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The Astonishing Economics of the Tesla Megapack

Tesla's Megapack is getting more attention. This is because it is being built at a massive scale in Lathrop, California and is using LFP batteries. And, there is much more.

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The Astonishing Economics of the Tesla Megapack

There are some astonishing economics of the Tesla Megapack that you may be missing. Tesla Energy has not made much of a profit and the numbers being touted seem too good to be true. Let's take a deep dive.

Megapack is not new - why have margins been low and profit low? Megapack was built in Nevada in the past and it didn't use LFP batteries - those are two main reasons. A Nevada Megapack was $461/kWh and a Lathrop Megapack is $615/kWh. Right away, the Lathrop Megapack draws much more money. Lathrop also produces a much bigger Megapack at 3.9 MWh -vs- 2.6 MWh and uses CATL batteries.

With Lathrop using LFP batteries that is about 20 to 30% less cost than the Nickel-Manganese-Cobalt (NMC) batteries per kWh. Also, the Lathrop Megapacks are priced about 33% higher. That's TWO huge cost boosts - the reduced price of batteries and the increased price of the Megapack overall.

Generation 2 Megapack -vs- Generation 1

When you put this together and see that Lathrop is producing 5 to 10 times more Megapacks, you also see economies of scale take place, which will drop fixed costs. Gross margins are about to explode higher.

Tesla has about a 2 year backlog on Megapack and only recognizes revenue in phases over the course of a Megapack's lifetime. It's likely we are still seeing just the revenue at the original price from Nevada. This will jump when Lathrop Megapacks start to get installed.

For projects signed after March 2022, prices increased to $576/kWh and jumped again to $615/kWh also increasing profit. Also, Lithium costs were stable prior to 2022, but then went to 5x to 6x in 2022. This was expensive for the NMC batteries Tesla was using. Margins will be artificially suppressed in the short term because of this.

Tesla's Energy Business posted 2 consecutive quarters of about 10% gross margin. If this becomes less in Q4, 2022, the cost of Lithium is probably why.

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Further Thoughts and Economics

For the market of Megapacks, does a high gross margin make sense for Megapack - can a high price be supported? I think so, because Megapack's value is immense. The backlog is almost 2 years and prices are almost certainly going to go up until this backlog starts to come down.

Capacity of the Megapack is about 8x and still, the backlog increased. This speaks to Tesla's pricing power, just like Tesla can do with its cars.

Let's look at the value Megapack brings to utility companies. Energy storage helps in the following ways:

* Lowers cost of generation and transmission of energy
* Can be paired with renewable energy to add more energy to the grid
* Energy arbitrage - the ability to buy low and sell high, energy

These benefits also get passed down to customers.

By adding about 300 MW of storage, ERCOT will generate approximately $1 billion in savings in 2025. This is from a one time purchase of Megapacks for $750 million. These savings will also happen each additional year after 2025 - they are recurring!

There is more. The U.S. has created the IRA for tax credits. Utility companies will only pay about half of the $750 million investment for the 15 year life of the Megapack. That's $1 billion - $325 million in savings for the utility company. That means Megapack could go to $1 billion in investment and still be a great investment.

A 50% gross margin is quite reasonable for the Lathrop Megapacks using LFP batteries and having pricing power with the IRA tax credits and the major benefits utility companies get. It's simply economics and utility companies would be insane not to take advantage of this.

There are over 1,000 gas and coal peaker plants in the U.S. providing 236 GW of power that are dirty and expensive. They are ripe for disruption. This equals about 236,000 Megapacks. Lathrop's capacity is 10,000 per year. New Megapack factories can and should be built. The total addressable market is nearly infinite with energy needs going up for the future.

50% margins on hundreds of millions of dollars per order with tax credits. This is astonishing and will surprise people.

I see Megapack contributing greatly to Tesla's revenue and profit in 2023, especially toward the end of the year. What do you think about Tesla's Megapack, will it add a lot of revenue and profit to Tesla? Will it benefit utility companies?

In Related News: Tesla FSD Finishes 2022 With 285K Users

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Jeremy Johnson is a Tesla investor and supporter. He first invested in Tesla in 2017 after years of following Elon Musk and admiring his work ethic and intelligence. Since then, he's become a Tesla bull, covering anything about Tesla he can find, while also dabbling in other electric vehicle companies. Jeremy covers Tesla developments at Torque News. You can follow him on Twitter or LinkedIn to stay in touch and follow his Tesla news coverage on Torque News.

Image Credit, Tesla, Screenshot

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Comments

Phil (not verified)    April 26, 2023 - 6:48AM

Where do you get your numbers from as they dont match with what I'm hearing in industry or by working from past accounts, the current price of Lathrop MP is about $550kWh + install. I get old Nevada MP to be to be $300-350/kWh. Would be interested to talk