Where are the customers?
The return of battery electric vehicles (BEVs) to the US market nearly a century after internal combustion technology swept them aside is one of the most compelling automotive stories of the last decade, bringing a much-needed injection of fresh ideas and enthusiasm to an increasingly mature and commodified industry. Though BEVs remain less than 1% of global auto sales, they have become immensely important to automakers by aiding compliance with various emissions regulations, as well as creating an aura of environmental responsibility and technological innovation. The immense power of these incentives is made manifest in Tesla, the Silicon Valley-based BEV maker that has defied the industry’s immense challenges to startups and become the hottest automotive brand in the world. Despite selling just 31,655 vehicles in 2014, a tiny fraction of the industry’s global volume, Tesla and its CEO Elon Musk receive huge amounts of (largely favorable) media coverage and enjoy a market capitalization that exceeds far larger competitors like Fiat Chrysler Automobiles.
Sales of BEVs continue to grow in the face of lower gas prices, but nearly every model still sells far below initial estimates. Even President Obama’s goal of putting a million plug-in vehicles (BEVs and plug-in hybrids [PHEVs]) on US roads by 2015 has turned out to be wildly optimistic. The high cost of lithium-ion batteries is widely considered a key limiting factor on the growth of BEVs, but just as important is the issue of range and recharging; in a market long accustomed to the convenience of gasoline, the limited range and long recharging time of BEVs remains a major barrier to consumer acceptance. Though rapid charging infrastructure has grown as more BEVs have been brought to market, they still require at least 30 minutes to deliver a meaningful amount of power, speed battery degradation, use competing charging standards, and remain far less common than gas stations.
These shortcomings have pushed some automakers, like Toyota and Hyundai, to avoid BEVs altogether in favor of hydrogen fuel cell electric vehicles (FCEVs) that generate zero tailpipe emissions but can be recharged as rapidly as gasoline cars. The only other way to provide rapid refueling of zero-emissions vehicles (ZEVs) involves swapping batteries rather than recharging them. This strategy was attempted by Project Better Place, a now-defunct firm that deployed battery swap stations and an innovative pricing structure in Israel and Denmark between 2008 and its 2013 bankruptcy, as well as several pilot projects elsewhere. When Better Place failed, the battery swap concept was widely seen as having been discredited. But by then, another startup had taken up the mantle of the promising-yet-challenging swap strategy: Tesla.
When Tesla announced its Model S in 2009, a bullet point in its initial press release claimed that the car was capable of “five minute battery swap.” This surprising claim was largely overlooked by the press, which was either dazzled by the astonishingly well-executed new car or simply accustomed to CEO Elon Musk’s propensity for making splashy claims. Whatever the reason, Tesla’s battery swap promise remained a forgotten footnote in the company’s widely-covered story until mid-2013, a year after Model S deliveries began, when Tesla held a media event at its Hawthorne, CA facility demonstrating the by-then forgotten feature. The event generated an explosion of overwhelmingly positive media coverage, and Musk promised to open a battery swap station between Los Angeles and San Francisco by the end of the year.
When that deadline passed with no swap station announcement, Musk said that high levels of customer satisfaction with the firm’s “Supercharger” rapid charging stations made battery swap less of a priority and that a swap station would be announced “in a couple of months.” The announcement finally came in December 2014, when Musk tweeted that “Pack swap now operating in limited beta mode for SF to LA route.” A subsequent Tesla blog post clarified that a “pilot” swap program would open in the following week for “invited Model S owners,” operating out of a “custom built” facility at Harris Ranch in California’s Central Valley. According to the post:
“At least initially, battery swap will be available by appointment and will cost slightly less than a full tank of gasoline for a premium sedan. More time is needed to remove the titanium and hardened aluminum ballistic plates that now shield the battery pack, so the swap process takes approximately three minutes.
With further automation and refinements on the vehicle side, we are confident that the swap time could be reduced to less than one minute, even with shields. Tesla will evaluate relative demand from customers for paid pack swap versus free charging to assess whether it merits the engineering resources and investment necessary for that upgrade.”
Within a few months it appeared that Tesla had concluded that its swap station would not be a major factor in its future. In March of 2015, Musk tweeted that:
“Battery pack swap is active between SF and LA and seems to be working well. Supercharging is the future, though, for non-commercial traffic.”
On the firm’s Q1 2015 investor call, Tesla’s CTO J.T. Straubel said there were “hundreds” of vehicles participating in the swap beta, but the company subsequently told Daily Kanban that “hundreds” of owners had been invited and only a small fraction had joined the pilot program. Musk continued to downplay the program’s importance, saying:
“Yeah, we’ve steadily increased the invitation list. We just found like there just is not a lot of interest in people doing pack swap. So, we make the invitations and we get a very small percentage of that actually take us up on the invitation.”
Tesla can’t seem to keep its story straight. After presenting battery swap as a key technology and insisting that the number of vehicles participating in its swap program is “not like ten or something,” the company now says a “very small percentage” of “hundreds” of invitees are participating and that Supercharging remained “the future” for the private customers who make up the vast majority of Tesla sales. For a company that heavily emphasizes its own innovations, Tesla’s conflicted, on-again-off-again relationship with battery swap may seem out of character. But when seen in context of California’s ZEV credit system, Tesla’s decision to keep a toehold in the battery swap game while downplaying customer demand makes considerably more sense.
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The California Air Resources Board (CARB) has long been the most aggressive regulator of auto tailpipe emissions in the US, setting standards high enough to drive regulation at the federal level and consistently frustrate mainstream automakers. But as controversial as its regulation of emissions from internal combustion vehicles (ICVs) has been, its ZEV mandate has been far more controversial. A hugely complex set of rules, the ZEV mandate seeks to incentivize the development, production and sale of ZEV by requiring that at least one percent of each automaker’s California sales be made up of vehicles with no tailpipe emissions. CARB enforces this mandate with a credit system, in which ZEV sales earn credits that must offset the debits created by non-ZEV sales. If an automaker fails to sell enough ZEVs in a given year to earn a positive credit balance, it must purchase credits from an automaker with excess credits or face a $5,000 fine per credit shortfall. Seven other states have adopted CARB’s ZEV mandate, but none has the market size–and therefore, the impact–that California does.
As the only automaker with an all-electric fleet and thus a permanent credit surplus, Tesla benefits more from the ZEV mandate than any other company. Though details of the credit scheme are not made public, Bloomberg has reported that Tesla earns between $14,000 and $17,500 worth of credits for each Model S it sells in the ten ZEV states. Morgan Stanley’s chief auto analyst has also theorized that ZEV credits earn Tesla as much as half a billion dollars each year. For an automotive startup that consistently loses money on a GAAP (Generally Accepted Accounting Practices) basis, this source of pure profit is hugely important to Tesla despite Musk’s recent claim that ZEV credit revenue is “not super material.” Yet Tesla’s battery swap program appears to be almost entirely aimed toward maximizing the credits Tesla earns for its cars, indicating that these credits are at least as important to Tesla as the evangelical mission to advance BEVs that it consistently invokes.
When Tesla first began selling the Model S (85 kW battery) in June of 2012, CARB classified it as a “Tier III” [PDF]: capable of driving 200 miles on a single charge, without meeting CARB’s standard for rapid charging (or at least 100 miles of range with the ability to rapid charge). With this classification, Tesla earned just four credits per Model S sold in ZEV mandate states. But just four months later, and with no apparent fanfare, CARB reclassified the 85 kW Model S as a “Tier V” ZEV [PDF], nearly doubling its per-vehicle credits from four to seven. For the 2015-2017 Model Years, credits for “Tier V” ZEVs were increased again, from seven to nine per vehicle, further expanding Tesla’s potential credit revenue.
CARB’s standard for Tier V ZEVs is that they be able to drive at least 300 miles on a single charge and be able to recharge 285 miles of that range in less than 15 minutes. Though the EPA rates the Model S’s range at just 265 miles, CARB uses a different standard to measure range that apparently credits the same vehicle with 300 miles. More critically, for the 2009-2014 model years, CARB required only that
“…the ZEV’s refueling system has been demonstrated to the satisfaction of CARB’s Executive Officer as having the potential, with appropriate infrastructure or other equipment, to accumulate the miles required under this subdivision within the given time period for the claimed ZEV type.”
In other words, a battery swap demonstration like the one Tesla held for media in 2013 was sufficient to earn it nearly twice the amount of credits per car that it had earned when the Model S was classified as a Tier III ZEV. Given the significant incentives and low required investment involved in demonstrating a battery swap capability, it’s no surprise that Tesla engineered the Model S to be swap-capable. Considering other automakers could spend up to $5,000 per credit and still save money over the state’s fine, the additional swap credits tied to battery swap capability could be worth well over $10,000 in pure profit per car. In an industry that fights for every penny of incremental per-unit profit, and for a company with only one profitable quarter (on a GAAP basis) under its belt, even an additional $1,000 in pure profit per vehicle is a windfall of epic proportions.
In September of 2013, CARB noted [PDF] that:
“Some BEVs have been qualifying under the fast refueling definition by means of battery exchange. However, it has not been publicly demonstrated that battery exchanges have occurred on the vehicles earning credits. Though staff does recognize the potential for a battery exchange to help market the vehicle, other vehicles earning Type IV and V ZEV credit depend on fast refueling for vehicle operation and success. Staff is proposing to remove battery exchange from qualifying under the fast refueling definition, starting in 2015 model year.”
The plan to disqualify battery swap eventually evolved into a requirement for automakers to actually document fast refueling events in order to qualify for the extra credits. Automakers had to prove that they had performed one fast refueling event per vehicle earning the extra credits, although they were allowed to perform as many as 25 rapid refueling events per vehicle in order to meet the fleet-wide goal. In the comment period for this rule change [PDF], Tesla’s representatives repeatedly complained that forcing them to document battery swaps represented an unreasonable burden. CARB held fast, however, and made it clear that:
“The purpose of modifications to the fast refueling definition was to prevent gaming and awarding credit for technology not in actual use. The Board agreed, and directed staff to ensure all fast refueling credits are given based on usage, rather than mere capability. This direction makes sense as it provides for a technology neutral approach to awarding fast refueling designation.” [emphasis added]
This was a stinging rebuke of Tesla’s claim to an undisclosed number of battery-swap-related credits based on demonstration of capability alone, and other automakers, trade associations, and environmental groups heartily endorsed the closing of the gaping loophole that had allowed Tesla to reap huge financial benefits without actually making the incentivized capability available to the public. Indeed, the Alliance of Automobile Manufacturers and Global Automakers joined the National Resources Defense Council and Union of Concerned Scientists in arguing that even the updated standard requiring proof of fast refueling was still too generous. These unusual allies argued that by allowing up to 25 swaps per vehicle, CARB was allowing manufacturers like Tesla the opportunity to earn higher per-vehicle credits for its entire fleet while only swapping batteries for four percent of that fleet.
Tesla does not disclose how many credits it was–and potentially still is–able to earn simply by demonstrating that it was possible to swap its batteries within 15 minutes, and CARB similarly treats that information as confidential. But reading comments on the rule change that closed this massive loophole reveals that CARB believed the previous rule was being “gamed,” that automakers resented the unfair advantage it gave Tesla, and that environmental groups saw it as failing to advance the goal of reduced emissions. Most importantly, the comments show how desperate Tesla was to keep the old system in place and prevent any requirement that it prove its battery swap system was in use through documentation. Though CARB may well be blamed for opening the loophole in the first place, and though the revised rule may still be lacking as an incentive to actually make battery swap available to the public, at least it did close the loophole and held firm on the documentation requirement for fast-refueling credits.
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In light of Daily Kanban’s investigation finding that Tesla’s Harris Ranch battery swap station was not used to swap customer batteries over a busy holiday weekend that saw long waits for Supercharger plugs, it seems that the concerns expressed by the auto industry and environmental groups were well-founded. Moreover, only a single first-person account of a battery swap taking place at Harris Ranch was found in Daily Kanban’s review of hundreds of blog and forum posts. The very same account was the only evidence found of a Tesla customer even receiving an invite to join the program; though Tesla says it selects owners to participate in the program based on their past use of Harris Ranch’s Supercharger station, we spoke to several Tesla owners who met that qualification but had not been invited to join the swap program. Even with the glaring loophole now closed, there is no real evidence that Tesla’s battery swap capabilities have moved beyond mere demonstration to become available to actual customers.
Given both Tesla and CARB’s refusal to publicize how many cars Tesla has had in its ZEV qualifying fleet, it is impossible to know precisely how many credits it has earned from its mere demonstration of battery swap technology. It is also unclear how many actual swaps Tesla will have to record in order to continue to earn fast-refueling credits under the new, more stringent requirements. Though Tesla only needs to swap batteries on as little as four percent of its California fleet (provided it swaps 25 times per vehicle), without knowing the size of its qualifying fleet there is no way of knowing how statistically significant the findings of Daily Kanban’s investigation really are. Still, the fact that one of the highest-demand weekends of the year saw not a single battery swap take place reinforces the perception gleaned from Tesla’s comments to CARB: that Tesla’s use of battery swap has far more to do with earning California ZEV credits than actually furthering the adoption and use of this electric vehicle technology. The shift in CARB’s policy appears to explain why Tesla’s relationship with battery swap has changed, whereas the opinions of Tesla customers–who seem universally unaware of how to test the capability and thus tend not to have strong opinions about it–do not.
The peak-demand Supercharger shortages documented by Daily Kanban over the Memorial Day weekend graphically demonstrate why battery swap is such an important technology. In addition to making the BEV ownership experience competitive with ICEVs by eliminating long plug-in times, battery swap eliminates the frustrations created by often unpredictable peaks in Supercharger demand. Though Tesla owners seem willing to put up with recharge times that are far longer than an equivalent gasoline fill-up, doubling the time spent off the road because of Supercharger shortages represents a considerably larger burden on these early adopters. Had Tesla invested in making battery swap more available to customers rather than installing two extra Supercharger plugs powered by a diesel generator, it could have avoided the long waits owners experienced during peak demand on the 22nd and 25th. Furthermore, this action would have positively supported CARB’s rule revision, which was enacted to push the idea of battery swap technology into reality for eco-conscious consumers.
Though Tesla owners are typically quick to defend the company and Mr. Musk, several owners who spoke with Daily Kanban expressed frustration not only with their own inability to swap batteries, but also with the company’s lack of follow-through on promised leadership in battery swap technology. One owner characterized battery swap as a “no brainer,” while another questioned why the company promoted its alleged battery swap capabilities for so long without independent verification or more broad customer availability, saying “if you say you’re going to do something, you should do it.”
This sentiment seems to unite Tesla owners and CARB regulators, as well as the rest of the auto industry and environmental groups. Given the lack of verifiable progress towards the kind of public availability that all these groups seem to want for Tesla’s battery swap program, Tesla’s leadership should improve transparency and take concrete steps towards this common goal, or admit that its battery swap program was only promoted to earn extra CARB ZEV credits and goodwill from those concerned about the environment. It is time that the company ends this false narrative, which has misled customers, investors, regulators, competitors, and the public. Though the cause of reduced emissions and energy independence through the use of electric cars is a noble one, not even the most laudable ends justify misleading or disingenuous means.
The Daily Kanban would like to thank Alberto Zaragoza Comendador of the Doubting Is Thinking blog for the research and encouragement that made this investigation possible. The Daily Kanban does not necessarily endorse every finding or opinion published at Doubting Is Thinking, but Mr Comendador’s tireless, long-term and skeptical research provided a critical foundation for this investigation and demonstrates the value of tenacious, small-scale blog coverage to the vital process of media watchdogging.
