Tesla, Elon Musk and their strategy to revolutionize the way we consume energy
Tesla to acquire SolarCity in a attempt to create the world’s “only integrated sustainable energy company”.
Burning of fossil fuels (coal, oil and gas) for transportation purposes is responsible for 26% of GHG emissions in the US. Tesla’s Co-Founder, Chairman and CEO Elon Musk responded by proving the world that electric cars can be better than gasoline-powered cars. Tesla develops, manufactures and sells electric vehicles. The Company was founded in 2003 and is headquartered in Palo Alto, California. Tesla sells its products through a network of Tesla stores and galleries, as well as through Internet. The Company’s mission is ‘to accelerate the world’s transition to sustainable transport” and in 2015 reported revenues of $4 billion. Owners of Tesla vehicles will never have to spend money on gas and enjoy the benefit of charging their vehicle either at home or at one of Tesla’s many supercharger stations located throughout North America, Europe and Asia Pacific.
However, “Tesla is not just an automaker, but also a technology and design company with a focus on energy innovation”. Company has begun to expand into other areas and recently Tesla started, in partnership with Panasonic, the construction of a gigafactory in Nevada that by 2018 will produce more lithium ion cells than all of the world’s combined output. More importantly, the factory will also produce battery packs intended for use in stationary storage. Similarly, in August 2016 Tesla announced its intention to acquire solar panel installer Solar City for $2.6 billion in a move to create the world’s “only integrated sustainable energy company” which is “capable of developing, producing, selling, installing, and servicing these products in the most seamless way possible”. SolarCity provides homeowners, businesses and government organizations with solar energy through a vertically-integrated offering that covers module manufacturing, mounting hardware, software, sales, installation, financing, monitoring, and maintenance. Transaction is pending final approval from shareholders, who are set to vote on November 17th.
Fossil fuel consumption for electricity is the largest contributor (approximately 25%) of GHG emissions, therefore major investments in renewable energy, resource efficiency and clean technologies have been made. Particularly, solar energy technology has dramatically improved in recent years. Photovoltaic electricity costs declined by 99% between 1977 and 2016, experts have suggested that by 2020 solar will be the cheapest electricity on the planet, and in some areas such as Southwest US and North Africa utility-scale solar PV is already cost competitive with coal and natural gas. The US government has set the goal of transitioning to 100% clean energy by 2050, of which approximately 45% should be supplied by solar. We are already experiencing positive changes, with for example, construction regulation in some locations requiring installation of solar panels on new buildings. Starting January 2017, San Francisco will be the first major US city to require solar panels installed on new constructions.
Currently, one of the major challenges for adoption of solar energy at scale is the requirement for energy storage. Elon Musk is fully aware and he sees Tesla and SolarCity as an ecosystem. The acquisition allows for vertical integration and should capture important synergies. First, households who have SolarCity panels installed in their rooftops will benefit from Tesla’s battery technology. Solar energy will be captured & stored in batteries during the day when households are away from home, and will be utilized during the night when families return (instead of relying on the more expensive electricity from the electric grid which in night time typically commands peak tariff). Second, an increased volume of batteries at the Gigafactory will provide significant economies of scale and potential for innovation in battery design and production (this same approach worked for Elon with Tesla’s first electric cars, with SpaceX’s first rocket launches, and with Ford many years ago). Finally, Tesla’s electric cars will be powered by solar energy.
Climate Change in 2016: Implications for Business (HBS No. 317-032)
Student comments on Tesla, Elon Musk and their strategy to revolutionize the way we consume energy
Very nice post summarizing Tesla’s strong position in renewable energy and zero-emission vehicles! Tesla recognized early on that simple making electric vehicles will not curb the world’s dependence on fossil fuels and it’s consequential emission of GHGs. Because Tesla batteries need to be charged with electricity, Teslas will still have a carbon footprint associated with burning of natural gas and coal to generate that power.
The Gigafactory is an IMMENSE undertaking (figuratively and literally -10 million sq. feet!) by Tesla and a huge step in the right direction. The promise of batteries used to supply energy brings a lot of hope, especially in the developing world, where is a lack of infrastructure in generating power. One fact that struck out to me from a recent climate change documentary I saw was that India’s rising middle class (~300-700 million people) will start to consume more natural energy resources which will have untold impacts on GHGs. I’m curious if Tesla has a strategy to work with developing countries in order to distribute/sell these batteries to areas in which the fuel alternative will be much worse for the environment.
Apparently, it will only take 100 operational Gigafactories to make the ENTIRE WORLD 100% renewable. Clearly, this seems within reach -but no one is stepping up to the plate. I’m curious to know what Tesla’s role, if any, will be to partner with states, international organizations, and NGOs to influence policymakers to take direct action to discourage further consumption of fossil fuels and develop renewable capabilities before it’s too late.
Great post! I am following Tesla innovations closely as well and have a question regarding effectiveness of the solar power overall and the way these could be addressed.
While I agree that solar energy will definitely contribute to greener future world, it is currently extremely expensive and not highly efficient: current efficiency ranges between 20% and 40%. To add, this efficiency is even lower if the surface is not clean. These two issues add up to high capital investments and maintenance costs, making this source of energy an option for very niche market. If we want every household in the world to switch to solar source of energy, how can we make it affordable? How can we review maintenance costs? Could we potentially use other materials?
Thanks for the post, I was intrigued by this move by Tesla. While I understand some underlying social desires, I had some significant concerns about the ability of Tesla to manage these two different businesses and models. I wonder what changes Tesla will make to Solar City besides just switching the batteries to ones that they have produced. You outlined three synergies that they will get from this vertical integration. However, none of these really seem to be in the best interest of Tesla. The consumer will benefit from better batteries in their house, the potential to have Tesla cars charged by solar generated electricity, and increased demand on their new factory to get economies of scale. I think Tesla could have achieved all these without the purchase of Solar City, so while I agree Tesla is a great innovator in shifting to renewable energy and power, I am struggling to see how they will effectively use Solar City to continue to develop renewable energy.
Thanks Andres. To address Michael’s concerns above, Elon Musk was involved with SolarCity from the beginning (the founders are his cousins) and so it seems to me that there may have always been some coordination with Tesla. Tesla’s branching out recently into home battery packs and (last week) solar-capable roofing tiles bears this out — it would surprise me if SolarCity’s invested stonewalled the merger. The big X-factor here is the Gigafactory — it must become operational and fast if Tesla’s growth strategy is to continue. Demand for Tesla cars is high and will only get higher as the Supercharger network expands, but hitting a price point to get competitive with larger automakers in the absence of significant federal subsidies is only possibly if the batteries can be produced at scale. It’s been complicated to even get the Gigafactory approval from a regulation standpoint. Once the factory comes online, Tesla may find itself having to deal with material availability for its batteries. There’s only so much Lithium available.
Great article, Andres! As you can tell by my name, I also wrote a post of the initiatives auto companies are taking to combat climate change. My question for you is regarding the manufacturing process for Tesla cars. I found out that one of Nissan’s greatest carbon outlay is during the manufacturing process, and they have used solar energy and other initiatives to power the manufacturing process of its cars. How carbon intensive is the Tesla manufacturing process, and what is it doing to reduce its carbon footprint at that stage of the process?