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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Tesla Bears Fear This Metric

Tesla Bears Fear This Metric

Almost no other company in America generates passionate debate like Tesla. Despite the fact that Elon Musk has built the company up from nothing amid extremely trying circumstances, while simultaneously upending the rocket industry with SpaceX, many investors continue to scorn Tesla. It was little surprise then that Tesla’s announcement of its grid-scale battery systems was greeted with skepticism and outright derision in some quarters of the market. Tesla bears may come to rue that dogmatic view.

Musk described demand for his firm’s batteries as “crazy off-the-hook”, and a recent report backs up that colorful assessment. The U.S. deployed 112 megawatts of energy storage in the fourth quarter of last year alone, bringing the total for 2015 to 161 megawatts. That figure is particularly remarkable in the context of the fact that there were only 221 megawatts of total storage in the entire country at the end of the year. This sequence of facts suggests the market is in its infancy and growing like crazy. The U.S. generates about 4.093 billion kWh of electricity annually, so the installed storage base is essentially nothing at this point. The situation won’t remain that way.

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Many investors scoffed at Tesla’s proposed battery system arguing that it was too expensive for homeowners. That’s largely true, but also largely irrelevant. The real bulk in the energy storage market is from the utility-scale portion of the market. From traditional utilities to solar and wind farms, almost everyone in the power business is interested in energy storage. Peaker power plants are expensive to build and utilities are interested in moving away from that model. Doing so would allow many utilities to produce (or buy) energy overnight and then sell it to consumers during peak hours at a hefty mark-up.

Indeed, in some states, a company could literally be built around simply buying electricity at off-peak prices, storing it by battery, and then selling it back onto the grid at peak prices. Grid-scale options make a lot of sense for many power companies at a certain price point, and improving technology combined with production efficiencies from Tesla’s Gigafactory are rapidly pushing the country towards that point.

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In addition to grid scale options, the residential and commercial business side of the market is more significant than many detractors believe. That market is small, but growing even faster than the utility side of the market is – a whopping 405 percent in 2015 for instance.

The market is likely to continue growing at a breathtaking pace. GTM Research which produced the report on 2015 growth is forecasting 1 gigawatt of installed storage by 2019 (up five-fold from present levels), and 1.7 gigawatts by 2020. That will make the market worth roughly $2.5 billion with plenty of runway for future growth.

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(Click to enlarge)

For investors looking to take advantage of that growth, there are not a lot of options. Tesla is perhaps the cleanest option. ABB and AES Energy Storage both make a variety of industrial equipment products, but their business models don’t have that much exposure to growth in the energy storage markets. Start-ups like Orison are great investments… except for two problems; since they aren’t publicly traded most people cannot invest in them, and you really want to have a broad portfolio to mitigate company specific execution risks.

By Michael McDonald of Oilprice.com

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Leave a comment
  • Mark B. Spiegel on March 17 2016 said:
    The author clearly has no idea how many companies are competing in utility-class battery storage and already have far more batteries in the field than Tesla. In addition to ABB there's Panasonic (yes, Tesla's supplier is a direct competitor), Toshiba, Samsung, LG, BYD, UniEnergy, NEC, UET, AES, Schneider Electric, Leclanche, Aquion, Saft, Kokam and BELECTRIC.
  • James Hilden-Minton on March 17 2016 said:
    One kWh of Tesla's batteries can displace about 6 barrels of oil over its life time. Tesla's Gigafactory will have 50.GWh/year capacity, and this capacity will double every decade as battery energy density increases. Thus, we can think of the Gigafactory as a massive oil field that is capable of replacing 20 billion barrels by 2045. This is a reserve size that rivals many oil producing countries.

    The world needs only about 20 to 30 such gigafactories to replace all oil used for energy. The price tag to build this out: $150 to $250 billion.
  • Weapon on March 18 2016 said:
    @Mark B. Spiegel - As always a clueless response from you. The issue is not how many competitors there are in the field but how competitive they are with their products. At this point Tesla offers the cheapest prices in the market.
  • Weapon on March 18 2016 said:
    @James Hilden-Minton -

    1 barrel = 42 us gallons

    Average new car has 25mpg

    Tesla Model S 90D is 34 kwh per 100 miles or 340wh per mile.

    340 * 25 = 8,500wh per gallon * 42 = 357,000 wh per barrel (357 kwh)

    Tesla has said that the battery should do at minimum 5000 cycles so 5000 kwh / 357 kwh = 14 barrels of oil.

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