Guest essay by Alberto Zaragoza Comendador

In the past I’ve provided estimates of the money Tesla has made off this mysterious feature enabled by credits authorized by the California Air Resources Board (CARB). These estimates were very simplistic: basically I multiplied their ZEV revenue by 0.35 or a similar number.

Now, I have something more precise with references to back it up.

Key data points:

Key assumptions:

For simplicity purposes, I assume all S85s sold in California since and including Q4 benefited from the ZEV reclassification. That is, they moved from 4 to 7 ZEV credits. I’m including 12 days’ worth of sales in 2012Q4, but they were still ramping up production then so it must be less than 10% of the quarter’s sales. In any case it does not affect the overall math.

In 2012Q4, 1,500 Model S were sold in the state.

90% of Tesla ZEV revenue comes from California.

In 2012Q4, ZEV revenue was $35 million. We know that for all of 2012 it was $40.5 million and it was concentrated in Q4 (they didn’t even mention it in the other quarters). We also know that the $40.5 million figure includes undisclosed but small revenue from GHG credits.

Tesla had 0 ZEV credits as of October 1st, 2012. Very small room for mistake here, as they could have a tiny quantity left over from the Roadster or the few Model S deliveries earlier in 2012.

If you think some assumptions are unrealistic or whatever, fine. The Excel document is free for anybody to download and tinker with.

So how much is the battery swap worth?

There are two questions here: how many of those extra credits they have sold, and how many they have earned but not sold.

One can envision any number of scenarios, but as you’ll see, no matter how you square the numbers Tesla stands to make a lot of money off the battery swap.

· Assuming a 60% S85 mix, Tesla earned 51,029 ZEV credits from 2012Q4 to 2013Q3. Of these, 32,148 were standard and 18,881 were extra. Since Tesla transferred 37,742 credits to other manufacturers in the same period, the conclusion is that they sold their entire standard allotment, and then an extra 5,594 credits. So the extra ones made up 14.8% of their sales. With ZEV revenue in California at $148.3 million for the period, this would mean the company got $22 million it wouldn’t have gotten without the battery swap.

· Under the same 60% mix, Tesla would still have 13,287 credits in its balance at the end of 2013Q3, all of them extra. (CARB’s website says they had 7,888, which suggests they transferred credits to other states). When adding those they earned in 2013Q4, the number rises to 24,404, of which 17,772 were extra.

· So in this period they sold 37,742 credits for $148.3 million, which gives a per-credit price of $3,929. If Tesla just manages to get the same price it has gotten so far, their remaining extra credits will be worth $69.8 million.

Yeah. More than $90 million in total. And that’s only the ones they got before January 1st, 2014. With about 1,800 Model S sales in California, the value of their remaining credits grows by about $15 million – every quarter.

It happens that the fine for not meeting ZEV requirements is $5,000 per credit (see slide 93), so that’s about the maximum other carmakers are willing to pay for these things. Our $3,929 figure is therefore in the right ballpark, and it shows Tesla’s revenue from California ZEV credits couldn’t have been much lower than the figure I offered ($148.3 million).

In the Excel I’ve uploaded, I assumed a 60% mix. But you can just change the numbers to see what happens. Keep in mind that sales mix does not affect the number of standard credits they earn, because both the S60 and the S85 get 4 of those: it only affects the number of extra credits.

Even so, I offered an absurdly high estimate of Tesla’s California sales for 2012Q4 (2,400, which were in fact their global sales), so as to increase their standard credits. Assuming 80% of Model S sales were S85s, the results would be:

· 35,748 standard credits earned in 2012Q4-2013Q3, plus 24,196 extra ones

· So if they sold 37,742 credits, that means they sold their entire standard batch and 1,994 extra ones. In turn, that means 5.3% of their ZEV revenue was thanks to the battery swap.

· That’s “only” $7.9 million. But if they sold so few extra credits…

· …the result is they had 22,204 in balance at the end of 2013Q3. Remember CARB’s website says they had 7,888, so either they transferred massive amounts to other states or there’s something else I’m missing.

· Add in their numbers for 2013Q4 and they have 34,038 in the bank, of which 26,866 were extra.

· And which, at a selling price of $3,929, would be worth $105.6 million.

Yikes.

“But they won’t be able to sell so many credits! The market will get saturated!”

Really?

Here’s a reminder of how the ZEV mandate works. It requires every major manufacturer to sell a given percentage of zero-emission vehicles, and by 2025 it will reach 15% Even if the state as a whole passes that threshold (EV sales were 1% of the market last year), many manufacturers no doubt will fall below and will need to buy credits. And if history is any guide, the program will not be withdrawn in 2025. EV advocates will say the technology still hasn’t reached critical mass, whatever that means.

It’s true the market is oversupplied right now. But starting in January 2018, all credits will be allotted according to range alone, not refueling time – this will effectively close the battery swap loophole. More importantly, the number of credits per car will be drastically reduced, as 3 will be the maximum – no matter if your electric car goes 300 or 500 miles. See slide 66 of the previous document.

Get this: right now, Tesla gets about 6.5 ZEV credits every time it sells a car. The market cannot buy all those credits so they keep thousands in the bank and transfer thousands more to states other than California.

Then comes 2018, the ZEV requirements have gotten much stricter, and every car gets 3 credits at most. Meaning there will be no manufacturer with an excess of credits it can sell. And there will probably be many with a deficit. And Tesla will have a huge balance of credits from the good old battery swap days.

Tesla is playing the long game.

Oh, and the company may have the opportunity to stockpile even more credits before the supply gets tight, because Type V ZEVs will get 9 credits instead of 7 in the 2015-2017 period. It’s unclear whether regulators will allow this, as CARB has stated it intends to exclude battery swap from the fast-refueling category at the end of this year; that would bring Tesla back to 4 credits per car. Other carmakers are going to sell hydrogen vehicles in that period which also qualify for the 9 credits because of their range and refueling time, and they’re probably protesting the privileged treatment Tesla gets.

But if the loophole isn’t closed, the company will be getting an average of about 8 credits per vehicle: twice what they would get without the swap.

Even if you assume the price of these credits will crash, the sums are still substantial. For $1,000 per credit, in the 60% mix Tesla would get an additional $17.8 million for the extra credits it had in balance at the end of 2013 – plus the $22 million in extras it had already sold. Remember that’s only from those they had earned before 2014. So a price collapse will mean they’ll only get $39.8 million from this once-demoed-and-never-heard-of-again feature.

Let’s use the same price with the second scenario: 80% S85 mix and 2,400 California sales in 2012Q4. Their 26,866 extra credits are now worth $26.9 million, which combined with the $7.9 million they had already earned gives us $34.8 million. Again, that doesn’t include any credits they earn in 2014 and beyond.

And all of the above assumes there is a mega-crash in the price of ZEV credits – a 75% decline. Need I remind you that electric cars have never broken into the mainstream, and in theory every manufacturer must get 8% of its sales from these vehicles? And if they don’t reach that figure, their only way to avoid $5,000 fines is by buying those credits?

There is no question Tesla will sell all of its credits. The only question is for what price.

Final thoughts

Some will argue that the credits they have already sold aren’t worth that much – about $20 million. But that’s missing the point. Tesla faces no penalty for stockpiling these credits forever. Even if the regulation changes the minute this article is published, and the battery swap loophole is closed, Tesla will get to keep the credits it has in the bank.

No doubt they hope to wait and sell them when everybody has forgotten about the whole battery swap charade.

So don’t forget. Don’t let them get away with this. Spread the message, and next time the company comes up in a conversation, remember to politely direct the other speakers to this post. And this one, too.

Next time you hear about these guys, remember.

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