From the rubble of failed energy industrial policy initiatives—Solyndra, Fisker Motors,A123 battery for example—we are told by the mainstream media that there is a success to celebrate.
Tesla Motors has seen its share price climb far faster than the market. Its Model S was named Motor Trend’s car of the year. And, there has been much fanfare about its early repayment of its government loan and its first quarter profit. All of this is supposed to convince us that some energy subsidies do work. But like most stories, the real story takes some digging.
The Wall Street Journal and LA Times have thrown some cold water on the Tesla miracle. And like the Wizard of Oz, it turns out that there is not much there there when the curtain is pulled back.
While the Tesla Model S sells for $7000, the federal government and state tax credits, and incentives can add up to $45000 per car according to the LA Times. Tesla biggest source of revenue is not from selling the Model S, it comes from selling nothing in the form of zero emission credits.
A number of states require automakers to meet quotas for ZEVs or purchase credits. Tesla has a monopoly on those and according to the Wall Street Journal could collect $250 million in credit sales this year. Selling something that it doesn’t make is the route to profitability. But, this is a short term boon created by government, not the forces of supply and demand. When automakers come out with their ZEVs, Tesla’s primary source of revenue will evaporate. Silicon Valley’s venture capitalists, who are part of the Tesla venture, will make a windfall by selling short before its bubble bursts. And, while these venture capitalists will add to there wealth, it is worth asking why they weren’t willing to put more skin in the game?
The big challenge to cars like the Tesla S is not the assembly or coming up with a wow design, it is finding a breakthrough technology to lower battery costs. With today’s technology, battery packs for electric vehicles cost about $800 per kWh and it takes 1600 kWh to power these cars. According to the National Academy of Sciences battery costs will have to drop to about $300 per kWh to be commercially viable. NAS doesn’t see the needed breakthrough anytime soon.
Tesla is just one more example of how the federal government and states like California are making the “Baptist and bootlegger” theory a proven business model.