California Contract A Big Win For Tesla Motors Inc Stock

  • Tesla was selected to provide the largest lithium-ion battery storage facility in the world to Southern California Edison.
  • The impressive delivery time of less than four months is enabled by the fast production capacity of the Tesla Gigafactory.
  • According to Tesla, the Powerpack system will be a landmark project that truly heralds the new age of storage on the electric grid.

In August Amigobulls covered Tesla's (NSDQ:TSLA) push to pivot towards the overall energy sector and become a leading integrated clean energy provider - a business that is likely to become at least as big as the car business in the long term and plausibly bigger. With the launch of the Gigafactory and the acquisition of SolarCity, Tesla is claiming leadership in the high-tech energy market.

After the Aliso Canyon leak, the California Public Utilities Commission requested the accelerated procurement of modern energy storage solutions based on batteries able to store electricity when demand is low and deploy it when usage spikes. Unlike traditional electric generators, the new energy storage systems should be quickly deployed at scale without water or gas pipelines. Southern California Edison, among other utilities, was directed to solicit a utility-scale storage solution that could be operational by December 31, 2016.

Also Read: Bankruptcy Is A Serious Risk For Tesla Motors Inc Stock

Tesla was selected to provide a 20 MW/80 MWh Powerpack system at the Southern California Edison Mira Loma substation. When fully charged, this system - the largest lithium-ion battery storage project in the world - will hold enough energy to power more than 2,500 households for a day or charge 1,000 Tesla vehicles.

In May 2015 Amigobulls covered the launch of the Tesla Powerwall, a rechargeable battery with 7 or 10 kWh of energy storage for residential use. The Tesla Powerpack is a bigger unit with 100 kWh of storage for industrial use. "Our goal here is to fundamentally change the way the world uses energy," said Tesla founder and CEO Elon Musk. "At the extreme scale."

The value of the contract hasn't been disclosed. According to Tesla's website, a 2-megawatt Tesla battery system costs about $2.9 million, and any contracts greater than 2.5 megawatts must be negotiated directly with the company. Bloomberg notes that the deal fits into Musk's long-term vision of transforming Tesla from an an electric car company to a clean-energy company. "The storage is being procured in a record time frame," months instead of years, said a Bloomberg analyst. "It highlights the maturity of advanced technologies like energy storage to be contracted as a reliable resource in an emergency situation."

The planned delivery at the end of the year - with less than four months to go - is nothing short of impressive. Such record delivery time is enabled by the fast production capacity of the Tesla Gigafactory - Tesla's huge manufacturing plant for electric batteries and storage systems, recently opened in the Nevada desert.

"In order to achieve a sustainable energy future, one which has high penetration of solar and electric vehicles, the world needs a two-way, flexible electric grid," notes the Tesla announcement. "The electric power industry is the last great industry which has not seen the revolutionary effects of storage. Working in close collaboration with Southern California Edison, the Tesla Powerpack system will be a landmark project that truly heralds the new age of storage on the electric grid."

The system will charge using electricity from the grid during off-peak hours and then deliver electricity during peak hours to help maintain the reliable operation of Southern California Edison's electrical infrastructure which feeds more than 15 million residents. "By doing so, the Tesla Powerpack system will reduce the need for electricity generated by natural gas and further the advancement of a resilient and modern grid," notes the Tesla announcement.

Sothern California Edison's vision for next-generation energy grids is detailed in a recently issued whitepaper titled "The Emerging Clean Energy Economy: Customer-driven. Modernized. Reliable." The path suggested in the report leads to a modern electricity distribution grid and enhanced, reliable and affordable utilities. "Decisions made now on how to embrace this change will have profound implications for how the energy grid adapts to meet consumer needs and reduce carbon emissions for the rest of the twenty-first century," notes the report. Reading between the lines, it is evident that the clean energy grid sector, on which Tesla is betting, has the political support it needs, and the Southern California Edison is likely to be the first of many.

Also Read: Is Ford Motor Stock A Better Investment Than Tesla Motors Stock

I am persuaded that the analysts who recommend to avoid or short Tesla's stock, and predict the company's doom and bankruptcy, are mistaken. Simply put, Tesla is betting its cash on the right initiatives to take advantage of today's big opportunities. All opportunities carry a risk, but doing nothing is often the biggest risk.

Tesla had a pioneering role in developing the technology for modern all-electric cars, and found a first successful niche in luxury electric cars. But the real money will be in cheap affordable electric cars for consumers. Now Tesla has its own entry-level Model 3, which starts at $35,000, but the established car makers are closing in, as indicated by the recently announced Chevy Bolt.

While Tesla might be unable to compete with established car makers on price, the company's premium electric storage technology can be repackaged and sold to consumers (Powerwall) and industrial facilities of all sizes including public utilities (Powerpack). This is Musk's bet-the-company strategy, with a big potential payoff for Tesla investors.

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