Now that we know that Tesla (NASDAQ:TSLA) will indeed charge extra for Model 3 Supercharging, including both a pay-per-use model as well as a lifetime access option, the biggest question remaining is how the electric-car maker will price each respective option.
There are plenty of economic implications to Tesla's business, so let's dig in.
Initially, Supercharging for early Model S vehicles that did not include the service by default cost $2,000 or $2,500, depending on if the option was selected at the time of purchase or after. Tesla is keenly aware of the declining costs of technology over time, a notion that has guided the company's entire market strategy since inception. Combined with the fact that Model 3 will cost less, it seems intuitively obvious that lifetime Supercharging for Model 3 should cost less, too.
I tend to think that the option will cost $1,000 to $1,500 upfront, and slightly more if purchased after the fact.
Tesla ambitiously hopes to deliver 500,000 vehicles in 2018, and almost no one thinks that the company will hit this target. Let's conservatively assume that Tesla delivers 350,000 vehicles total that year, including 250,000 Model 3s. However, it's hard to estimate how many people will opt for Supercharging, since Tesla has never shared any data about early penetration rates back when Supercharging was optional.
Let's just say that 50% of customers buy the lifetime option, and the remaining half pay as they go or don't Supercharge if they only commute locally. If Tesla prices Model 3 lifetime Supercharging at $1,000 a pop, the company could bring in $125 million in 2018 alone just for that option. Greater adoption rates or higher pricing could increase that figure further.
For context, at the end of the first quarter, the net book value of the Supercharger network was $170.6 million and Tesla had $58.3 million worth of deferred revenue related to Supercharger access. That net book value figure represents four years of growing the network, so even $125 million would go a long way toward continued expansion. Each Supercharger location costs a few hundred thousand dollars to construct.
The EV charging industry is still incredibly young -- even younger than the EV industry itself. Companies are still trying to figure out different revenue models. Some locations offer public EV charging for free as an amenity, since the associated electricity cost is negligible. Some companies operate the networks and charge based on charging time.
Most third-party charging network operators are still struggling to find a financially viable model, and the overall lack of profitability is a key question for the charging industry. But Tesla doesn't need to profit on Supercharging itself, and likely doesn't intend to. The company has never looked to profit on services, instead seeing other strategic values in Supercharging. Once the Superchargers are built, maintenance and operational costs are minimal.
Additionally, since Supercharging rates adjust dynamically based on the vehicle's battery capacity and current charge rate, it might not be appropriate to price based on charge time. Instead, perhaps Tesla will charge based on kWh delivered, which is the most prominent marginal cost associated with operating a Supercharger.
While the national average for commercial electricity is about 10.1 cents/kWh, prices vary wildly by geography. States like Oklahoma get commercial electricity for as little as 6.7 cents/kWh, or less than half the 13.8 cents/kWh that Californians pay. Tesla should accommodate for regional differences while simply passing along that cost to the customer, perhaps with a modest markup only to help cover other operational costs.
Evan Niu, CFA owns shares of Tesla Motors, and has the following options: long January 2018 $180 calls on Tesla Motors. The Motley Fool owns shares of and recommends Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.