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Eagle Or Penguin: Will Tesla Batteries Fly In Commercial Applications?

We look at Tesla Powerwall and Powerpack prospects in the commercial application space.

Special emphasis is given to the much hyped "peak shaving" application and the dynamics that drive the application.

We see potential for several applications but skeptical of the timing and the size of the market.

In the past we have written about Tesla's (NASDAQ:TSLA) Powerwall battery in the article "Is The Tesla Powerwall Battery Hype Justified?"

What we have not covered in the last article is the prospects of the battery solutions in the commercial space. In this article we expand the scope of the battery discussion to include commercial, non-utility scale deployments. In our view, the scope of commercial applications is vast and both Tesla Powerwall and Powerpack could be targeted toward commercial applications.

Tesla utility storage prospects, which will be tied exclusively to the Powerpack product line, will be covered in a future article.

When it comes to batteries, it's important for investors to understand the regulatory context. There is a widespread agreement in the industry that battery technology today is rarely economical for energy applications and, similar to residential solar, the investment value depends on the largesse of subsidies and utility rate structures. This dependence has certain implications for investors.

If the solar revolution taught utilities anything, it's that new technologies can lead to unexpected arbitrage and cause major disruption to their business models. Arbitrage, as most readers know, exists due to market inefficiencies.

The major inefficiencies and the root causes of arbitrage in the utility world are:

- Customer tariff imperfections: Utility tariffs have been devised in times when there was little or no competition for the utility customer base. The arrival of competition means that creative financiers can exploit the gap between perceived costs of competing energy solutions.

- Historic utility incentive models: Utilities, by and large, are guaranteed a return on assets and have resorted to a practice of piling up assets without much consideration to end customer costs. This has created a situation where utilities are asset heavy and the energy prices are often driven by outdated or expensive infrastructure. This dynamic has made utilities vulnerable to newer deployment models.

When competition started exploiting these inefficiencies, the first response of utilities has typically been one of blissful ignorance or denial. Especially, when it comes to solar, utilities have initially underestimated solar and ignored its technological price curve and exponential growth potential. In some cases, utilities unwittingly supported asset purchases and pricing/subsidy structures that were poorly thought out without regard for an emerging threat. In geographical areas with a significant solar penetration, utilities are now well past this phase. There is now a clear and widespread awareness of the threat of solar.

The second phase of response has started more recently with utilities attempting to fix the arbitrage problem by amending tariffs. Within the next few months and...