Tesla (NASDAQ:TSLA) is wrongly regarded by some as “just another auto company”. It is true that in the short term its stock price will probably be mainly affected by the progress of Model 3 production. Autos represent 80% of revenue at the moment. In the long term though its energy storage business can become an engine of further organic growth for the company. My article in June last year gave details of Tesla’s strong position in the market compared to competitors. Developments since then have strongly reinforced this perception.

Tesla’s Energy Storage Business.

Tesla bears point to the fact that the energy storage business is on a small scale. This is true in terms of sales, but not in terms of investment or potential. Tesla Management has repeatedly said that they regard energy storage as the greatest growth area for the company.

The Q3 2017 earnings call gives the details on this. “Energy generation and storage revenue” in Q3 increased to US$317.5 million. This was up from US$23.3 million year-on-year, a percentage increase of 1261%

Gross margin was at 25.3%. The margin will improve this year with better capacity utilisation and manufacturing cost reductions at the Gigafactory. It is relevant here that in the results the facility in Nevada was referred to as “Gigafactory 1”. “Gigafactory 2” has since opened in Buffalo and more will follow.

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U.S. energy storage increases 46% in 3rd Quarter. Hawaii, California, Massachusetts aim to be powered by 100% renewable energy by 2045.

The article “US Energy Storage Increases 46% in 3rd Quarter” by Joshua Hill, published on December 7, 2017, revealed the latest U.S. Energy Storage Monitor report by Greentech Media (“GTM”) Research showed a total of 41.8 MW (megawatts) worth of new energy storage capacity was deployed in the third quarter of 2017, representing an increase of 46% year over year and 10% quarter over quarter.

Texas led the way in the utility-scale segment with its 30 MW project, followed by Massachusetts, California, and Hawaii. GTM Research also highlighted the increasing role that energy storage is having in utilities’ integrated resource planning (IRP), with utilities across 14 states including nearly 2 GW (gigawatts) worth of storage into their IRP thinking.

Another article by Joshua Hill – “California To Meet 2030 Renewable Energy Targets By 2020”, dated November 21, 2017 – indicates California state’s major utilities have already met and should soon exceed the state’s 2020 renewable energy target of 33%. The article also says they will likely meet the 2030 target of 50% by 2020.

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BYD Co Ltd (OTCPK:OTCPK:BYDDF) is looking to seize energy storage business opportunities around the world. Recent contract wins in both residential and commercial emphasize the company’s worldwide reach and competitive position. Many other companies, including Tesla (NASDAQ:TSLA), are optimistic about the business as well. BYD may have the competitive advantage, though. Its founder and chairman has very ambitious targets for future growth.

North America

Energy storage systems are benefiting everywhere from a combination of rapidly falling costs, improved capability and greater industry expertise. Many Governments are looking to subsidize the business short-term. Consumer interest is showing strong levels. The World Bank has predicted that 378.1GW of solar and wind generating capacity will come on-stream between 2017 and 2022. They see the main barrier as up-front cost. However costs are falling across the board. Thus payback times are shortening. The affluent USA did lead in such early applications, but may now fall behind the rest of the world.

Energy storage systems are still increasing in the USA. It is estimated that 260 MW was installed last year. This has been encouraged by a decline in net metering. This makes it now more viable for the consumer to store energy. Commercially the market will be hampered by the lack of clear direction and policy initiatives from the Federal Government. Individual States very much have individual policies.

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In recent weeks, discussions over the credibility of Elon Musk’s statements have been culminating. Even though the commencement of the Model 3 production and Q2 deliveries grabbed the most attention, the last few days indisputably belonged to Tesla’s Australian energy storage deal. Much to my surprise, the project has been immediately surrounded by a strong wave of skepticism, which comes primarily from Tesla’s short sellers. For example, Seeking Alpha fellow contributor Montana Skeptic wrote:

If the South Australia deal were going to change the losing trajectory of Tesla Energy, wouldn’t Tesla be announcing the great news in a press release, accompanied by tweets from Musk? Of course it would, and of course, he would.

However, as convincing as these statements and main arguments of the article may seem at first glance, I believe that they fail to put the deal in a broader context and as a result provide a distorted view of the reality.

Let me explain this further in the following paragraphs.

Is money the only benefit Tesla gets from the Australian deal?

Certainly not. As Elon Musk emphasized on several occasions, Tesla’s mission is to accelerate the world’s transition to sustainable energy. In this sense, Tesla focuses on goals greater than making money every single quarter and therefore financial details of the latest giant battery deal in South Australia should be seen at least as important as the company’s reputation, credibility and expertise.

Apart from helping to solve Australia’s power problems, Tesla’s energy storage solutions also support numerous other applications such as electricity price optimization or availability of an emergency backup in the event of a grid interruption due to unexpected environmental disasters, which was the key rationale for building the world’s current largest battery system in Southern California.

With a constantly growing share of renewables in the global energy basket, the demand for energy storage systems will only rise. More and more commercial subjects will be looking to take an advantage of peak shaving, load shiftingand demand response features of energy storage systems and therefore Tesla needs to be building its brand in this sector from now on.

Was the tender non-standard by any standard measure?

Although the majority of media reported that there were 91 bidders on the project, 14 bidders were invited to provide more detail and five considered for detailed assessment, some observers suggest that the tender was rigged and “normal bidding procedures were sidestepped“. If this were true, some investigation would likely have been already launched and a tangible evidence would have been provided. Without any material testimonies, these allegations remain just false assumptions and Twitter photos will mean nothing more than Twitter photos.

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Albemarle’s (NYSE:ALB) leading lithium business provides avenues for growth through the electric vehicle and battery storage markets. These growth markets, coupled with supply constraints buoying lithium prices, will power the firm’s business for decades.

Quick Take and Stock Performance

Albemarle is a leading supplier to the growing energy storage and electric vehicle markets through its lithium business. ALB also has exposure to solar through its Performance Catalyst Solutions business, which produces high-purity metal organics used in solar cell production. The same division supplies LED manufacturers (general lighting and displays). While these are the “in-demand” markets the company serves, the firm is a diversified specialty chemicals producer serving the petroleum refining, consumer electronics, plastics, lubricants, pharmaceuticals, crop protection, food-safety and custom chemistry markets. ALB’s diversified portfolio is a foundation from which the firm can power growth in these in-demand markets.

The company’s stock has handily outperformed the S&P since the start of 2016, returning 89% vs. 19%, respectively. The same performance carries over to the 2017 YTD subset, with ALB returning 23% against the S&P’s 8%. The recent stock performance is heavily driven by the company’s purchase of Rockwood Lithium in 2014; ALB’s lithium business grew EBITDA 56% YoY and contributed $37M to the $21M EBITDA growth YoY for the first quarter. For full-year 2016, the Lithium and Advanced Materials division grew both net sales and EBITDA 16%, while company wide net sales were down 5% and EBITDA virtually flat.

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Welcome to the latest edition of the Energy Recap. This week, we wanted to highlight an interesting article that we came across recently titled “The Race to Build a Better Battery for Storing Power.” The article notes that one of the major downsides of renewable energy – such as solar and wind power – is that it can be “unreliable as the primary source for power grids.” If this energy could be stored in giant batteries until it was needed, that would be a major step forward in this arena.

So, what’s your take on the idea of creating batteries for this purpose? Do you think it’s even feasible? Please let us know by leaving your thoughts in the comments section.

On a separate note, last week we asked readers to provide any suggestions they might have as to what topics the recap should cover going forward, whether related to renewable energy or any other energy-focused topic. We’d love to hear from more of you, so please comment below with your ideas.

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Tesla (NASDAQ:TSLA) is well placed to reap the benefits of rapid moves towards energy storage in a new renewables environment. The Trump Administration’s withdrawal for the Paris Accords is effectively being ignored by the rest of the world.

My article in March outlined the company’s potential strengths and opportunities. Since then Tesla’s offerings have started to be ramped up by the company. There is little doubt about the potential but also little doubt that this will be a competitive market. For instance a similarly vertically integrated company, BYD Co Ltd (OTCPK:BYDDY), is already making inroads in this area and other Chinese companies may be fierce competitors.

Developments in the US

It is no coincidence that at the Stockholders Meeting this week, Elon Musk focused on the total energy storage offering.

As he referred in his address:

“The beginning of the transition of Tesla to a fully integrated sustainable energy company where you have solar creating energy, then the stationary battery pack, the “Powerwall” and “Powerpack”storing the energy and then that energy being used in the electric vehicle.”

All these applications can be linked together now for the consumer by a mobile phone app.

Doubters have considered that there will not be demand for homeowners to install big expensive batteries in their residences. In the past net metering had meant this was largely the case. If a homeowner saved energy during the day through, say, solar panels, this could be sent back to the grid and therefore there was no point in storing it via an expensive battery.

However utilities in the US are now starting to offer deals to compensate for energy storage. Batteries will start to be used not just for back-up power but will allow for integration with utilities.

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Tesla’s (NASDAQ:TSLA) ability to raise capital should mitigate fears over solvency. The $350 million equity and $850 million in convertible notes offers improved operating leverage with minimal dilution of approximately 4.6 million shares or 3% dilution. Not too bad considering expectations of generating futures revenues of over $12 billion in EVs.

In the big picture, let’s focus on how Tesla is positioned to leverage the additional capital and build the infrastructure to effectively compete in the EV, energy storage, solar and in particular, what IP can be gained from competencies in self-driving vehicles. Tesla’s position in energy storage is a differentiator in EVs where it commands the lead in battery efficiency and vehicle range. Tesla can gain a cost advantage by continuing to drive lower battery cost per kWh.

Tesla Vision can generate substantial value because of the competencies extended through image and sensor processing that are also a catalyst for AI. Tesla Vision is leveraging testing and data compiled from its relationship with Mobileye (NYSE:MBLY), recently announced target of acquisition by Intel (NASDAQ:INTC) for $15 billion. Image and data processing of numerous data points from RADAR, LIDAR, and cameras are complex requiring graphic floating-point intensive operations and neural network architecture. The capabilities gained through autonomous driving offer substantial competitive advantages that create additional value for Tesla.

Energy Storage and EV Performance

Tesla has improved its EV positioning as the leader in the EV market by extending the EV range battery efficiency can be measured by energy density or kW per kilogram of battery weight power duration. In practicable measures the vehicle range relative battery kWh size is a relevant measure. However, vehicle size and weight will have an impact on the range metric. To compensate for vehicle weight a measure of distance and weight may offer a more impartial performance metric. The following chart shows the battery kWh size relative to vehicle ton-miles similar to comparing freight costs.

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Energy storage is set to become a major revenue earner for Tesla (NASDAQ:TSLA) in 2017. Recent moves in Europe and Asia show the promise this holds for the company as the energy storage industry takes off worldwide. Some analysts are now starting to recognize this, most recently, Baird. It made Tesla a “top pick” based on what it believes to be an accelerating energy storage business. This caused Baird to give Tesla a price target of $338 (the current stock price is $226.99). Indeed, its stock price rose markedly on the back of an announcement about battery production at the Gigafactory. This is possibly the start of Tesla’s energy storage being a positive catalyst for its stock price.

My article in October laid out many of the reasons why energy storage was so promising for the company. Recent developments reinforce my thesis.

Tesla’s Advantage

Tesla’s vertical integration model means it is able to integrate up and down the supply chain and produce products like solar panels, racking, inverters and energy storage all in-house. The ability to integrate an inverter with storage gives Tesla many opportunities to entice customers. An inverter turns direct current energy from solar panels into the alternating current used by the grid and by home circuits. As Musk said at a recent earnings call, “solar and batteries go together like peanut butter and jelly.”

Both solar and battery prices continue to fall. Critics who say prices won’t fall further don’t back their argument with good reason. The electricity grid has not really changed since the days of Thomas Edison and, alternative energy and battery storage should completely change everything.

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Elon Musk has had a good couple of weeks as the Tesla (NASDAQ:TSLA) stock price has shown recently. Very strong Q3 auto sales are expected to continue into Q4. Musk’s talk about his Mars colonization plans, though typically highly ambitious, were well-received by all but the usual Tesla Musk bears. Recent commercial storage orders have been less emphasized but represent further strong gains for the company.

Those writers who criticize Musk’s vertical integration model for new energy products are either hooked up with the fossil fuel industry or fail to understand the way the world is going. Chinese manufacturer BYD Company (OTCPK:BYDDY) have already gone a long way down that road, and have been very successful accordingly. They have just launched a new energy storage system in Europe using lithium iron-phosphate batteries.

Tesla is now consolidating its vertically integrated new energy systems. This will tie in their interests in electric vehicles (EV’s), rooftop solar and energy storage systems. Success is coming remarkably quickly now in their energy storage business. This is happening as the Gigafactory production ramps up and approvals are received. There is a huge market appearing rapidly for cost-effective energy storage which can overcome the mismatch between renewable energy supply and energy demand.

Commercial Gains.

In September the California Public Utilities Commission awarded the world’s largest lithium ion battery storage project to Tesla. The company will provide a 20 MW/80 MWh Powerpack system at the Southern California Edison Mira Loma substation. This was necessitated by a huge and polluting rupture in the Aliso Canyon natural gas reservoir. 15 million residents were potentially affected.

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