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Tesla Plant May Power SolarCity, Apple Too

Whatever Tesla Motors (TSLA) CEO Elon Musk reveals in the coming week about building an electric-car battery factory, it's sure to fuel speculation about where Tesla can go with it, and one other thing: round-the-clock solar power.

Synergies between Tesla and cousin company SolarCity (SCTY) don't end with Musk.

Tesla already has started making some battery packs for SolarCity. More insights on synergies might come out when SolarCity reports its Q4 earnings after the close Monday. And more clues could emerge from the "Tesla Gigafactory" conference call that Musk plans in the coming week.

Besides being CEO of Tesla, Musk is chairman and a major shareholder at SolarCity, where his cousin is CEO. Musk also helms privately held commercial space flight company SpaceX.

Luxury electric-car maker Tesla needs more batteries than it can get in order to eventually build an electric car at prices that would compete with the mainstream BMW 3 Series and Audi A4, by Volkswagen (VLKAY).

Baird & Co. analyst Ben Kallo bottom-lined it this way in a research note Tuesday: "The launch of low-cost Gen III vehicles relies on the ability to reduce battery costs. If TSLA is unable to significantly reduce battery costs through economies of scale or technological advances, it may prove challenging to produce vehicles at the $35,000 price point without reductions in performance.

Tesla agrees. Musk closed his Q4 shareholder letter on Wednesday with a tease about the planned battery factory and its ramifications for home-and-business solar installer SolarCity.

"Very shortly, we will be ready to share more information about the Tesla Gigafactory," he said. "This will allow us to achieve a major reduction in the cost of our battery packs and accelerate the pace of battery innovation. Working in partnership with our suppliers, we plan to integrate precursor material, cell, module and pack production into one facility.

"With this facility, we feel highly confident of being able to create a compelling and affordable electric car in approximately three years," he continued. "This will also allow us to address the solar power industry's need for a massive volume of stationary battery packs.

Storing Solar Energy

Solar panels on home or business rooftops deliver energy while the sun is shining, but adding what's essentially a big battery can allow the excess to be stored for use during cloudy days or at night — and can also smooth solar's spiky delivery back to the electric grid. Making the battery packs affordable and small enough has proved to be a challenge.

Utility-scale power systems don't use conventional batteries but have started to store energy using molten sand and other approaches.

Regarding Tesla's battery factory plans and SolarCity, Kallo told IBD: "I do think they're building out capacity with that in mind — Elon is chairman of and has sizable interest in SolarCity, so I think that will play an important part in offtake of the battery factory.

He says SolarCity will ultimately benefit, "but Tesla will benefit the most.

"They have the technology and IP (intellectual property) around the battery chemistry," Kallo said. But "we're still a couple years from it making a big difference.

Analysts expect Tesla's current lithium ion battery partner Panasonic will play a role in the factory. And after word about Tesla talks with Apple (AAPL) surfaced recently, analyst Kallo told IBD that Apple could conceivably be an additional user of batteries made at the plant.

While the Tesla Gigafactory would chiefly serve Tesla, Musk clearly also is focused on supplying SolarCity.

That company's CEO, Lyndon Rive, told IBD in September that "a couple hundred" Tesla-aided solar systems were being deployed — mostly in California — with what is called the DemandLogic power storage system. In December the plan went formal, as SolarCity introduced an energy storage plan for business customers.

Besides storing energy, on a nothing-down service plan that aims to trim power bills, SolarCity touts the DemandLogic system, with Tesla battery technology, as a way to "power IT functions, security systems, cash registers and other critical business systems during power outages." The systems were first being made available in parts of California served by Pacific Gas & Electric (PCG) and Edison International's (EIX) Southern California Edison.

SolarCity, to be sure, isn't the only provider of distributed solar energy systems to get into storage. Rivals also are exploring how different battery technologies can be of use. SunPower (SPWR) CEO Tom Werner told IBD in an interview last month that energy storage "is one of the most important components of our strategy going forward.

Tesla, SolarCity and SunPower are among only 15 companies with market cap of at least $1 billion that saw their stocks rise more than 300% in 2013.

French energy company Total is solar panel maker SunPower's majority shareholder and has investments in energy storage approaches. SunPower has three storage pilot projects under way in California, Australia and Germany.

"It's good to have options," Werner said. "We will be selling storage this year, tied to our 'energy services' offering.

Controlling Your Own Cost

"Think of combining a (solar energy system) lease with storage with one more element, energy management, and you can say to a consumer, 'You're close to controlling your own energy cost.' The short version is you can start to take control of your energy bill. You can take energy from the peak of day and use it at some other time," such as for maybe a four-hour stretch, not infinitely.

Other solar firms are tinkering with storage for rooftop systems, too.

Most are smaller outfits, and two are Sunverge Energy and Greensmith Energy Management Systems, says Haresh Kamath, program manager for energy storage at the Electric Power Research Institute. Though, he says, "those guys — SolarCity and Tesla — account for the vast majority of applications for the (California) Self-Generation Incentive Program, which is how a lot of these systems are paid for.

The program cites an incentive level of $1.62 per watt for advanced energy storage projects.

Kamath says that with economies of scale and advances along the learning curve, the pre-incentive cost of solar energy storage systems has come down.

It varies a lot, but the cost to an installer (not a cost the end customer would see) has been cited as low as $2 a watt for a two-hour battery — so about $10,000 for a 5-kilowatt residential or small-business set-up.

"It used to be something like $4 a watt, and in some cases $8 a watt in 2010 and 2011," Kamath said. "We expect it to fall by another factor of two in the next two years ... people are learning how to make these things more inexpensively.

Solar Acceleration Center

Xcel Energy (XEL) and the Electric Power Research Institute have teamed to research battery-based energy storage projects at the Solar Technology Acceleration Center in Aurora, Colo.

The projects aim to gauge the value of the approach. One outfits a model solar neighborhood with a 25-kw/50-kilowatt-hour sodium nickel chloride system made by Fiamm SoNick. The other project for larger applications evaluates a 1.5-megawatt/1.0-megawatt-hour advanced lead-acid system made by Xtreme Power.

While Tesla explores ways to make the most of its battery expertise and plans, Musk told analysts on Wednesday that the Gigafactory "is really there to support the volume of the third-generation car" that Tesla plans.

But "applications abound" for Tesla-produced battery technology, Dougherty & Co. analyst Andrea James said in a research note Feb. 14. Those applications include "use in grid storage, military operations, and unmanned aerial vehicles," she said. "As the biggest buyer and producer of cylindrical lithium ion battery cells, which are chemically optimized for automotive use, Tesla also gets the first shot at new technology.

The company also gets a chance to lower costs.

"There should be a cost benefit for Tesla to produce its own batteries," James wrote. "It is unclear to us just how much, but we estimate it could be as high as 8 cents per watt-hour, which would lower Tesla's cost per kilowatt-hour on its battery pack to about $180.

Tesla's agreement with Panasonic lets it take delivery of at least 1.8 billion lithium-ion cells over four years, James points out, which would allow Tesla to produce a minimum of 64,000 vehicles a year at 7,000 cells per vehicle.

Tesla says it expects to deliver over 35,000 vehicles this year, up from 22,477 in 2013.