How Tesla Is Quietly Expanding Its Energy Storage Business

This battery is one of the largest battery energy
storage systems in the world. In Moss Landing, California, PG&E has been working
with Tesla to install its Megapack utility-scale battery storage system. Once complete, it will help store energy for
redistribution during off-hours when solar output decreases. California needs generation for our, September,
August is our key areas of when we need storage to be able to capture it during the day
and then release it in the afternoon, evenings. Even as nations around the world set goals to
transition to renewables, demand for these large-scale storage systems is on the rise.

The market size of grid-scale battery storage is
expected to become a $15 billion market by 2027. Now we're seeing in many parts of the world, in
California, in Germany, now in China, mandates to have a certain amount of storage available per
unit of renewable energy. If you look at resource forecasts or resource
plans, the expectation is there will be tens of thousands of megawatts of new energy storage in
just California. Welcome everyone to, basically the announcement of
Tesla Energy. Tesla got into the energy business in 2015 and
it's betting it will become increasingly important for the company. In 2020, it surpassed
three-gigawatt hours of energy storage deployments in a single year, largely due to the popularity
of Megapack, like the one being built in Moss Landing. I think long term Tesla Energy will be roughly the
same size as Tesla Automotive. I mean, the energy business collectively is
bigger than the automotive business. They have really deep tactical knowledge of
batteries, not just the cells themselves, but how to operate them, how to build a battery
management system, how to package them well, make sure they're in the right kind of thermal window.

The systems have smart technology built into them. The technology and the way the batteries are
actually configured is one thing. But equally significant at the moment is how you
control them. Tesla has a system called Autobidder that
actually chooses what the battery does and when it does it. The amount of data we get from each mega pack is
phenomenal. The Tesla product has got a lot of technology
built into it. It's really an answer to one of the big challenges
we've got. We all know that we're transitioning our
electricity systems to renewable. It is the way of the future. We're going to see a lot of these. Energy storage has been around for a hugely long
time, but for a very long time, the only real viable technology was actually the lead acid
batteries in our cars. The one, of course, that was ramping up during
those same decades were lithium ion batteries. The first lithium ion batteries were used in
consumer electronics in the late 1990s. We can thank Sony's Handycam for pioneering this
innovation for us.

Lithium ion batteries are now everywhere, from
electric vehicles to our phones. Though there are many other types of batteries in
the works, lithium ion is still the most cost effective for utility scale storage. In the past, prohibitively high costs have meant
that lithium ion batteries couldn't be used at large scale grid storage levels. In the past decade alone, according to estimates
from BloombergNEF , costs fell about 90 percent. With the world transitioning to electric vehicles,
demand for electricity could be greater than ever before. People are moving towards electric vehicles.

Roughly you need twice as much electricity if all
transport goes Electric. And you need three times as much electricity if
all heating goes electric. This is a prosperous future, both for Tesla and
for the utilities. And with the recent failure of the power grid in
Texas and brownouts in places like California, energy storage is becoming necessary to keep
power up and running. There is a new impetus behind building out a
stronger, more resilient grid. We've seen again and again our grid can't handle
climate change, can't handle these climate disasters that are becoming increasingly
frequent. Tesla built one of its storage systems on the
Hawaiian island of Kauai in 2017. In addition to supporting the SolarCity solar
farm, it's added more reliability for the utility.

We had our best reliability ever as a co-op last
year. Part of running an electric utility grid is you
have to always match every second of the day supply and demand. Batteries are amazing at that because batteries
are instantaneous. If you look at some of the events for the
batteries responded to, it's gone effectively from zero to full output in a bit over 100
milliseconds. And it's just, there's no other technology that
can do that. In the U.S. and around the world, more aggressive
energy storage policies are being put in place. China has mandated energy storage as part of its
effort to reach 16.5 percent solar and wind in its national power targets by 2025. In Biden's recently unveiled more than two
trillion infrastructure package. There's more than $600 billion earmarked for
climate related policies, and that includes $100 billion for the power grid. President Biden has set 2035 as the 100 percent
clean electricity date. Just meeting that one's going to be not only a
big challenge, but also a market opportunity for all these technologies. Tesla is one of several companies working on
energy storage. Tesla gets, and they deserve to get, a lot of
attention for their effort to build the Gigafactory facilities.

But there's lots of others. There's a whole range of startup companies in the
storage space. The majority of grid scale, energy storage,
lithium ion battery, energy storage is being built out by utility companies such as NextEra Energy
down in Florida, Duke Energy. These are a few of the names that are
integrating battery storage into their models.

AES Corporation has been working on a number of
projects, most notably with Kauai Island Utility Cooperative. In 2019, it completed a 28 megawatt
solar farm with a battery capable of storing 100 megawatt hours. And it just brought a microgrid
online at the island's Pacific Missile Range facility. With the success of these projects, the
utility cooperative is working with AES on a new project to combine solar and hydro for even
greater storage capacity. It's going to have two hours of battery that can
handle the solar output. Well, what's really wild about this one is it's
going to also have pump storage hydro power brought in.

Pump storage has been around for
decades. So it's a proven technology, but linking it into
an intermittent resource such as solar is a new thing. Next to the PG&E and Tesla storage project in Moss
Landing, Vistra is also building one of the largest battery systems at its natural gas power
plant. Phase one of the project was completed in
December of 2020, bringing 300 megawatts of storage capacity online. Phase 2 will add an additional hundred megawatts
when it's completed later this summer. We need to do everything we possibly can to
accelerate the transition to sustainable energy. You can't really talk about energy storage without
talking about Tesla, which of course is the leader in EVs and also has a big footprint in the energy
storage space. Tesla launched its energy business in 2015 with
the announcement of a new battery product. So this is a product we call the Tesla Powerwall. It has all of the integrated safety systems, the
thermal controls, the DC to DC converter.

It's designed to work very well with solar
systems right out of the box. People in a remote village or an island somewhere
can take solar panels, combine it with the Tesla Powerwall and never have to worry about having
electricity lines And for larger scale applications, Tesla developed
the power pack. What about something that scales to much, much
larger levels? So for that, we have something else. So we have the Powerpack. The Tesla Powerpack is designed to scale
infinitely. So you literally make this into a gigawatt hour
class solution. In the summer of 2016, Tesla acquired SolarCity
for $2.6 billion. The deal was controversial and is still the
subject of some shareholder suits, but it drove Tesla to do more in energy storage. Tesla has unveiled several solar roof tiles and
has hyped the product, but installations have not grown as quickly as expected.

They've had numerous technical setbacks in kind of
deploying that product and making it happen in a solution that works at the right price point
that's competitive with conventional rooftop solar. But, by and large, they've built the right
pieces. They've prioritized it in the right way for
consumers. Just recently, Tesla updated the Powerwall 2,
doubling the capacity of energy it can discharge. All Powerwalls made since roughly November of last
year have a lot more peak power capability than the specification on the website. The energy is the same but the power is roughly
double. According to the company, demand has been so high,
Tesla is now only selling Powerwalls bundled with its solar products. We will not sell a house solar without a
Powerwall. A Tesla Powerwall 2 has an energy capacity of 13.5
kilowatt hours. A Model S has up to a 100 kilowatt hour battery. Powerpack, its smallest utility scale storage
solution, has a capacity of up to 232 kilowatt hours per unit.

This can be scaled up to include several
Powerpacks to meet energy needs. Tesla's first major battery installation near
Jamestown, South Australia, had a capacity of 129 megawatt hours. At the time of its completion in December 2017,
it was the largest lithium ion battery storage project in the world. The system charges using renewable energy from
the Hornsdale Wind Farm and helped bring more stability to the grid following a significant
blackout. An extreme weather event that happened in
September 2016 in South Australia that resulted in the entire state blacking out. The response that the South Australian government
took to develop and accelerate the energy plan that they were already
working on, was really triggered by that.

Based on studies observing its first and second
year of use, Tesla's Australia battery system has proven to be reliable and has saved the utility
company money. That first years performance, we could see that
the battery itself generated revenue of $24 million. But the saving to the electricity
system, in terms of how much more cheaply the frequency control services
were provided, was $30 to $40 million. With the success of this project, Australia is
looking to bring more lithium ion battery storage systems online. There's quite a few underway now in other parts of
Australia and also in South Australia. Another project Tesla took on was in Kauai,
replacing diesel fuel generators that were supplying power when solar c ouldn't. In the Hawaiian Islands, one thing was for
certain, we had to do something. We couldn't stay on oil. All these technologies, every single one we've
done, even the higher priced solar ones, have been cheaper than the alternative of oil.

So they've all saved us money. The project consisted of a 52 megawatt hour
battery and a 13 megawatt SolarCity photovoltaic system. Kauai Island utility Cooperative contracted with
Tesla to purchase electricity over a 20 year period for 13.9 cents per kilowatt hour. It's a great economic thing. We know we're going to have a fixed price for 20,
25 years on these. Before we had the technology, when we were
heavily oil dependent, our pricing can go up 40, 50 percent from two or three month period as
we're riding oil. Since the Tesla and AES projects, Kauai Island
Utility Cooperative has been able to operate nearly on all renewable energy Almost every day now, we will go six to eight
hours at 100 percent renewable working on, we call it inverter based technology here where
it's batteries running things.

There's not really another grid out there that is
doing that. Similar to Kauai, Tesla completed a project on the
island of Ta'u in American Samoa, which was previously powered by diesel generators. Tesla installed 5,328 solar panels and 60
Powerpacks and said this would allow the island to stay powered for three days without
sunlight. Tesla says it will offset the island's use of
more than 109,000 gallons of diesel per year. And when Puerto Rico's utility infrastructure was
devastated in 2017 during Hurricane Maria, Musk took to Twitter suggesting Tesla could help. In 2018, ongoing outages left Puerto Rico without
power. So Tesla brought in Powerpacks to several
critical sites around the island. Another one of Tesla's early projects went online
in December 2016 to help reduce Southern California's dependency on peaker plants. In East Los Angeles, the Mira Loma substation has
two 10 megawatt systems, which can store 80 megawatt hours. The site is comprised of 396 Powerpacks. With the success of these early projects, Tesla
developed an even larger capacity solution, Megapack, which has up to three megawatt hours of

The equivalent of almost 13 Powerpacks or 30
Model S sedans. Tesla says if scaled to one gigawatt hour of
energy storage, that would be enough to power every home in San Francisco for six hours. We're working with utilities, large and small, not
just utilities, but also just like microgrid and project developers of all types and building our
own projects where it makes sense. And there's a lot of demand for the product and
we're growing the production rates as fast as we can. Apple is working with Tesla to build a 240
megawatt hour Megapack at its California Flats solar farm that powers its Cupertino
headquarters. Outside of Houston in Angleton, Texas. Tesla has quietly been working on its first site
in the state.

Once complete, the 100 megawatt system will be
capable of powering about 20,000 homes. CNBC visited PG&E's Megapack site in Moss
Landing, California, which is expected to be completed by the end of the summer. We're standing at the PG&E Elkhorn Energy Storage
Project. It's 182.5 megawatts of Tesla Megapacks. We're next to another very large project, which
is the Vistra 300 megawatt energy storage project.

Combined, you're looking at 1,930 megawatt hours
between the two projects, which really makes Moss Landing, as some would say, the energy storage
capital of the world right now. California is the top producer of renewable energy
in the U.S. In 2014, the state realized that the renewables
were great, but we needed to do something to deal with the excess. So the state started launching
its energy storage programs. As part of energy storage, one of our first
assignments was to procure 580 megawatts to be online by 2024. It is the glue that holds it all back together, is
the energy storage. If you consider how much energy we do use, we're
going to need more facilities like this. When PG&E looked to integrate an energy storage
solution, it said it received several proposals, but ultimately chose Tesla for this site.

Tesla definitely had the most mature product. Their understanding of energy storage was better
than the rest. They've already done UL 9540A burn tests on their
Powerpack product. For these Megapacks, if there is a fire, it self
extinguishes. It's one of the few projects I've ever worked on
where this is going to save customers money. While Tesla has been aggressive in its rollout, it
is unclear how profitable this business is for them. It does not break out energy storage sales
from its solar business. In the first quarter of 2021, Tesla energy
revenues were $494 million, while costs were $595 million. But energy storage deployments grew 83 percent
from 2019 to 2020, which the company said was driven mainly by the popularity of the Megapack. They've deployed a lot of systems. They've deployed them on time, at a profitable
price point where the product operators have also used the project successfully and made money from
them. They've built a lot of the right pieces and have
a promising play in the energy space because of the battery expertize they've had.

And the future looks promising for Tesla and
others in the space. As energy storage and as lithium ion and as
renewables become a greater make up of our grid, it's going to fundamentally shift how our grid
currently works. This is a big opportunity for a wide spectrum of
companies who are involved in what's known as the energy transition. There are still a bunch of hurdles to making
lithium ion batteries, first of all, while the costs have come down a lot, they are still high. Batteries are the most expensive part of electric
vehicles. And similarly, the large quantity of cells in
utility scale batteries make them costly. The average price per kilowatt hour for a lithium
ion battery pack is around a $137, down from $157 in 2019. The increase in energy density really isn't about
how do we make longer range electric vehicles today. It's about how can we make them cheaper by
using less materials and getting the same amount of energy from them.

And there is the issue of resources. With electric vehicle production ramping up,
there are concerns demand will outpace supply for materials to make batteries. Tesla is reportedly looking into changing to a
cobalt free lithium ion phosphate battery for its Megapack. The change in chemistry could help cut
costs and ease demand for supply-constrained nickel based battery production. There are definitely issues going forward with
whether or not there will be enough supply to meet that demand because demand is not just growing in
the United States, but growing around the world. I've been working in lithium ion cells for 20
years and I've seen factories evolve. And then Panasonic built the Gigafactory, which
is just on another scale.

But even this factory really only supplies one
car model. So if we're really going to change to an
electrified industry, we need something like 20 of these factories. The Biden administration has emphasized it wants
to bring mining and cell production back to the U.S. China started to ramp up their mining a rare
earths in the 80s and 90s. And because of that supply, the United States
actually ramped down. Actually, now we're seeing in the United States,
Canada and Australia are ramping up again of supply. To meet the growing demand, new types of battery
technology are also being explored.

There are sodium batteries. There are salt based batteries. One of my favorites is called a flow battery. One of the huge benefits of flow batteries is
that instead of thousands of cycles before degredation, they give you potentially millions
of cycles. And for certain projects, energy storage is being
done through alternative means. Long duration storage can be anything from things
we're really familiar with, like storing energy in hydro systems or pumping water uphill. As the world transitions to renewable energy,
storage will continue to play an increasingly important role.

And Tesla could become as
important of a player in the energy industry as they have in the electric vehicle space. So while we don't really have an idea of who is
going to win the day and who's going to be the most successful company in the space, I do think
one thing is for certain, and that's that we're going to see a lot more solar and wind buildout,
both here in the United States and abroad. Getting bulk wind and solar into the network is
what will bring prices down for consumers. And I think that's important. Rather than people thinking it's all about, do
these technologies need subsidy? Are they getting a free ride? Actually, no,
they're going to enable much cheaper energy while we're decarbonizing the grid, which is hopefully
what we all want..

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