Tesla Motors, the luxury electric car company, will release its fourth quarter and full-year earnings reports on Wednesday after markets close. Their flagship project is the massive “Gigafactory” being constructed outside of Reno, Nevada to produce batteries for their future production of electric cars. The project site was finalized in October 2014, with construction in the industrial park beginning even before the agreement with Nevada was formally concluded. Tesla estimates the Gigafactory will be completed in 2.5 to 3 years, and it will revolutionize the whole electric vehicle industry.
The ambitions of the Gigafactory are unprecedented. Its goals are to produce 50 GWh in annual battery production by 2020, enough for 500,000 Tesla cars — exponentially higher than its vehicle production in 2014 (expected to be announced at around 35,000). The finished complex will be powered by renewable energy and aims to be a net-zero energy factory. The Gigafactory’s advanced technology and economy of scale give CEO Elon Musk and industry analysts real hopes of it bringing down battery production costs to the “holy grail” level of $100/kWh, which would make electric vehicles (EVs) price-competitive with conventional cars. Currently, the battery pack of an EV accounts for 25% of its total cost, and while Tesla has not released its precise battery costs, Musk has cited a conservative estimate that the Gigafactory will reduce battery costs by 30%.
Panasonic, arguably the world’s leading lithium-ion battery producer, agreed in July 2014 to partner with Tesla in jointly building and operating the Gigafactory. Of the project’s total cost, which could reach $5 billion, Musk said that Panasonic will cover 30-40%. Panasonic also agreed that a 30% reduction in battery costs by 2017 is a conservative estimate with considerable upside.
Tesla considered locations in several states for the Gigafactory, but the incentives that Nevada offered were outstanding. The terms included a 20-year abatement of sales tax and a 10-year abatement of property tax, which, along with some smaller tax breaks, add up to $1.2 billion that Tesla will save over the next decade. Still, these incentives will cover only 5% of the construction cost, Musk wrote, and just over 1% of the operational and upgrade costs over a 20 year period which he expects to be approximately $100 billion.
In return, Nevada will reap major benefits for decades. With the exception of the land acquisition, all of the incentives are performance based, meaning that Tesla must deliver according to the plan in order to receive them. In other words, while Nevada shares in the upside, Tesla alone shoulders the downside. Furthermore, Tesla promises 6,500 jobs for the Reno area, which is expected to experience a 20% boost in economic activity from the construction and operation of the Gigafactory. The value of properties in the area have increased, even sparking a land grab by real estate developers in anticipation of workers with good-paying jobs wanting to live nearby. Reno’s local economy will benefit further as it attracts other high-tech startups and additional partners for Tesla and Panasonic, aiming to be the new Silicon Valley.