Will the battery gigafactory be Elon Musk’s waterloo?

Elon Musk, Tesla Motors’ CEO, has been on quite a roll. In just the last 15 years, he cofounded PayPal (which now moves hundreds of billions of dollars of currency every year), started up Tesla (which now features a market cap about half that of General Motors [GM]), founded SpaceX (which recently launched the Deep Space Climate Observatory satellite), and was instrumental in the founding of SolarCity (which now holds a nearly 40 percent share of the solar electric market).

At virtually every step, Musk has been denigrated by short sellers, naysayers, and business journalists, but his winning streak continues. According to a headline in a CNET Magazine last year, “Second-Guessing Elon Musk Is Turning Into an Expensive Lesson.” Sooner or later his detractors will be right about something, as winning streaks don’t go on forever. Indeed, is Musk currently charging onto the very battleground on which he stumbles?

Last year, Musk kept the world guessing while he figured out where to locate his company’s battery-manufacturing Gigafactory—which, when it’s completed in 2017, is expected to produce more lithium-ion (Li-ion) batteries than the current combined production of all manufacturers worldwide. By producing at such scale, Musk predicted that Tesla would drive down battery costs by 30 percent. We know now that the Gigafactory will be located near Reno, Nevada, and will cost $5 billion to construct. What we don’t know is whether it will have a similarly outsized impact on the electric vehicle, electric storage, and photovoltaic (PV) markets or whether it will be a monumental bust.

The plot thickened a few weeks ago, when Musk announced that Tesla was developing a battery for the home market. Business journalists were quick to note how disruptive those batteries could be to the entrenched utility industry, especially when combined with SolarCity’s PV panels. A few remaining Musk skeptics (okay, just me) wondered whether the Tesla home battery was really a disruptive threat or a sign that Musk is in over his head.

Here’s the skeptic’s take on the Tesla home battery: Tesla is actually under a lot of pressure. Low gas prices can’t be good for electric car sales, even Tesla’s. Competitors that have either announced plans to release models designed to compete with Tesla cars or are rumored to be planning on doing so include GM, Porsche, Audi, BMW, Mercedes, and even Apple. Sales in China have been well below expectations, and Tesla’s chief marketing officer in China quit just a few weeks ago. The handwriting is on the wall, and it says that Tesla is not going to sell enough cars to support the output of the Gigafactory. Instead, Musk needs to find more ways to sell those batteries, and find them fast.

Selling batteries to homeowners is not going to be easy. There’s a good reason why so few of us have large battery banks in our homes, and it’s not because there aren’t any for sale. Batteries are expensive, and the advantages they offer homeowners are few. The majority of homeowners with PV panels get most of the benefits of batteries by hooking up their panels to the grid at little or no cost. For homeowners without solar panels, the grid in most locations is sufficiently reliable that there’s little to gain from having battery backup. If Musk is going to sell those customers batteries, he’s going to have to sell them much more cheaply than current prices, and it’s not clear that a 30 percent cost reduction is going to be enough.

Musk isn’t the first corporate executive to make grandiose claims about a battery product and then be pressured to succeed. On just about the same day that Musk announced the Tesla home battery, Steve Levine, a journalist and an adjunct professor at Georgetown University, released a book titled The Powerhouse. It tells the story of the battery-manufacturing start-up Envia, whose product was touted in 2012 as a major breakthrough by the Advanced Research Projects Agency for Energy (ARPA-E), the federal government’s energy technology incubator. GM even bought into the dream, investing at least $7 million on top of the $4 million poured in by ARPA-E. But it was not to be, and ultimately GM’s engineers determined that the Envia battery could not achieve the performance promised by the company. There were even allegations that Envia didn’t own some of the technology on which its battery was based. By the end of 2013, GM backed out of the deal.

Envia has plenty of company in the overpromise-and-underdeliver club. For another, there’s A123 Systems, the 2005 battery start-up that promised to produce Li-ion batteries with higher power density and faster recharge time. The company received a $249 million federal grant in 2009 but filed for bankruptcy in 2012. Over the past century, a countless number of companies have been making extravagant battery claims and ultimately failing. It was none other than Thomas Edison who was quoted over 130 years ago (originally in the Boston Herald but more recently in an article by Steve Levine) as saying, “The storage battery is, in my opinion, a catchpenny, a sensation, a mechanism for swindling the public by stock companies. … Scientifically, storage is all right, but, commercially, as absolute a failure as one can imagine.”

When I visited the Thomas Edison National Historical Park in West Orange, New Jersey, the guides told me that Edison made more money off the battery than any other of his inventions. He surely understood how many human desires could be met with an inexpensive, light, and compact battery. He must have also understood how resistant battery technology is to making such a product feasible. Many have tried, but few have succeeded at more than eking out small incremental improvements.

Like Napoleon, who led France to victory in multiple wars, Elon Musk is now facing his own potential Waterloo. So far, he has prevailed against overwhelming odds. If he can master the intricacies of the electric battery, he will march on to unprecedented success. Musk may well find, though, that overcoming the inherent resistance of the electric battery to yield great increases in performance, or great decreases in price, is a bigger challenge than even he can overcome.

http://theenergycollective.com/jayirwinstein/2198531/will-battery-gigafactory-be-elon-musk-s-waterloo