Tesla (TSLA) wants to become an electricity trader

Last week, Tesla Energy Ventures, a new subsidiary of electric car maker Tesla Inc. (TSLA), applied to become an electricity supplier in the state of Texas. According to reports, the company plans to sell electricity from the grid to customers and from its battery storage products. Its network transaction software can also enable customers for its solar panels to sell excess electricity back to the grid.

For those who have followed Tesla’s fortunes in the electric car industry, the Palo Alto, California-based company’s application may seem mind-boggling. But the move aligns with Tesla’s overall ambitions for its renewable energy business.

Key learning points

  • Tesla last week applied to become a retail electricity supplier in Texas.
  • The company’s move could boost profits for its young energy subsidiary.
  • It will also provide low-cost and accessible power to the company’s production facility in Austin.

Why does Tesla want to become an electricity supplier?

The simple answer to that question is that Tesla already makes devices that produce and store electricity. Examples of such devices are the electric cars, which are equipped with lithium-ion batteries, and the range of battery storage products for homes and businesses. Selling the power generated by these devices to consumers or to the grid is a logical next step.

Tesla’s move will benefit its operations. The filing states that it plans to build a massive battery storage facility near its production facility in Austin. The factory will provide the company with a ready-to-use and low-cost power source to make its cars.

Tesla’s submission should also be analyzed in the context of the Texas grid. The state’s electricity market has been completely deregulated, generating about a quarter of its total power from wind and solar in 2020. The Biden administration’s aggressive pursuit of clean energy is only expected to increase that share.

After a February fiasco in the state grid resulted in a shutdown of renewables and skyrocketing natural gas prices, Texas pledged to increase the role of battery storage in its grid. The Electricity Reliability Council of Texas (ERCOT), the state grid operator, has said it plans to install 3,008 MW of battery storage by the end of 2022, a sharp increase from the 225 MW generated by the end of 2020. ERCOT’s proposed installation increase represents a huge market for Tesla’s battery unit.

Tesla already has a lot of experience in this area. It has built battery storage plants in California and Australia and is building a massive battery storage unit in Houston, according to a June Bloomberg report. The unit is expected to serve wholesale power generators. In addition, the company plans to use an app and website to do business with existing customers for its batteries so that they can buy and sell power between themselves.

Tesla Energy Ventures: A Future Profit Center?

Tesla’s foray into becoming a retail electricity supplier could boost the sales of its energy services company. In its last reported quarter, the company said its power generation and storage business generated $810 million in revenue.

Analysts predict a positive future for its battery storage business. Alex Potter of research firm Piper Sandler wrote last year that battery storage could bring in more than $200 billion a year in revenue and grow to one-third of the company’s total business.

Immediately after the news was released, Morningstar analyst Travis Miller wrote that Tesla poses no direct threat to other major players in the Texas retail market, such as NRG Energy, Inc. (NRG) and Vistra Corp. (VST). According to him, the company will initially target its own customers to “complement” its offerings in electric cars, batteries, charging and solar panels.

However, further down the line, Tesla’s brand name and resources could work in its favor. “Tesla’s name recognition gives it an edge in a hyper-competitive market,” Miller wrote, adding that the auto company’s entry confirmed the company’s view that consumer tech or telecom companies will try to enter the retail energy markets.