Shares of electric-car maker and battery company Tesla Motors (NASDAQ:TSLA) closed about 9% higher on Wednesday. Shares jumped following news that the company received a large order for its lithium-ion batteries designed for energy storage from SolarCity (NASDAQ:SCTY). Here's what Tesla investors need to know.
"SolarCity has selected Tesla Energy to supply the batteries for a first-of-its-kind solar array and energy storage system to be built for Kaua'i Island Utility Cooperative," according to a Tuesday press release from Hawaii's Kaua'I Island Utility Cooperative, or KIUC.
A Tesla spokesperson told the Motley Fool the company stands by the press release.
The order followed "a comprehensive competitive solicitation in the battery marketplace," read the release, suggesting the deal had more to do with Tesla's competitive offering than the two company's commonalities in their largest shareholders: Elon Musk. Musk is the chairman for both companies -- and the CEO of Tesla Motors. Musk has said he spends about 5% of his time working on SolarCity.
Indeed, the terms of the deal appear to be competitive: "Under the terms of the 20-year contract announced in September 2015, KIUC will pay SolarCity 14.5 cents per kilowatt hour, only slightly more than the cost of energy from KIUC's two existing 12 megawatt solar arrays, whose output is available only during the day."
The magnitude of the deal is notable. The order is for 13 megawatts of electric storage from Tesla's Powerpack system -- a deal that is likely the biggest utility-scale storage project in North America to date.
Already receiving most of the required state and county approvals, it's looking like the deal will go through. But it could still face hurdles as the project is now waiting for final approval from the Hawai'i Public Utilities Commission. The press release noted that KUIC and SolarCity are together requesting an accelerated review of the project "so that construction work can begin by April with a goal of being in commercial operation by the end of 2016."
A model for the future
There are a couple of implications for Tesla investors.
First, the scale of the potential deal suggests Tesla's energy storage business is ramping up quickly. Tesla's energy storage business, called Tesla Energy, was introduced less than a year ago.
Tesla said in its most recent shareholder letter that demand for its energy products was "strong." To help meet demand, the company transitioned production of its energy products to its Gigafactory in Nevada earlier than expected.
This deal is representative of Tesla's confidence in its production ramp-up or energy products.
Second, the project could serve as a model to solicit similar orders from utility companies in the future.
"The proposed SolarCity/Tesla project is believed to be the first utility-scale system in the U.S. to provide dispatchable solar energy," the release explained, "meaning that the utility can count on electricity being available when it's needed, even hours after the sun goes down."
Any news of big orders for Tesla Energy is good news for Tesla investors, as the company noted in its most recent shareholder letter that the segment is already achieving positive gross margins and is on track to be a positive cash contributor for the company even if growth occurs rapidly.