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Tuesday, December 26, 2017

Profitably Powering The Tesla Semi

While talking with some EV-driving friends about the Tesla Semi, we got to the subject of paying to charge the truck on the road. At the Semi unveiling event, Elon Musk said that it would cost 7¢ per kilowatt-hour anywhere to charge in North America. To my surprise, they didn't think that Tesla could profitable sell energy for such a cheap price. One of these friends drives a Tesla and is a big fan of the company, so I was surprised to hear his skepticism. I asserted that they could.

Everyone has opinions, but let's look at some data and try to make it an informed opinion.

Wholesale Electricity Market

The US Energy Information Administration tracks US wholesale prices here:

Looking at the numbers for 2016 and 2017, you can see that wholesale prices are generally $30-$50 per MWH. That is only 3 to 5¢ per kilowatt-hour. There are times when it is 9 or 12¢, but just as many times when it is 2¢.

Tesla has acquired SolarCity and they are in the energy business. This gives them access to the wholesale market in many regions. Looking at the wholesale data alone, you could profitably buy energy on this market and resell it at 7¢ per kWh. However, this is only part of the picture.

Demand Charges

What makes industrial energy expensive are demand charges. Large industrial electricity consumers are charged per kilowatt-hour similar to residential customers, but they additionally have to pay a demand charge. Whereas industrial electricity rates are pennies per kilowatt-hour (generally cheaper than residential rates), demand charges are generally several dollars per kilowatt-hour. Depending on the usage, these demand charges can be up to 80% of the energy bill. Demand charges are designed to discourage big swings in demand from the grid. If industrial customers can use energy at a steady and predictable pace, then the utility can better serve everyone. Steady predictable usage helps prevent brownouts and the need for more expensive peaker plant sources such as diesel generators to be powered on by the utility.

Controlling demand charges the key to industrial electricity usage. If Tesla can buy energy for 3 to 5¢ and sell it for 7¢, they have a positive gross margin. If they have $8 per kWh demand charges on top of that, they have a big loss.

Applying this to Tesla Megacharger stations, there are three mechanisms that Tesla has to manage these demand charges: Onsite energy storage (Tesla Powerpacks), Solar energy production, Charging speeds. Let's look at each of these.

Onsite Energy Storage

Tesla's Megacharger stations will most likely have Powerpack energy storage systems as part of their design. Using these batteries Tesla can manage their grid demand. During a peak use time, rather than draw all the energy from the grid, they could, for example, draw 80% from the grid and 20% from their onsite batteries. This allows them to reduce the grid draw while not requiring the onsite batteries to take 100% of the needed demand. The batteries can then be recharged long after the semi is back on the road. This draws the same amount of energy from the grid, but it smooths out the load and reduces or avoids demand charges.

Utility Services

Once Tesla has Powerpacks installed, they could offer Peak Shaving and Load Shifting energy storage services to the local utilities. In many regions utilities have renewable energy goals. If they have to turn on demand standby sources (peaker plants) such as diesel generators, this could blow their CO2 budget and result in fees (in addition to the fuel cost).

If Tesla offered Demand Response Services to local utilities, they could have an additional revenue stream for these sites. Today, for Tesla to build an energy storage system for a utility, they have to go through an arduous approval process. However, if the Powerpacks are already installed and Tesla is offering this as a service, the upfront cost to the utility would be much smaller and the approval process to use the service could be much simpler.

Solar Energy

As we covered recently, a solar carport covering 40 parking spots (depending on where it is installed) can provide enough energy to power 100,000 Tesla Semi Truck miles annually. This is energy that Tesla can sell without buying it on the wholesale market.

Additionally, when solar is paired with energy storage, this allows for load demand management. The solar panels will produce energy during the day. Any semi charging that occurs when the sun is out would allow the onsite management software to determine the best combination of sources to draw energy from (solar panels, batteries, and/or grid).

Excess solar energy would be stored in the Powerpacks for evening use. The Powerpacks could then be recharged overnight at off-peak rates for morning charging events before sufficient solar energy has been generated for the day.

Charging Rate

Last on the list of things that Tesla could do to control Demand Charges is to slow the recharge rate of the Semis at the Megacharger. This is not something that they are likely to do, but it is an option. If they hit a case say at 8PM when the Powerpacks are drained, the solar is no longer generating and using grid energy is the only option. Then charging at 90% instead of 100% would reduce the grid load.

Capital Costs

Installing Megacharging stations with solar carports and Powerpacks will be expensive. Today, however, the markets are willing to invest in Tesla's growth. Projects like this, with significant capital outlays are only possible when they expand the market potential for a company. For Tesla, freight hauling is a new market with the possibility for huge future revenues, so the markets are again likely to fund this topline growth.

Gas Station Model 

I've been making the case that the energy sales alone could be profitable. However, it is worth pointing out that at franchise gas stations, the station owners make little or no money from the pumps. The profits from the fuel sales go to the parent company. The franchise makes its profit from the store. The coffee, Marlboro, and Slim Jim sales are what keeps the lights on at your local gas stations.

Tesla Megacharger stations are going to have amenities such as coffee shops and restaurants. Sales are more likely to be lattes and scones than Marlboros and Slim Jims though. These amenities sales will be a much higher margin portion of the Megacharger revenue.

Wrap Up

This post started with the assertion by my friend that Tesla would lose money by selling energy at 7¢ per kWh. A first-order approximation response shows that wholesale energy markets commonly sell energy for 3 to 5¢ and that reselling for 7¢ could be done profitably. Additionally, Tesla will generate their own energy onsite with solar panels. These require very little ongoing maintenance and will allow Tesla to sell energy without buying it from the wholesale market.

With solar and onsite storage, Tesla has all the tools they require to mitigate demand charges. Tesla has further opportunities to generate revenue with the Megacharger stations by offering peak-shaving and load shifting services to local utilities.

There will be a significant cost to build-out this infrastructure, but the market has shown a willingness to fund Tesla's topline growth and Tesla's market darling status does not appear to be in any danger. This will allow Tesla to raise capital as needed to fund this growth.

All this allows Tesla to branch increase their revenue, grow their infrastructure, and take a chunk of a new market.