Tesla’s Battery Swap Stations Will Help It Requalify For ZEV Credits In California

Tesla Motors (NYSE:TSLA) is now making its much hyped battery swap stations available to Model S owners in California. The battery swap station will be located opposite a Tesla station between Los Angeles and San Francisco. ^[1] The station enables the company to offer customers the choice of “faster or free,” meaning that when a Model S owner comes to a Tesla station, they have the option of a 30 minute recharge or a three minute battery swap for a small fee in the region of $50 – $60.

The company demonstrated the battery swap last year in a presentation that was centered on a video which showed the fastest gas station in Los Angeles filling out a gas tank in four minutes — the same time it took Tesla to swap a thousand pound battery for two cars. ^[2] Since then, the introduction of a titanium under body cover to prevent damage to car batteries has increased the length of the procedure to more around 3 minutes. Still, the reduction of the time required to swap a thousand pound battery to less than that required for filling  a gas tank is an impressive achievement. But, the Tesla swap station is interesting for other reasons as well. Below, we take a look at those reasons.

ZEV Credits

Earlier this year, Tesla Motors was stripped of its qualification to zero-emission vehicle (ZEV) credits in California. The state revised its rapid refueling rules, introducing a new standard that requires cars to be refueled to a range of 285 miles in 15 minutes. Tesla’s Model S can receive a 160 mile supercharge in 30 minutes does not qualify for those credits any longer. Meanwhile, fuel-cell backed vehicles, such as Hyundai’s Tucson and Honda’s FCX, which can be refueled in about 5-10 minutes, qualify for those credits. Prior to the introduction of the new standard, Tesla had been selling its excess ZEV credits to other auto companies. This was one of the reasons why Tesla turned a profit on a GAAP basis last year.

Since then, Tesla has become profitable with or without ZEV credits, which fell from $68 million in the first quarter of fiscal 2013 to $0 in the last quarter, while Tesla’s gross margin number rose from 2% to 23.6% over the same period. ^[3] Even so, once the battery swap station opens, Tesla will requalify for the credits. But in order to do so, the stations will have to be used sufficiently.

Qualifying All Cars For ZEV Credits

The logistics for the operation of a battery swap are simple. Users will need to pay $50-$60 for a swap and are required to pick up the battery on the return trip or pay an upgrade fee. So, consider that Tesla sells 5,000 cars in California next year. Assuming that each car covers a distance of 9,000 miles in the year and 900 miles are covered in round trips between Los Angeles and San Francisco. This means that each such car requires three battery swaps in a year. If a third of Tesla car owners can meet these requirements, then each of the company’s cars will qualify for the full ZEV credits. There are other ways in which the company can achieve this. For example, if even 1 in every 25 of Tesla’s cars operate only on the Los Angeles and San Francisco route. If each of these cars can swap a battery pack 25 times in a year-a reasonable number since each 9,000 mile covering sport sedan spends $1,350 on fuel a year, assuming a gas price of $3/gallon-then also all the company’s cars will qualify for the full credits. Either way, through some combination of these two extreme cases, the company should be able to meet these requirements.

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More Trefis Research

1. Tesla To Test Drive EV Battery Swapping, Breaking Energy, December 2014 [↩]
2. Tesla Model S – Battery Swap HD Official, Tesla Schweiz (Community Channel), YouTube [↩]
3. Tesla Investor Relations [↩]