Tesla Motors Inc (NASDAQ:TSLA)’s giant gigafactory could be a big threat to the entire utility industry, says Morgan Stanley analyst Adam Jonas. Morgan Stanley has an Overweight rating on the stock with a $320 price target. The scale of the gigafactory and the implied cost per kWH both exceed the research firm’s expectations. If Tesla can achieve its cost per kWH of $150 and defend its intellectual property, the company has significant revenue potential, which is not covered in Morgan Stanley’s $320 price target.

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Estimating Tesla vehicles’ energy storage capacity

Tesla Motors Inc (NASDAQ:TSLA) targets 50GW of annual battery production from the gigafactory by 2020, which is 60% higher than the estimate of Adam Jonas. The electric vehicle company aims to sell 500K vehicles in 2020, compared to Morgan Stanley’s forecast of 371K. The gigafactory will help Elon Musk bring down the storage costs further, and make Tesla a key player in grid storage. Just to give you a perspective, Morgan Stanley says that there will be about 7.2 million Tesla vehicles on the roads worldwide. These vehicles will have a combined energy storage capacity of 443GW, which is much higher than the daily electricity consumption of the entirety of Mexico.

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The ongoing cost/efficiency improvements in distributed generation, and the gigafactory’s battery production capacity at a previously unheard-of scale together suggest that batteries+distributed generation can partially or completely eliminate many customers’ usage of the power grid. The research firm says that Tesla Motors Inc (NASDAQ:TSLA) can expand their existing relationship to integrate storage into a complete home/office energy management system. That would allow customers to go completely off-grid.

Higher fixed charges would be a positive for Tesla

The addressable market for solar panels and batteries depends on two key factors: net metering rules and the 30% solar investment tax credit (ITC). Today, solar customers can use distributed generation to completely eliminate their power bill in 43 states. That includes the portion related to the utilities’ investments in offering a reliable grid to customers. On that basis, Morgan Stanley’s utility team estimates the U.S. commercial and residential solar market potential at 240GW. If the fixed charge levied on distributed generation customers is higher, there is a great potential that they would purchase batteries on a large scale, and go entirely off-grid. That will be a positive for Tesla Motors Inc (NASDAQ:TSLA).

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The “rate headroom” for Tesla Motors Inc (NASDAQ:TSLA) batteries would go up with a rise in solar penetration. Tesla batteries are likely to be cost-competitive with the grid in several states. Analysts say the most competitive off-grid approach would involve a stirling engine that produces power from natural gas. In many parts, solar conditions are less favorable, and there is plenty of natural gas supply.