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The Energy Storage Slump Tesla Motors Isn't Talking About

By Justin Loiseau - Oct 7, 2015 at 11:07AM

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Tesla Motors, Inc.'s Powerwall has a potential problem.

Image source: Tesla Motors. 

Renewable-energy doomsdayers have a date: Jan. 1, 2017, the day a federal tax credit is set to dry up. But fewer forecasters are talking about its effect on energy storage, and storage suppliers like Tesla Motors ( TSLA -6.42% ) have hardly said a word. Here's a brief breakdown, as well as one reason energy storage may just pull through.

Investment Tax Credit 101
Way back in 2006, the federal government decided renewable energy might need a nudge. It's a common practice for governments to motivate new markets with financial incentives, and this one equated to 30% of total investment expenditures for solar, wind, and other renewable energy products. In 2013, with the rise of energy storage solutions, the IRS ruled that solar energy storage solutions could also qualify for the credit. 

But all of that could come to an end. On Dec. 31, 2016, the Investment Tax Credit is set to drop from 30% to 10% for commercial companies. That spells potential trouble for a renewable energy market that relies on competitive pricing to stay afloat. And for energy storage solutions, the negative effects could be twice as large.

Energy storage slump?

Image source: Tesla Motors. 

When the tax credit drops off for solar, that'll mean fewer new solar projects. According to the Solar Energy Industries Association, the Investment Tax Credit has helped solar installation increase by more than 1,500% since its 2006 start. The U.S. solar market is far from saturated, but much of the low-hanging fruit has already been built, and higher prices will mean less opportunity to tip the comparative price scales of fossil fuel sources elsewhere.

For energy storage solutions like Tesla Motors' Powerwall, this equates to a double whammy: fewer solar projects to choose from, and more expensive storage solutions. That's not something potential renewable-energy customers want to hear, and it's not going to help Tesla's value-add.

So far, Tesla Motors has done a poor job of informing investors of the potentially bad news ahead. In previous annual reports, the company has clearly noted how a $7,500 federal tax credit drops its vehicles' sticker prices. However, in its mention of the upcoming Powerwall in its 2014 report and its more detailed update in its latest quarterly report filed just four months ago, Tesla Motors makes no note of the impending Investment Tax Credit retirement that could raise real prices by 20 percentage points and cut market opportunities in just 14 months. Instead, Tesla refers abstractly to the "material adverse effect" that an "unavailability, reduction, or elimination" of government incentives would have on its company. That kind of information does nothing to inform investors, and is simple boilerplate to cover Tesla's bumper.

A scaled storage solution?
Tesla's minimum $3,000 price tag per Powerwall module can seem difficult to justify for anything other than the satisfaction of continuing to capitalize on solar energy after the sun the goes down. However, there is hope yet for an energy storage solution with no tax credits and a slower solar market.

Tesla Motors markets its Powerwall as an infinitely scalable model, and some utilities are turning to storage solutions as an opportunity to reduce grid power purchases during peak hours. Unlike individual electricity users, utilities and some large corporations have to pay more for power when demand is peaking. Energy storage solutions allow them to draw down stored power (from solar panels or just grid power pulled during non-peak hours) to smooth out purchase prices.

In Minster, Ohio, for example, the local utility has built a new 7 MW, 3 MWh storage system that should pay for itself using this strategy, with no federal income tax incentives to speak of. 

What does this mean for Tesla investors?
Tesla Motors is trying to market a new product, but it needs to be more up front with investors about the downsides to its Powerwall solution. At the same time, investors should remember that tax credits play a limited role, and longer-term investments have the benefit of looking far beyond any government push to promote a certain product.

Investors will need to keep a close eye on Tesla's energy storage solution over the next couple of years -- the energy storage story isn't over yet.

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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