In February last year, Obama set an ambitious target of having one million electric vehicles on American roads by 2015, in a bid to reduce the country’s dependence on oil and to create a cleaner environment through lowering emissions. The government plans to achieve this by setting up a number of incentives to encourage both manufacturers and buyers of clean fuel vehicles. Here we discuss how some of these incentives can aid Tesla Motors (NYSE:TSLA) in its attempt to establish itself as a large scale electric vehicle manufacturer in the long term.
The Department of Energy (DOE) provided a low-interest loan of $465 million to Tesla in 2009, in order to help accelerate the production of electric vehicles. According to its annual report, around $364 million of this loan was used in the development and production of the Model S. Tesla will begin repaying the loan at the end of this year. The company believes that from next year onwards, cash flows from the sales of the Model S will be sufficient to fund its operations going forward.
Plug-in EV Tax Credit Boosts Tesla’s Margins
Starting 2010, plug-in EV buyers who satisfy certain requirements are eligible for a tax credit of upto $7,500. Obama recently proposed increasing this tax credit to $10,000 and extending it to cover all “advanced technology vehicles” (ATVs).  According to the Alternative Vehicle Data Center, ATVs are “light-duty vehicles or ultra-efficient vehicles that meet specified federal emission standards and fuel economy requirements”. The tax credit benefits Tesla by allowing it to charge a higher price on its vehicles, thus receiving higher margins. For example, the base variant of the Model S is priced at $57,400, but the buyer effectively pays only $49,900 due to the tax credit.
Proposed Increase in Average Mileage Requirements May Give Tesla Advantage over Competitors
A change to the regulation on the average mileage of cars and trucks was also proposed in which all auto manufacturers would be required to double the average mileage of all cars and trucks they sell by 2025. Until last year, the required mileage was 28.6 miles per gallon. According to the new regulation, the requirement has been increased to 54.5 mpg. In a recent test, the Model S got a MPGe (miles per gallon equivalent) rating of 89. To put this into perspective, the Audi A7, one of the Model S’s main competitors, has an average mileage of 22 mpg.  We believe that regulations such as these have the potential to accelerate the growth of the burgeoning EV market.
ZEV Credits Increase Tesla’s Average Revenues per Vehicle Sold
The laws in a number of US states such as California, Massachusetts and New York provide that manufacturers of zero emission vehicles (ZEVs) are eligible to receive ZEV credits. Tesla, being a pure electric vehicle manufacturer, is eligible to receive such credits on every vehicle sold. It then sells excess credits to other auto manufacturers, who apply these credits to satisfy regulatory requirements.  This effectively increases the average revenue Tesla receives per vehicle sold.
We currently have a price estimate of $37 for Tesla Motors, which is about 30% above the market price.Notes: