GigaFactory Proves that Tesla is Ahead of the Clean Energy Curve, But Does Texas Stand to Benefit?

Source: Texas Public Radio

Elon Musk, Tesla CEO, speaking to Texas Legislature in 2013. Source: Texas Public Radio.

Disruptive technologies tend to follow a certain trajectory. First, they are outliers, often ignored, and typically on the cusp of never entering the market. But, for the successful ones, a tipping point is ultimately reached, after which the technology goes viral and changes the status quo it was designed to replace. In the new energy revolution, Tesla is one such company that has surpassed the tipping point and threatens to change the way we produce, distribute, and consume electricity.

It isn't just Tesla's sleek and beautiful electric vehicles that will be key to disrupting the status quo. At a current price point of around $80,000, most people en masse won’t be able to afford a Tesla, even though the company has plans to develop more affordable models. But what makes Tesla unique, besides the strange genius of CEO Elon Musk, is the potential diversification of its offerings, highlighted recently by the company's announcement to build the GigaFactory, a $5-billion battery factory that will employ 6,500 workers.

Set to open in about three years, the new GigaFactory will be large enough to manufacture more lithium-ion batteries than the entire industry produces now, and due to its sheer scale, is expected to reduce the cost of batteries by almost one-third.

Tesla batteries and renewables

Tesla’s move to build the largest battery factory in the world is significant for the electricity market – and not solely for the large-scale adoption of electric vehicles.

Energy storage is the missing link for realizing the full potential of renewable energy. Storage guarantees that the energy produced by renewables is available at all times, even when the sun isn't shining or the wind isn't blowing. For example, storage can capture West Texas wind power at night when wind energy is most abundant and release that stored energy during the afternoon hours when demand for electricity is high.

But, to date, storage has been lagging in its availability and cost-competitiveness.

Worldwide, there were only 420 storage projects at the end of 2013 and only 34 megawatt hours’ worth of lithium ion battery projects built for the grid by the end of 2012. For comparison’s sake, there were 23 gigawatt hours' worth of lithium ion batteries made for consumer electronics, like cell phones, over the same period (1 gigawatt is equal to 1,000 megawatts).

Tesla's current costs for lithium ion batteries (supplied by Panasonic) are around $200 – $300 per kwh. If the factory could reduce those battery costs by 30 percent, prices could drop to $140 – $210 per kWh. Navigant analyst, Sam Jaffe estimates that battery packs will end up at around $180 per kWh. “They are definitely setting the bar for battery costs,” Jaffe said. “By 2020 every other battery manufacturer will have to get close to or beat the sub-$200 per kwh number that Tesla will be able to accomplish if they meet their goals.”

This is not to say that lithium ion batteries are the only option for energy storage- especially when it comes to renewables. A diverse portfolio of choices, including technologies like compressed air caverns and hydro pumping to sodium-sulfur batteries, will play an important role in the application of storage for both utility-scale and distributed generation energy storage.

Location, location, location

Tesla has not yet decided on a location for the GigaFactory, and many states are vying for the economic benefits of this development. The automaker is looking in Arizona, Nevada, New Mexico, and Texas, but at least two of these states (Texas and Arizona) are at odds with the company over its direct-to-customer selling strategy.

Because of long-standing state laws protecting and regulating auto dealerships (and the lobbying power of the Automobile Dealers Association), Tesla cannot sell directly to consumers in these states, or New Jersey, the latest state to effectively ban Tesla under their current business model.

Instead, Tesla can only showcase vehicles at “galleries" and state law prohibits employees from discussing the price or any logistical aspect of acquiring the car. Prospective buyers must order the cars from California, which are “delivered in a truck with no company markings, per Texas law, and customers even have to unwrap their new automobiles themselves, because the law prohibits Tesla’s in-state representatives from doing, saying or touching anything related to selling or delivering cars.”

Ironically in a letter attempting to woo Tesla to the Lone Star State, Rep. Jason Villalba stated, “I can attest to you that there is no better state in the Union to begin, grow and expand a new and thriving business such as Tesla Motors.” Tesla begs to differ.

According to Diarmuid O’Connell, Tesla’s Vice President of Business Development, “The issue of where we do business is in some ways inextricably linked to where we sell our cars. If Texas wants to reconsider its position on Tesla selling directly in Texas, it certainly couldn’t hurt." In an interview in April with The Texas Tribune, Tesla CEO Elon Musk went as far to call the state’s auto franchise laws “very un-Texan.”

Too late for a Texas GigaFactory?

During the last Texas legislative session, House Bill 3351 introduced rules to allow manufacturers of 100 percent electric cars to sell directly to consumers, but it did not pass. Arizona is also lobbying aggressively for the factory and lawmakers are pushing legislation that would allow Tesla to sell direct. And automakers in Ohio just struck a deal with Tesla easing the battle over its direct-to-consumer retailing model. Governor Perry has voiced support for HB 3351 and went so far as to admit in a recent Fox Business Today interview that Texas needs to revisit its “antiquated rules” prohibiting Tesla from selling electric vehicles in the state.

Perhaps Texas legislators should reevaluate their principles for the upcoming legislative session. Waiting till next year may be too late to sweeten the deal for a Texas GigaFactory, although it does appear that Texas leaders are making moves behind closed doors to secure this project.

The Texas Tribune reported that a secret meeting took place on Wednesday, where Tesla executives met with leaders in San Antonio, causing further speculation about the Lone Star State’s chance of landing this coveted project. Either way, Texas leaders should act fast or risk losing the opportunity for thousands of jobs in Texas. As Tesla breaks down many barriers with its innovative products and business models, it will be met with resistance. But the agility of the company to overcome the odds has already been proven.

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