the facts stand in the way of a good story” 

Clayton Handleman's picture
Clayton Handleman on February 26, 2015

Jay, your thesis appears to be that Tesla is at risk due to the dangers of novel new technology and risky addressable market..  In both cases they are well hedged and history will almost surely show that in 20-20 hindsight, the Gigafactory was a relatively low risk, conservative pursuit.

The technology is not very risky.  It is mature Panasonic technology.  A123 was a new technology and so is not a ‘comparable’.   Tesla is teamed with Panasonic and applying scale and incremental improvements to existing, mature battery technology.  This is much the strategy that the Chinese used to crush the price of solar modules.  They applied scale to standard silicon modules.  The experience curve is alive and well and is very effective at predicting how scale will impact cost.  If you can buy the scale, you can bring down the costs.

The risk of evaporating addressable market is a red herring as well.  Even if no home storage or EV batteries are sold we are on the cusp of another market disruption.  With the cost reductions that will occur with the Gigafactory production ramp, lead acid batteries will become obsolete as starter batteries in ICE autos.  The market for starter batteries alone can soak up more than the entire production of the Gigafactory.  And that, of course, is in the unlikely circumstance that the markets they are planning for are slow to develop.  The math is quite simple and this article lays out the numbers.

Finally, the home storage market is not about offering totally solar homes.  It is about providing a way to shift generation to the most profitable time to sell back to the grid.  As Tesla has already shown, batteries start to pay when they can be used in various strategies such as TOU metering to sell into peak rate times and monetize the time-shift from the batteries.

 

 

 

Robert Bernal's picture
Robert Bernal on February 26, 2015

Good point on starter batteries which might double for RV (and hobby) scale solar, too. These batteries will require less embodied energy than lead acids because they last longer, allow for deep discharge, require less mass and will be manufactured more efficienctly to reduce costs.

Clayton Handleman's picture
Clayton Handleman on February 26, 2015

They also add value and reduce vehicle energy by virtue of their lower weight.  Nice benefit in RVs because they are smaller so less space.  Car makers will like that as well.

 

Bob Meinetz's picture
Bob Meinetz on February 27, 2015

Joe, Saudi Arabia is sitting on 300 billion barrels of oil reserves. They don’t have to cut production – just tweak prices a bit, and try to get by on a few billion fewer riyals in 2015:

Saudi Price Cut Upends Oil Market

Meanwhile, U.S. “punishment” of Canada by refusing to be their dirty fuel doormat has nothing to do with B.C.’s revenue-neutral carbon tax, which has been an outstanding success. Turns out British Columbia doesn’t want to abet leveling 55,000 square miles of pristine Albertan forest either:

B.C. government to Northern Gateway pipeline proposal: ‘No’

Had Mark Twain lived today, he’d probably have an analog: “Never let the facts stand in the way of a bankrupt ideology.”

Nathan Wilson's picture
Nathan Wilson on February 26, 2015

Selling batteries to homeowners is not going to be easy.”

Home solar energy systems with batteries don’t have to reduce the actual cost of producing and delivering electricity in order to be profitable for manufacturers.  As with the solar panels themselves, a cost increase that is shifted to other electricity consumers is enough to create a temporary business opportunity, which could last sereral years.

Today’s home solar PV systems are cost effective for their owners due to the billing policy of net-metering which encourages solar deployment by forcing other electricity users to accept a cost shift: the utility must buy energy during the day from owners at retail prices (often several times higher than wholesale), then sell it back to the homeowner in the evening at the same price.

Eventually, the fraction of homeowners with solar system will be large enough that opposition against the subsidy grows.  Two of the possible alternative billing schemes which public utility commissions may adopt instead of net-metering are time-of-use metering and feed-in tarriffs (presumably below retail rates).   Either of these options will create a price differential that will tend to make batteries more economically competitive (and remember, the top tier of electricity prices in California are a whopping 32¢/kWh, see this article).

In the long run, the public utility commissions will have to also adopt larger fixed charges, along with lower per kWh charges for customers with solar PV system; this will degrade the apparent benefits of grid-connected batteries.  But until then, there will be an opportunity.

The SEIA reports that the US has over 3 GWatts of installed residential PV, and they expect us to install another 4 GWatts by the time the federal ITC subsidy ends in Dec of 2016.  If changes to net-metering rules forces half of that capacity to add batteries, and those systems put in 6 hours of storage each, that comes to 21 GWh of batteries, which is a big chunk of the 35 GWh of batteries that the Gigafactory is supposed to build each year.

Joris van Dorp's picture
Joris van Dorp on February 27, 2015

Good article, thanks for it.

Trying to develop a battery which is cheap, reliable, safe, clean, efficient, lightweight, compact, robust, etc, is extraordinarily difficult, because there are wicked trade-offs in attempting to improve each of these important battery performance characteristics without sacrificing one or more of the others. Brilliant minds have grappled with this subject-matter for many decades, long before Elon Musk came along.

What has not been mentioned here is the concept of using second-hand car batteries as stationary (home) storage. This concept proposes that once an EV car battery reaches end-of-life (which happens after 5 to 10 years already) it can be removed from the car and still be placed into usefull service for stationary storage. I like that idea, because it suggests that cheap electricity storage might actually be possible in a world ruled by EV vehicles.

However, I don’t know nearly enough about the performance of end-of-life batteries put to work in this way. What happens to the efficiency, capacity and (fire)safety of lithium ion batteries after they have aged so much that they are no longer fit to use in an EV car? How much service can they deliver until they are completely spent? etc.

If anyone here has technical information about the prospects of the concept of using second-hand EV car batteries for cheap stationary storage, I’d be very interested.

 

Joris van Dorp's picture
Joris van Dorp on February 27, 2015

Chinese solar PV dominance was bought and paid for by the Chinese government.

William Hughes-Games's picture
William Hughes-Games on February 27, 2015

A small amount of battery capacity in a grid connected home solar elecric system has a distinct advantage to the home owner.  Power companies can make up the rules as they go along and generally insist that you have two read-outs.  One records power you import and they other, power you export.  Neither read-out goes backwards.  So, for instance, in a day in which clouds pass in front of the sun, whenever the sun is shining you are exporting and whenever a cloud is coverning the sun you are importing.  If your power company gives you (as here in New Zealand) 7c for power you send them, and charge you 25c for power you buy, you will have a substantial power bill even if you produce all the power you need or even more.  A bit of battery capacity gets you around this problem. Some battery capacity also helps with the lack of fit between the timing of your typical house power use and the typical solar generating curve.   Remember, even if the rules at present from your power company are benign, they can change the rules whenever they want.

http://mtkass.blogspot.co.nz/2013/10/solar-power-and-ratchet.html

William Hughes-Games's picture
William Hughes-Games on February 27, 2015

The market for the new battery facility will be when Tesla produces the next generation electric car; the affordable electric.  The market will go wild.  Let’s hope it has all the great engineering features of the other Tesla models but no bells and whistles. 

http://mtkass.blogspot.co.nz/2008/01/car-id-like-to-drive.html

Bob Meinetz's picture
Bob Meinetz on February 27, 2015

William, I’m not familiar with New Zealand utility policy, but in every one of the United States utilities are highly regulated to prevent them from changing the rules whenever they want.

Clayton Handleman's picture
Clayton Handleman on February 27, 2015

“Current lithium battery technology is NOT a suitable replacement for lead-acid starter batteries.”

Well then I guess the EVs won’t run in cold temperatures either. But, of course, they do. 

Lead acid has its own problems at low temp.  Do you have any engineering data, i.e. links, to suggest that improvements cannot be made to address the difficulties you have encountered.  This piece suggests that there are a variety of lithium ion chemistries and they can operate as low as 40 degrees C or F.  They also point out that 70% of low tempertaure starting problems are currently attributed to problems with the lead acid batteries.

Bruce McFarling's picture
Bruce McFarling on February 27, 2015

It can’t be his Waterloo … Waterloo was after being defeated, thrown out of power, put into exile, , escaping exile, and then leading an attempt to restore his position as rule of France that lasted about 100 days, to end in Waterloo.

Elon Musk’s Siege of Acre perhaps? Or if more damaging, Elon Musk’s Invasion of Russia.

William Hughes-Games's picture
William Hughes-Games on February 28, 2015

I wish New Zealand would follow your example.  What happens, though, if a Republican president gets in next election with both houses as well.  The GOP doesn’t seem to care much for the good of the people.  Or are these regulations in the hands of the states.

Bob Meinetz's picture
Bob Meinetz on February 28, 2015

William, it’s hard to say what might happen under a new Republican administration. There are a lot of Republican ratepayers, so any policy which raises utility rates will get vocal and nonpartisan opposition.

Most of utility policy is under state jurisdiction, which in my opinion is a good idea. There are public hearings on rate increases, and in most circumstances utilties have to come up with a pretty good reason for raising rates. In California utilities are prohibited by law from allowing their profit margin to exceed 10%, which also places a tight lid on rate increases.

In smaller states utilities make up a larger percentage of revenue and there can be an uncomfortably cozy relationship between energy power brokers and the politicians who are supposed to be keeping an eye on them. It’s a constant struggle.

William Hughes-Games's picture
William Hughes-Games on February 28, 2015

Can Li batteries supply the very large start up amperages of around 80+ amps at 12 volts?

Clayton Handleman's picture
Clayton Handleman on March 1, 2015

Porshe has offered it for a while to reduce weight.  But the cost has prevented wider spread use.  Other outlets offer as a third party direct replacement for lead acid.  So yes, current is not an issue.

 

William Hughes-Games's picture
William Hughes-Games on March 1, 2015

What is the size of a replacement battery compared to a equivalent lead acid battery.  Would it fit in the same location as the lead acid battery?

Jay Stein's picture
Jay Stein on March 3, 2015

As the author of this post, I’d like to thank everyone who posted comments. This posting generated the best collection of comments of any blog I’ve ever written. I read all your comments several times and watched the video recommended by several of you. By doing so, I learned a lot, and I expect lots of other readers did as well. There were a few points brought up in the comments that I’d like to take the opportunity to respond to.

To start with, I’d like to say that I do hope Tesla succeeds at building up and operating the Gigafactory. If it does succeed, we’ll all live in a much better world than the one we have today. Such a world would include ubiquitous well-crafted but inexpensive electric vehicles, equally ubiquitous solar panels, and enough storage built into the system to maintain grid stability even with a generation mix featuring high levels of renewable energy.

I was inspired to write this blog because I saw the SS Tesla headed for shoals on which many ships have already foundered. I’m well aware that Elon Musk is a capable pilot and may well chart a course that successfully takes Tesla to its next destination. That’s why I was careful not to predict failure for Tesla, but instead, noted that the company is attempting a feat at which many others have failed.

Another inspiration for this blog was media coverage of the Tesla home battery, whose near-term prospects I am skeptical about. I noticed that no one presented compelling evidence that the home battery is likely to be a big success anytime soon. Nathan Wilson pointed out that at some point in the future, net metering rules are bound to change and at that point, the economics for batteries in homes with photovoltaic panels are likely to be much better. I agree with that logic, but I expect that time to be far off. It will take many years before such high fixed charges are put in place. When they are, I expect they will be carefully calibrated to avoid overly encouraging grid defection. I also expect that existing net-metered homes will be grandfathered in such that they keep their benefits. Lastly, I doubt that anywhere near half of solar collector owners will buy batteries and go off-grid. There are so many benefits to be being on the grid, I expect most of those future solar homeowners will grumble and pay the fixed charges. Of course, we’re just speculating here, so it will be interesting to see, a decade from now, what happened.

Clayton Handleman made the fascinating suggestion that if EV sales didn’t materialize at a high enough level, Tesla could sell nearly the entire production of the Gigafactory into the automotive engine-starting market. As he noted, some vendors already sell such batteries and they’re lighter than the lead-acid batteries that currently dominate the market. The big obstacle Tesla faces here is driving the price of its Li-ion batteries down low enough to compete with lead-acid batteries. According to the PluginCars article Why Do Electric Cars Have Lead-Acid 12-Volt Batteries When Lithium Is Lighter? in the automotive market, the cost of comparable Li-ion batteries at the end of 2013 was about 6 to 10 times that of lead-acid batteries. Though this market represents an attractive long-term opportunity for anyone with a large Li-ion battery factory, it doesn’t sound to me like a lead-pipe cinch backstop for the Gigafactory.

Several commenters made portions of a complex argument that I’ll attempt to paraphrase: Because Tesla is not attempting to make big improvements in Li-ion battery technology, but is simply attempting to scale up established technology, this should be a straightforward thing for the company to do. In fact, the Chinese government did just that when it dramatically drove down the cost of PV panels. Weapon Zero wrote, “Musk is not betting on any breakthrough, he is betting on incremental improvements and economies of scale. Something that has a proven track record to work.” Handleman wrote, “History will almost surely show that in 20-20 hindsight, the Gigafactory was a relatively low-risk, conservative pursuit. … If you can buy the scale, you can bring down the costs.”

I have three issues with this argument. The first is that numerous experts have expressed a great deal of skepticism that Tesla can achieve its goals simply by cranking up scale. You can read about them in these three articles: Study: Big Battery Factories Won’t Do Much to Cut Costs, Does Musk’s Gigafactory Make Sense?, and Lux Research Predicts the Gigafactory’s Li-Ion Production Will Be +50% Overcapacity. According to a group of professors at Carnegie Mellon University, “We found that battery economies of scale are exhausted quickly, at around 200–300 MWh of annual production. That’s comparable to the amount of batteries produced for the Nissan Leaf or the Chevy Volt last year. Past this point, higher volume alone won’t do much to cut cost.” Of course, “the experts” have already been wrong about Tesla at nearly every step, so it’s hard to know how much weight to give to these opinions. Then again, it would probably be a mistake to dismiss them out of hand.

The second issue is that a key factor in A123 Systems’ collapse was its failure to manage its attempt to build scale. Several media accounts describe how A123 overinvested in manufacturing capacity that it then underutilized. One such account is the Greentech Media article Energy Storage Experts Explain What Happened at Battery Firm A123. To quote from an article in the Boston Globe, Cash-Fueled Climb Led to Fall of A123 Systems, “That flood of money would sow the seeds of A123’s fall, enticing it to ramp up commercial production too quickly—far faster than the market for electric vehicles would grow.”

Lastly, driving down prices by building scale can backfire. It’s called “flooding the market,” and that’s what happened when the Chinese government subsidized domestic solar panel manufacturers between 2008 and 2012 to expand their production tenfold. Chinese manufacturers did build their market share, but worldwide panel prices plunged by about 75%. As noted in the 2013 New York Times article Chinese Solar Panel Giant Is Tainted by Bankruptcy, “Chinese manufacturers lost as much as $1 for every $3 of sales last year as they struggled to keep factories open despite falling prices.” The coup de grace came in March of 2013 when the main subsidiary of the Chinese firm Suntech Power, one of the world’s largest PV panel manufacturers, declared bankruptcy.

Moving on to sunnier thoughts, from reviewing these comments, I learned something new about the factors that contribute to Tesla’s success. I’ve often admired the culture of superb execution that Musk inculcated into his company. By reading these comments, I’ve also learned that there are many people who are firmly committed to Tesla’s success. I’m sure Mr. Musk takes great comfort in knowing he has such support.

 

Thank you again, commenters. Your passion and involvement make the Energy Collective a vibrant place.

Clayton Handleman's picture
Clayton Handleman on March 3, 2015

Hi Jay, the replacement of lead acid batteries does not require price parity it requires LCOE parity.  The Li-ion batteries last longer and withstand deep cycling much better.  This results in crossover before the up front price is equal.  However, that said, the cost of Li-ion batteries is dropping rapidly and over the last year, experts are rapidly revising estimates (to sooner) of when we will hit $100 / kwhr.  And crossover will occur before that.  This piece compared the two technologies when Li-ion prices were a good bit higher than today and Li-ion looked pretty favorable. 

Joris van Dorp's picture
Joris van Dorp on March 5, 2015

Thanks to you too, for your detailed response to the comments.

Clayton Handleman's picture
Clayton Handleman on March 30, 2015

Smaller – lighter. 

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