TM - Tesla Big Battery In South Australia Delivers (Again) This Time On Inertia Services

• Tesla Lithium batteries are now validated by Australian Energy Marketing Authority for grid-scale inertia services using Tesla’s Virtual Machine Mode software.
• This is a world first for inertia services on an established grid, and it represents a significant step towards exit from fossil fuel-based power.
• Big lithium batteries now have an additional functionality validated (in addition to frequency regulation, short-term time shifting, etc.).
• At the same time, scale-up of flow batteries is happening.
• News about inertia services broadens the value of Tesla’s energy storage offerings.

Tesla ( TSLA ) is a huge presence in the world of electrified transport, and Elon Musk seems quite serious about building production of Tesla BEVs (Battery Electric Vehicles) to 20 million annually by 2030. This is a mammoth goal since the world's largest car manufacturer currently, Toyota ( TM ), produced 10.5 million vehicles in 2021. Tesla's Gigafactories are moving to produce 2 million vehicles annually, so 10-12 Gigafactories need to be in operation by 2030 to achieve 20 million vehicles. Given the above, it isn't a surprise that the other side of Tesla, grid scale battery offerings, is often overlooked. Here, I describe a significant new development in the battery storage story, which heralds a major reconsideration about how batteries are going to contribute to decarbonization of global power grids. Tesla is a key part of this development, and this is why Elon Musk insists that battery storage will eventually become half of Tesla's business. When considering an investment in Tesla, this is worth keeping in mind.

Tesla's Battery Software Products

It is easy to overlook Tesla's achievements that define the company. While Tesla's cars involve innovation at every level, from whole body casting to heat pump-based temperature control, the essence of Tesla is information collection and management. Tesla has a series of software products in the area of battery storage that is just as significant as its autonomous driving technology for its BEVs. Tesla lists five software products involved with its battery technology that are of interest to customers at all levels of battery storage. These are:

1. Autobidder

This product enables power producers, utilities and capital partners to monetize battery assets. It is a real-time trading platform that is about risk management and maximising revenue.

2. Powerhub

This is a monitoring and control platform for distributed energy resources, renewable power plants and microgrids. It is about maximising operational efficiency, uptime and asset value.

3. Microgrid Controller

This software maintains grid stability and reduces operating costs for energy sources within a microgrid. It is integrated with the Powerhub platform. It incorporates load and solar forecasting.

4. Opticaster

This software is designed to maximise economic benefits and sustainability objectives for distributed energy resources.

5. Virtual Machine Mode

This software helps replace mechanical inertia for a grid, which is traditionally provided using fossil fuel based resources. The software virtually emulates mechanical inertia. This means that megapack batteries have grid-forming dynamics to provide grid strength allowing response to added and rejected loads, maintaining quality voltage at interconnection points.

Here I consider two of the Tesla software products that are relevant to grid scale batteries.

Tesla's "Autobidder"

I've covered Tesla's Autobidder technology in relation to Australian renewable energy company Genex Power's (ASX:GNX) 50 MW/100 MWh Bouldercombe battery project. This involved Tesla supplying 40 megapacks for the energy storage and the Autobidder energy trading platform. Included in the deal was long-term revenue support from Tesla.

Today Genex announced acquisition of a second and much bigger (up to 2GW) battery storage project, Bulli Creek, also in Queensland, Australia. This involves a 5-stage project, with the first stage being a massive 400 MW/ 1600 MWh big battery energy storage system.

In its release, Genex provides hints about how it will finance this project based on its previously successful Bouldercombe Battery Project. Part of that deal involved a creative partnership with Tesla. I think there is a good chance that Tesla will be successful as the provider of its battery megapacks and Autobidder software.

Tesla's "Virtual Machine Mode"

In a world first, South Australia's big Tesla battery at Hornsdale (owned by Neoen ( OTC:NOSPF )) has been approved by the Australian Energy Market Operator (AEMO) to deliver grid-scale inertia services.

The Hornsdale Power Reserve in South Australia can provide up to 3 GW seconds of inertia in Virtual Machine Mode, which is ~50% of South Australia's entire inertia needs.

This is a historic key step in renewables providing grid services with no requirement for fossil fuel backup. This has obvious relevance to Tesla's emerging big battery energy storage business.

Flow Batteries

The above discussion focuses on lithium batteries because they are the technology that is increasingly being rolled out in partnership with renewables (solar PV and wind) projects. The lithium battery projects keep getting bigger and now GWh scale projects are being implemented. The actual kind of lithium batteries that are optimal for grid scale storage is an evolving story, which I'll consider elsewhere, but it is becoming clear that both NMC (Nickel, Manganese, Cobalt) and LFP (Lithium Iron Phosphate) batteries are being used.

Flow batteries represent another kind of battery technology which, while not suited to transport because the batteries are heavy, offers prospects to complement lithium batteries, which are perhaps better suited to shorter duration applications (e.g., frequency regulation, 0-4 hour storage operations). Flow batteries have the possibility of longer-term storage, and they can be completely charged/discharged on a daily basis. Flow batteries have been seen as a possible solution for many years, although the success of lithium batteries has meant that flow batteries have struggled to get scaled up and down the cost curve.

This may be changing as very recently a huge Vanadium Redox Flow Battery (VRFB) is being installed in China. This battery is based on technology developed with US flow battery company UniEnergy Technologies, even though this company was declared bankrupt last year. Chinese company Rongke Power has worked with UniEnergy over six years to build a 100MW/400MWh battery in Dalian, China. This battery was connected to the Dalian Grid in May 2022. This battery is the first stage of a project that will have a capacity of 200 MW/ 800 MWh. A second VRFB battery in China is being built by Canadian headquartered VRB Energy, whose majority shareholder is Ivanhoe Electric ( IE ), a mineral exploration company which has recently listed on the NYSE. This VRFB battery might have similar technology to the Rongke Power battery since both were part of a flow battery program in China.

Henry Miles' recent article mentions heavyweights Lockheed Martin ( LMT ) and Honeywell ( HON ) both with flow battery technologies, although the precise details of their flow battery chemistries are shrouded in secrecy. Both are talking about GWh scale of flow batteries.

Even if flow batteries become successful, it seems almost certain that lithium batteries will continue to have a significant place in grid level battery storage and this could become a crossover application with electric vehicles as V2G (Vehicle to the Grid) technology becomes adopted. Batteries with LFP chemistry might be more suited to V2G applications.

Conclusion

Most analysis of Tesla concerns its automotive business, no doubt because Tesla has transformed the electrification of transport, pulling just about every major manufacturer to plan to exit ICE (Internal Combustion Engine) manufacture in favour of BEV (Battery Electric Vehicle) manufacture. Since transport represents the biggest emissions sector (27%) in the US, the focus on Tesla's auto business is relevant. Emissions from energy (25%) and Industry (24%) are almost as large and so the new battery functionality reported here is a major development in the energy sector, which will facilitate exit from fossil fuels. The way that big battery projects get rewarded is evolving, but it is clear that energy storage through batteries is becoming increasingly important in the energy transition. This is not only about the batteries, and Tesla is pioneering software applications that not only enable technical features such as providing inertia services (Virtual Machine Mode) mentioned in this article, but also other aspects of commercialisation of big battery technology, such as Autobidder which is implemented in the Neoen Hornsdale facility in South Australia and will be part of the Genex Bouldercombe Battery project. These are important products that add value to the battery hardware.

Tesla is a challenge for investors to get their heads around, and most commentary focuses just on the automotive side of the business. Of 16 Seeking Alpha authors in the past 30 days, there were five buy, two sell and two strong sell recommendations, with seven authors on the fence with a hold recommendation. The 37 Wall Street analysts in the past 90 days were more bullish with 14 strong buy, seven buy as opposed to four sell and one strong sell; 11 analysts had a hold rating. I still struggle to find a good entry point, but I am clear that Tesla is a much bigger investment opportunity than just considering its BEV business.

I am not a financial advisor, but I follow closely the dramatic changes happening as energy and transport begin to become decarbonized. I hope that my commentary about Tesla helps you and your financial advisor to get a fuller picture of the overall Tesla offering as you consider investment in this space.

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