Tesla is a famous company thanks to its iconic electric cars. But fundamentally, Tesla is less a car company than it is a battery company. The company underscored that fact yesterday when it announced a contract to build the world’s largest lithium ion battery installation in South Australia. Tesla didn’t disclose the deal’s value, but given the size of the batteries involved it’s likely in the tens of millions of dollars.
We can expect to see a lot more of these projects in the coming years as the world moves to intermittent renewable energy sources like wind and solar. And that — along with the rise of electric cars — is going to strain the global supply of batteries. The batteries in electric cars and grid storage systems are way, way bigger than the battery in your cell phone, and so companies are scrambling to build bigger battery factories to accommodate the soaring demand.
Tesla has been ahead of the curve here. In 2013, the company announced a massive battery factory in Nevada that it touted as having as much capacity as the rest of the world’s battery factories put together. That’s no longer true today, as other companies have vastly expanded their own capacity. But building this “Gigafactory” has given Tesla a reliable source of low-cost batteries while deepening the company’s expertise in battery manufacturing.
The ultimate goal here is to maximize economies of scale in battery production. Like most manufactured products, batteries get cheaper if you make them in larger volumes. The more markets Tesla can find for its batteries, the larger its battery factories can be, and the cheaper its batteries can get.
“We’re going far upstream in the cell manufacturing process,” said Tesla Chief Technology Officer JB Straubel in a 2014 speech describing the strategy behind the Gigafactory. “We’re actually going all the way back to literally where the raw materials come from. Even those materials costs can be reduced if you drive the right volume and drive purchasing power into how you’re buying them.”
And because batteries are the most expensive component of an electric car, cheaper batteries will ultimately mean cheaper cars. If batteries get cheap enough, we could reach a tipping point where electric cars — with their relatively simple electric motors — will be cheaper to own and operate than conventional gasoline-powered cars.