Tesla’s announcement last week about creating a new line of batteries for use by businesses, consumers, and the electrical grid at large is a game-changer for the industry. Currently, when individuals or companies need back-up power, they usually rely on generators. Effective battery storage for large amounts of energy would be a game changer in that it would enable a separation of generation and use of energy produced through clean fuels like solar and wind power.
The big problem with solar and wind right now is that the energy is only useful when it is actually produced and, because a company cannot modify generation to correspond with demand needs, any excess power has to be sold back to the market for immediate use. Tesla’s new batteries could go a long way towards solving this problem. It is likely that Solar City, for example, would be very interested in any home application for large scale battery technology.
But beyond Tesla, these economies of scale could also have benefits for other firms in the same industry. To the extent that Tesla’s production capabilities create new demand for component parts, the result would be lower costs for inputs in batteries. As supply costs fall, battery production costs across the industry would fall also leading to increased quantity demanded by consumers and businesses.
Put differently, when Edison invented the light bulb, the standard method for producing vase shaped glass vessels was very different than what it is today. Producing a vase by traditional glass blowing is expensive and time consuming. So if a person had to make just one or two light bulbs, it would likely take hours of work. Once millions of light bulbs are needed, the process becomes industrialized and the cost per bulb falls to pennies. The same principle applies to the economics of battery production, and that already has even competing producers salivating.
Batteries already may be much more profitable than most people realize, and so if Tesla can open up new markets for its products, it could drive the company’s earnings dramatically higher. The exact level of profit will depend on many different factors of course, but assuming that Tesla can sell its batteries based on charge capacity, then the profits could be astronomical. Tesla recently increased the price on some of its vehicles by $4,000 in concert with a 10KWh increase in battery capacity.
By Michael McDonald of Oilprice.com