Elon Musk guest appearance on the CBS sitcom “The Big Bang Theory”. The renewable energy credit market has created a deal where Tesla competitors have been forced to buy zero-emission compliance from Musk’s company, or as one renewable energy expert put it, “The last thing a company wants to do is its competitors to pay to eat them. ” own lunch. “
Monty Brinton | CBS | Getty Images
Tesla’s ability to make electric vehicles without losing money has been a constant concern of investors. Since renewable energy loans have played a major role in the recent quarterly earnings of Elon Musk’s EV companies, they have been a source of frustration for Wall Street analysts – who have struggled to keep track of the sales of those loans in increase every quarter – and arouse skepticism among investors.
However, the renewable energy credit market is not in doubt. Actually, TeslaThe dominance of zero-emission vehicle loan trading – which is estimated to have sold more loans than any other business – is an example of a climate finance mechanism that works the way it’s supposed to work. Unlike traditional automakers, Tesla risked everything to make and sell electric vehicles. In the meantime, traditional auto companies have to pay differently for the decision to delay their transition to zero-emission vehicles with battery or fuel cell electrics.
“The last thing a company wants to do is pay its competitors to eat their own lunch,” said Simon Mui, deputy director of the Clean Vehicles and Fuels Group on the Defense Council for Natural Resources. But that’s exactly what automakers like Fiat Chrysler automobiles – who signed a private contract with Tesla to buy credit in the European market – had to do so.
“Automakers are trying to catch up, and they see that Tesla, like any other automaker that can produce more EV credits than they need, can monetize the credits. They did it from the start and it was a big element in Regarding creating a strong tailwind, “said Mui.
The NRDC expert compared the market to the US state-implemented renewable portfolio standards that have provided renewable energy companies in sectors such as solar and wind power with a market for sale to utilities. “That’s how the renewable energy industry started … We’ll see Rivian and Lordstown and all these other EV startups come out,” said Mui. “Rivian sees it and licks his lips too.”
The recent numbers related to this trade are great. In the second quarter of 2020, revenue from the renewable energy credit market was $ 428 million. That revenue is free, as opposed to the challenges an automaker faces when trying to get profit margins out of factory operations. It all boils down to the bottom line and the final quarter was the biggest ever for these loans at Tesla.
The role of RECs in the US auto market – in programs like California’s ZEV (Zero-Emission Vehicle) transfers – will grow in the years to come. Tesla CFO Zachary Kirkhorn recently said that his revenue from RECs will double in 2020. This will continue to be a source of consternation on Wall Street. Stock analysts need fixed numbers to build their financial models and try to gauge a company’s performance in a single quarter. The lack of transparency in trading renewable energy credits has hampered these efforts.
“It’s probably the biggest source of your bottom line over the past four quarters and a position so unpredictable,” said Garrett Nelson, senior equity analyst at CFRA Research.
“The market is not transparent like a stock or bond market,” said Nelson. “That makes it harder to model, harder to model. As an analyst, you know that this is likely to be the biggest swing factor any quarter when it comes to whether they meet or miss estimates, and that’s why we had this broad spectrum in massive earnings has been higher for the past four quarters. This position was bigger than expected. “
Renewable energy analysts agree on the lack of transparency. In contrast to California’s greenhouse gas cap-and-trade market, with prices and volumes transparent, most of the information about ZEV trading remains unclear. “Automobile companies may know what these loan prices mean, but it’s really hard to tell how much information they have in making decisions,” said Benjamin Leard, environmental economist and fellow at Resources for the Future, who made estimates Commercial market based on information required by California. “There is room for improvement,” he said.
The market for trading zero-emission vehicle loans is not transparent, but Resources for the Future and others have sought in recent years to shed light on Tesla’s trading activities and revenue per loan.
Resources for the future
CFRA Research analyst Nelson, however, does not disapprove of Tesla’s success in the climate finance market, even if that makes its job difficult.
“We see regulatory tax credits as a kind of reward for making electric vehicles that people want to buy. Aside from Tesla’s Models 3, X, and S, only one other non-hybrid battery electric vehicle model sold over 10,000 units in the US in 2019 (the Chevy Bolt). The vast majority of the other EV models didn’t sell well at all, “Nelson said. He added that while it is impossible to accurately estimate the revenue Tesla will generate on these loans due to a lack of information, he expects them to remain strong through the end of 2021. “Other manufacturers don’t have the EV sales that Tesla has right now,” he said.
CFRA expects renewable energy loan revenue to exceed $ 600 million in the next quarter, and Nelson said there is a direct correlation between Tesla’s electric vehicle market share, which continues to grow, and the level of revenue regulatory credit exists. Tesla vehicles accounted for 58% of all electric vehicles sold in the US last year, up from 14% in 2014. Loan income will continue to grow as Tesla continues to grow market share through 2021, “he said.
Tesla just reported one Record the Q3 delivery number.
“Deliveries have increased 30 to 40 percent this year while other electric vehicles have not caught on,” Nelson said. “That will change over time, but Tesla will continue to grow its market share over the next four to six quarters.”
Tesla didn’t respond to requests for comment.
Credit market to get stricter and bigger
To date, the zero-emission vehicle loan market “is basically just a sale of Tesla,” Leard said, although his research shows that Nissan also benefited less from it in the early years of that program because of the Nissan Leaf. “If you look at the list of companies that have traded each year, Tesla is one of them and maybe the only one among the sellers.”
He expects the market to become more rigorous and widespread, and for automakers this means either selling more electric vehicles or paying the loans through banking operations. Ideally, the climate mechanism will force more automakers to make the decision to invest in electric vehicle technology while putting more pressure on the credit market.
ZEV programs similar to California’s are in place in eleven other states in the country, including recently Colorado. Together, these states make up 30% of the US vehicle market. “Those credits, number and volume, will go up sharply and value can go up too,” he said.
“We have sold these loans and will continue to sell loans to auto companies and other regulated companies that can use the loans to meet emissions standards and other regulatory requirements,” Tesla said in an annual report.
Tesla’s revenue from auto registration loan sales increased from $ 360 million to $ 419 million and then to $ 594 million in 2017-2019. Sales in the second quarter of 2020 alone were higher than sales for the full year 2018.
There is also a federal greenhouse gas emissions bill in place that allows Tesla to sell excess loans to other manufacturers. These programs are on the rise, and that doesn’t take into account the US presidential election outcome, which could also be a major driver of climate finance.
“We have seen a tremendous expansion of these programs depending on the choices,” said Nelson. “A Biden win would be optimistic for EV manufacturers as it has proposed increasing the number of EV charging stations by 20 times the current infrastructure from 27,000 to over half a million.
Mui said ZEV programs will hit 40% of auto sales in the coming years, with more states considering. And the US is just a market with newcomers like Nio to benefit from China as well, whether or not it enters the US market in the near future. “All of these automakers are facing similar standards in the other largest markets like China and Europe. … The automakers are at a moment when they are either innovating or becoming irrelevant. That is why we see Tesla’s success in market value.” said the NRDC analyst.
By 2025 the California ZEV program requires that more than 16% of major manufacturers’ sales are pure zero-emission vehicles, either battery-electric or fuel cells, or through purchases in the credit market.
California also passed a ZEV requirement for advanced trucks earlier this year, which will help develop the credit market for Amazon-Supported Rivian and Tesla semitrailer program. And 15 US governors have signaled that their states will meet the ZEV requirements for commercial vehicles. “These are not only blue, but also red and purple conditions,” said Mui.
California Governor Gavin Newsom recently announced the state’s intention to request it All new car sales will run without gasoline through 2035.
The automaker’s innovation change is coming
Nowadays, automakers can only meet the electric vehicle sales requirement through passenger cars, but that’s about to change and automakers see the writing on the wall.
“These standards will not be lowered, air pollution will not be reduced as a problem, and governments will raise standards over time so that an EV product or two will not be enough. You will have to make a wholesale portfolio shift in each one.” Product line, “said Mui.
Teslas and Rivians won’t meet all demand, so traditional automakers will accelerate the pace of innovation, especially if they want to compete in China, he said.
GM recently made a significant investment in the Nikola, whose founder left the electric vehicle company shortly afterwards. But that huge shift in innovation could still be a tough investment decision for many auto gamers today. Today, when traditional automakers feel more cost pressures on the side of technology investments, they will go to the credit market to meet the demands. And as more states add more requirements, “it will increase the demand for these loans, which will increase the price,” Leard said.
“A company trying to make a profit and maximize profits can either choose to adopt technology or go into the credit market and buy from other companies what it is already doing,” Leard said. “In any case, auto companies are finding it hard to invest a billion dollars in new models in the short term, and the credit market is serving as a way for auto companies to meet and avoid the large capital investments they need to make now.” put a new car on the market … … If car companies don’t want to introduce new models, they can just buy loans for an indefinite period of time. “
For the zero-emission credits, it will continue to be “a seller’s market,” Leard said. As he says, are traditional car companies move in the right direction, with projects in the coming years like ford‘s electric F150 pickup and the electric Mustang Mach-E“The big boys, the Fords and GMs, these companies are still a long way from having a really well-selling electric vehicle on the market.”
And that seller’s market will be Tesla’s market for the foreseeable future.
“They are way behind Tesla, which is introducing popular, affordable electric vehicles. Tesla and other companies that are introducing electric vehicles are really going to make money in these markets, and ZEV programs will get a lot stricter over the next 5 to 10 years,” said Leard said.
Tesla’s credit strategy
Even if the market ultimately helps get more companies to make and sell more EVs as it should, with the percentage of sales that need to be ZEV, over time there will be auto companies that don’t have enough sales In order not to do so, buy loans, Leard said. “You have to go to Tesla and say we really need these loans and that will raise prices.”
In the first two quarters of 2020, Tesla had loan revenue of $ 780 million. To put this in perspective, Tesla achieved sales of around $ 12 billion in the first half of the year.
With record volumes of Tesla shipments expected to continue in the fourth quarter of 2020, though much of that can be attributed to the ramp-up of the Chinese factory, CFRA expects Tesla to be a net seller of these loans in the years to come.
Nelson estimates third quarter sales of $ 560 million and fourth quarter sales of $ 670 million. “Directional it’s going to go up over the next two quarters, but it’s more of an estimate. I don’t think anyone has a really good handle on where it’s going in other than that it’s going to be higher,” he said.
“It doesn’t generate revenue, but it has certainly helped increase profit margins,” added Mui of NRDC.
Ultimately, Tesla knows that depending on the credit market, it will not build a long-term, sustainable and solid auto business with profit margins.
“They really want a credit market as an added bonus on top of other healthy profit margins,” Leard said.
Tesla wants to show investors that they can make constant profit, or at least avoid consistent losses, without being dependent on loans. His CFO Kirkhorn has stated this after his huge income from the credit market in the second quarter, stating that over time the company expects ZEV trading to fade as a financial resource for the company.
“Analysts are complaining and the bears are questioning the quality of returns because so much is driven by RECs,” said Nelson of CFRA. “We see the credit market as efficient and it is a separate issue from the unpredictability of earnings forecasting. Tesla takes all of the risk and has many other hurdles to overcome and high fixed costs, and it is a capital-intensive business with high barriers to entry” , he said.
The Tesla stock analyst said Musk & Co. is doing business the right way: he doesn’t expect credit to be a profit factor in the future as other OEMs rise.
For one, GM plans to be All-EV in the future. Nelson said his view is that Tesla is buying time for it Lower battery costs to widen the competitive gap in EV range and cost and build a better moat compared to other manufacturers.
“That’s what they are trying to do. They are not trying to run a business that is based on the sustainability of EV credits. They do not assume that there will be no further cost,” said Nelson. “Could it use more transparency? Absolutely, but that will come in time and Tesla’s disclosure may improve. … The entire street would agree that they could do a better job by providing guidelines on the loans and the provide quarterly revenue. “
In response to the company’s second-quarter earnings statement, Kirkhorn responded to the latest analyst question on RECs, which focused on the fact that without the loan income, margins would have been much lower year-over-year by providing more information about the company, according to Nelson Future delivered from this source of income as Tesla has stated in the past, even if it remained less than detailed.
“I mentioned this in relation to regulatory lending. … We do not run business on the assumption that regulatory lending will be a significant contributor to the future. I am assuming that regulatory lending revenue will increase in 2020 will relatively double by 2019, and it will be some time. But at some point the flow of regulatory credit will diminish. “
For now, at least, it won’t be easier to measure Tesla’s success by its revenue stream in US dollars when it comes to RECs, but it will be easy to measure Tesla’s success at other automakers who are forced to Musk’s company paid for selling electric vehicles and collecting credits.
“We anticipate some automakers will take a slower path,” Mui said, but cited a compelling reason for automakers to move faster to making and selling electric vehicles: “They won’t promote this, but you can bet any company whether GM or Toyota or FCAdoesn’t want to pay Tesla to eat her lunch. “