The Economics of Tesla’s Batteries Business

Tesla (TSLA) is a U.S. automotive and energy company based in Palo Alto, California. The company manufactures electric cars and solar panels as well as batteries and aeronautics. Tesla operates six "gigafactories" around the world to produce its eponymous electric vehicles as well as rechargeable batteries to power them.

Supplier relationships and how battery-related revenue is doing can be a key driver for Tesla. Tesla produces most of its batteries through a partnership with Panasonic, but it has since diversified to other suppliers as well as producing some batteries in-house. In 2022, CEO Elon Musk set the goal of producing 1,000 gigawatt-hours of battery capacity in the United States, but it is not clear when he hopes to reach that goal.

Tesla’s Endeavors

Elon Musk is the CEO (and face) of Tesla, the electric car company. Musk is also responsible for the spaceflight company, SpaceX, which sends rockets into space to restock the international space station. He is known for the proposed high-speed underground transportation system linking Los Angeles to San Francisco, called the Hyperloop.

When people complained that Tesla's all-electric cars were too expensive for the middle class and that their driving range between charges was too short, Musk promised to work with battery manufacturers to cut costs and improve efficiency.

When progress with its battery suppliers was too slow, Tesla took steps to get into the battery business more deeply. Then, in 2015, Elon Musk announced the company was going to start making solar batteries. The 2015 announcement helped to shore up more bargaining power with suppliers, while also introducing Tesla’s own lines of electric, solar batteries.

Understanding Current Batteries

Batteries are solid-state devices that store and release electrical current, powering an array of consumer electronics, cars, home utilities, and other devices. Lithium-ion (LiOn) is the key ingredient in most batteries. LiOn is also the main component of most rechargeable batteries. Rechargeable batteries have become widely used in many applications. Different variations of them can now be found in everything from mobile phones and tablets to laptop computers and electric vehicles.

While microchips and integrated circuits have become exponentially more powerful, smaller and cheaper battery technology has lagged. Improvements in LiOn batteries have been small and incremental.

In a modern smartphone, the computational effort is packed into a tiny portion of the device while the battery takes up most of the available space. The battery is also a large factor in the total cost of the device. For electric vehicles, the problem is compounded. Electric cars are essentially an array of battery packs on wheels. Under the hood, you will find batteries and a battery-charged motor, which alleviates the need for any gas.

Lithium, however, can be an unstable substance. Therefore the batteries must be built carefully so that they avoid damage during a typical car accident. Even small amounts of exposure to air or water can make lithium burst into flames. Ensuring that each battery is properly sealed and secured is an added cost.

Tesla’s Car Batteries

Beginning solar battery manufacturing in 2015 helped bring Tesla more powerfully into the electric battery business. This also gave it a little more leverage in the production of its own car batteries.

As of 2021, Tesla partners with Panasonic for its car battery building. Panasonic also supports the efforts of all battery manufacturing in Tesla’s Gigafactory. The partnership gives Panasonic a significant portion of space in the Gigafactory, which makes transporting Panasonic’s contributions simplified for the overall manufacturing process.

Its growing foothold in the batteries business has helped it to increasingly improve the cost structure for its cars while also maintaining a pretty big lead ahead of its competitors. The pair—Tesla and Panasonic—are now looking to use a prototype battery that will lower production costs.

The Tesla Energy Batteries Announcement

Elon Musk’s May 2015 announcement was much anticipated. In May 2015, Musk announced Tesla Energy, expanding the company’s capabilities into a new reporting segment, now called energy generation and storage. The two inaugural products were a home battery and a grid battery.

The new batteries build out the concept of electric storage. To support this segment the company has built an enormous battery factory (appropriately named a Gigafactory) in the Nevada desert. Its vision suggests as many as 10 Gigafactories around the world.

Tesla's Powerwall

The Powerwall is the home battery. The first-generation Powerwall was launched in 2015. An updated Powerwall 2.0 was announced in October 2016 with twice the storage capacity of the original. In 2021, two Powerwall batteries with supporting hardware cost $17,000. Installation can also cost anywhere from $12,000 to $16,500, according to EnergySage, a platform that researches and compares solar installation prices and companies.

To install the Powerwall as part of a solar-plus-storage system requires an energy system like solar. An average of 5 kilowatts (kW) solar energy system costs between $9,000 to $15,000 depending on the location and the equipment.

Although it might be costlier than other options in the initial stages, installing a solar-plus-storage system can be a worthwhile investment. The Powerwall can be used as a backup generator. Tesla owners can also use Powerwall for the home as well as to charge their electric vehicles.

Note that Tesla bundles its Powerwall with its Solar Roof product (previously sold separately). The Solar Roof, unlike solar panels, replaces a home's entire roof—replacing standard shingles with tempered glass panels.

Tesla's Megapack

The Powerpack is a grid battery, which is being phased out and replaced with the Megapack. This battery is intended to provide electric energy for much more than just a single home. One of the greatest advantages is the ability to potentially take an entire interconnected ecosystem entirely off the grid. The Megapack is also known for its extraordinary backup capabilities. The complexities of the Megapack limit its use on a large scale.

Competition in Electric Batteries

Tesla relies heavily on Panasonic for much of its battery manufacturing and car batteries, although it's tried to reduce that reliance of late. Other electric car manufacturers are also making inroads.

In-home and grid batteries, Tesla is not the only manufacturer. In home-powered solar batteries, Tesla competes with LG, Orison, Sonnen, SimpliPhi Power, and Sunverge. In electric grid energy, the contenders include Strata Solar, AES, and NextEra.

Electric car batteries and solar-powered battery charging are technologies that are evolving. For car buyers, a Tesla car still ranks at the luxury sportscar level when it comes to price, but these prices are falling.

For home and grid energy, the goal is to reduce costs through stored energy. Home and grid costs can be significantly reduced when stored energy is used but manufacturing and installation costs still make the implementation cost high which requires longevity for an actual return on the investment.

It's worth noting that Tesla is still very much a car company that relies heavily on car sales, leasing and related services—roughly 87% of revenues in 2022 came from the automotive business. The gross profit for the energy generation and storage segment for the same period was $288 million.

The Bottom Line

Tesla is one of the world's leading providers of electric cars, and the company also manufactures rechargeable batteries for those vehicles as well. As demand for the vehicles improves, the company hopes to scale up its battery business to become a global provider.