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Elon Musk thinks Tesla can sell batteries much faster than cars

Attendees take pictures of the new Tesla Energy Powerwall Home Battery during an event at Tesla Motors in Hawthorne, California April 30, 2015. Tesla Motors Inc unveiled Tesla Energy - a suite of batteries for homes, businesses and utilities - a highly-anticipated plan to expand its business beyond electric vehicles. REUTERS/Patrick T. Fallon - RTX1B28Q
Patrick Fallon / Reuters
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Tesla is going hard after a new customer: the power grid.

In a presentation at the company’s annual shareholder meeting on Tuesday (May 31), CEO Elon Musk said he thinks half of the company’s batteries will go toward electricity storage for the power grid rather than Tesla’s vehicles in the coming years as Tesla expands its battery business.

The company’s Gigafactory in the Nevada desert (a joint-venture with Panasonic) is expected to churn out 35 GWh of the newly designed lithium-ion batteries (pdf) each year (Musk speculated that figure could triple if demand warrants). The factory is slated to open this year and reach full capacity in 2020. Musk said the battery packs’ stationary storage applications should account for at least half of the output, up from earlier projections of one-third.

Musk believes electricity storage now looks like it could be a faster growing business, if not necessarily a larger one, than selling cars for the company. Key barriers to selling cars globally, such as inconsistent national regulations and entrenched competition, don’t exist in the stationary energy storage market. “No one is really doing it right,” said Musk about battery storage. “[Tesla’s] Powerpacks can scale on a global basis faster than the cars do. … I think the rate of growth will be several times that of the car side of Tesla.”

Tesla has increased deliveries of its cars by about 40% to 60% per year since 2014. It delivered 50,580 vehicles in 2015.

Tesla’s Powerwall for the home (which costs $3,000, plus installation) has not proved to be a best seller so far, with the company discontinuing its 10kWh version this year. Analysts say the Powerwall is overpriced for customers expecting to recoup their costs quickly in most markets. Instead, Tesla has shifted toward grid-scale applications, where battery systems offer storage and balance electricity supply for regional electrical system. Exact sales figures were not released, but Musk said last year that 80,000 orders were placed for grid-scale Powerpack batteries, and the $40 million in quarterly sales could ramp up to “a few billion dollars” per year by 2017.

One of the largest grid projects is in Hawaii, where electricity prices are nearly triple the national average. Solar City, a solar service company chaired by Musk, is building a solar power plant and 52 MWh battery bank using Tesla’s batteries to pump electricity into the grid at peak demand. While Kauaʻi Island Utility Cooperative said a “breakthrough” price made the project possible, Hawaii’s example does not necessarily translate elsewhere given its unique combination of sky-high electricity prices and abundant renewable energy.

Musk’s critics have scoffed that pricey batteries will ever offer more than niche services for the grid. Bob Lutz, the former vice chairman of General Motors, said in a CNBC interview last year that using batteries as backup storage was a hundred-year-old idea that remains prohibitively expensive and called the concept “greatly overvalued.” Lutz said: ”The highest cost in the lithium-ion battery is not the assembly labor; it’s the raw materials.”

Tesla has made fundamental changes to battery manufacturing processes in its Gigafactory and is trying to condense a supply chain that now moves materials from South America to North America to Japan and back to the US. Musk spent time yesterday dwelling on the company’s efforts to improve the efficiency of its car and battery factories, with the possibility of slashing costs by a factor of 10.

“If you design a factory like you design an advanced computer, the same effort [invested in improving the product] can deliver an order of magnitude more once you focus on building the machine that builds the machine.”