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What Investors Miss About Tesla Energy - The Motley Fool

There is more to Tesla's giant batteries than meets the eye.

Key Points

  • Renewable energy is not enough to decarbonize the US grid.
  • Software is key to Tesla's energy storage turning a profit.
  • But that software faces larger structural hurdles before it can succeed.

For electric vehicle maker and renewable energy stalwart Tesla (NASDAQ:TSLA), batteries are a lousy way to make money. Lots of companies compete to make them cheaply, keeping batteries' profit margins low. To cash in on them, Tesla needs to add brains to batteries' brawn – and luckily for Tesla, its Autonomous Control software does exactly that. 

When paired with renewables and storage, Tesla's software holds the power to disrupt the U.S.'s roughly $400 billion electric utility market and create a new era of abundant energy, distributed power, and virtual power plants – a massive opportunity that too many investors are completely overlooking. 

How energy storage software works

The US grid suffers from polluting power plants, wasted electricity, and blackouts. It must also maintain a delicate balance-constantly predicting the exact power supply and demand. Solar and wind cannot solve these problems alone; these sources produce the most energy at a time with relatively low demand. But adding energy storage solves this intermittency problem, adds an extra margin of safety against blackouts, and reduces the grid's carbon footprint. 

With Tesla's control software, battery owners can buy or sell energy to one another in real-time, switching between using battery power, on-site generation, and grid power at the drop of a hat. One part of the software suite, Autobidder, helps utilities and homeowners use the cheapest, most efficient power source at any given time. Autobidder learns when to draw on power stored in batteries for customers' own use, and when to sell that stored power to others for maximum profit. Powered by machine learning, this software continuously improves its ability to forecast electricity prices as it gathers data from different geographies and regulatory environments. 

Tesla Powerpack

TESLA POWERPACK. SOURCE: TESLA, INC.

Why Tesla is winning

Tesla's smart energy storage software leads the industry because it has the broadest reach, ties in with Tesla's full suite of energy products, and has amassed a track record of strong performance. Autobidder runs on over 1.2 gigawatt-hours (GWh) of Tesla's commercial storage – enough to light up over 100 million LED bulbs.This vast storage network ensures that Tesla collects a mountain of diverse, valuable data to improve its software's performance. As in the race for autonomous driving software, the business with the best data wins. 

Tesla's size and willingness to handle tasks in-house allow it to run software on its own servers while rival products rely on third parties to provide computing power and web hosting. Tesla handles everything from programming software to building solar roof tiles itself. By taking on these tasks, Tesla should be able to cut costs, make Autobidder price competitive, and keep control over the entire user experience. And by making many of the batteries that Autobidder runs on – Megapacks and Powerwalls – Tesla Energy may have another opportunity ahead. Right now, Autobidder works with most battery packs. But Tesla could tweak the software to get better performance out of its own battery products, driving customers who are already using Autobidder to invest in Tesla's batteries, too. 

The Hornsdale Power Reserve (HPR) in Australia is a testament to Autobidder's success; no other software can boast results this impressive and on such a large scale. The HPR is the largest lithium-ion battery in the world, and Tesla's Autobidder has allowed it to save customers $116 million in 2019.The giant battery has intervened during blackouts or coal shortages, providing affordable energy and stabilizing Australia's grid. In Vermont, Green Mountain Power (GMP) has built a successful virtual power plant by linking thousands of residential Powerwalls, using Autobidder to store energy across that network and release it at times of peak demand. This clever setup saved GMP customers $3 million in 2020 alone.

Why energy storage software has a long growth runway

Tesla CEO Elon Musk said that Tesla's energy business could become as big as its auto segment on Tesla's Q3 2019 earnings call. That's not such a crazy idea considering that global battery deployments in 2021 will grow 156% year over year. From there, deployments are expected to reach 70GWh in 2030, compared to 4.9GWh in 2020.A wave of sustainability pledges, renewable investment, and declining battery prices should further drive demand for storage – and expand the market opportunities for Tesla's Autobidder. 

Autobidder revenue will have a better chance to grow as Tesla Energy moves into new markets and customers who have Tesla batteries, opt to buy the software as well. Tesla Energy is making its first move into Texas, installing a 100-megawatt battery in Angleton and becoming a registered utility.This Texas project is one application, but Tesla installs much more energy storage globally over 3 GWh in 2020 alone.Autobidder, in total, only runs on 40% of that, leaving a huge opportunity for the software to make money on Tesla's existing storage. 

A future tangled in power lines

Although Autobidder has some huge tailwinds behind it, renewable energy and battery storage still get held back by the transmission lines that send that power between generation plants and homes. In Vermont for example, the Public Utilities Commission has denied a new solar project because the grid does not have enough capacity for more energy production.

A Princeton studyfound that the US needs to triple its transmission infrastructure by 2050 to decarbonize the grid. And while it can take about one year to build a generation project, transmission infrastructure typically requires three to ten years of convincing landowners to sell plots and receiving approval from numerous regulators.

Unfortunately, the study also revealed most of the potential locations for new solar or wind farms lie in the middle of the US, not where most Americans live. In the worst-case scenario, Autobidder's utility applications could be limited to regions where renewables make the most profit and grids can handle more renewable power.

Even with those transmission problems looming, Tesla's Autobidder stands in a prime position to improve the grid. It has the early lead and growth trajectory required to become the most popular and profitable solution in energy storage software. 

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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.

Zane Fracek owns Tesla. The Motley Fool owns and recommends Tesla. The Motley Fool has a disclosure policy.