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Why Tesla Motors Inc.'s Growth Won't Be Short-Circuited by Electric Grid Problems

By Beth McKenna - Mar 29, 2014 at 10:21AM

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The nation's electric grid is in sorry shape. But here's why it won't derail Tesla's growth.

Fellow Foolish writer Daniel Jennings laid out a well-reasoned argument for why Tesla Motors( TSLA 4.24% ) growth potential could be hindered by the United States' antiquated electric grid. I agree with his characterization of our electric grid, and believe it's disgraceful that we've let our country's overall infrastructure deteriorate. That said, I don't believe this is an issue that should concern Tesla investors any more than it should concern the average citizen.

It's a bit difficult to separate out reasons, as many are interrelated, but here are several:

Electric vehicle owners will mostly charge up during off-peak times
It's key to remember that a primary issue with the nation's grid relates to capacity at peak demand times, not simply capacity. Peak demand occurs during the daytime hours, when most businesses are operating. It's when air conditioners are cranked up the most during the summer months, and when most folks use their clothes dryers and other energy-sucking appliances.

Most electric vehicle owners are going to do the bulk of their charging overnight while they sleep. So they'll be pulling juice from the grid when daily demand is at its lowest. Now, of course, once there are a considerable number of people charging up overnight, the nighttime demand will increase. While I'm not an expert on the typical fluctuations in daily electricity demand, it would seem that usage during off-peak times is so much lower than demand during peak times, that it will take many EVs in the same general area charging up at night before a capacity issue is reached.

Tesla's growth trajectory gives time for electric supply issues to be worked out
While Tesla is growing nicely for a new car company, the number of U.S. residents who will own a Tesla electric vehicle (or any EV, for that matter) -- and, thus, are powering up at home or elsewhere -- will almost surely be a drop in the bucket through at least 2017.

Here's a brief rundown of the numbers: Tesla sold 22,477 Model S sedans in 2013, with about 19,000 going to U.S. residents. It expects to deliver more than 35,000 vehicles in 2014, with half to slightly more than half of those likely going to U.S. residents. Tesla's Model X crossover is slated to launch in spring 2015, and there's reason to believe it will sell at least as well as the Model S. I'll stop here, as you get the point: good growth, yet minuscule numbers compared to the overall auto market.

It won't be until Tesla's more affordable Gen III sedan hits the roads in any fairly substantial numbers that we need to concern ourselves with electric supply issues, in my opinion. This mass-market vehicle is targeted for a launch in "approximately three years," CEO Elon Musk noted in last month's earnings conference call. Given that everything takes longer than expected, a late 2017 launch is probably the best-case scenario. So we're talking more than four years for any fairly substantial sales of the Gen III. More important, we're not talking about EV sales going from 0 to 60 -- to use auto lingo -- in an instant, which would surely cause grid issues. More than likely, EV sales (in general) will steadily increase over time, which will give utilities and others time to work on solutions.

Where there's an issue, there's usually a business opportunity
Let's continue with the above assumption that there will be an eventual issue with the grid if EV-mania strikes the American public. It seems to me that we can count on what we call "American ingenuity" to provide a solution. Where there is an issue, there's almost always going to be an entrepreneur who comes up with an idea to address it if there is money to be made in doing so.

Besides, technological advances or changes are always going to present some new challenges alongside the new benefits gained. This is usually no reason to put the brakes on new technology. When the country's primary mode of transportation started changing from horseback to gasoline-powered autos, there were surely people who asked how they would buy fuel when there was no national infrastructure. And so on...

There will likely be increased solar solutions
Solar power systems, in general, are going to become more predominant as installation costs drop and companies, such as SolarCity, offer PPA programs. In power purchase agreements, the systems are owned by the solar company, often in a partnership with a financing company, and leased to homeowners and other building owners. A primary benefit is that building owners put little or no money down up front ; they simply pay a monthly fee for their power usage. So an increasing number of EV owners will likely be "going solar" over time. In addition to not taxing the grid, some of these folks will actually supply excess power back into the grid.

Additionally, Musk is chairman of SolarCity, which is run by his two cousins. There is good synergy between the two companies: they partnered last year to develop batteries to store solar energy, and Tesla's planned "Gigafactory" will supply lithium-ion batteries for this partnership. There is surely additional potential for these companies to work together to increase solar power use in general, and specifically among EV owners.

Foolish final thoughts
The sole issue Tesla investors should concern themselves with is its Gigafactory, with most everything else being noise. Battery cost will be the key to Tesla being able to profitably manufacture its gen III sedan, which, in turn, will be the key to Tesla's long-term success. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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