What SolarCity And Kauaʻi Mean For Tesla Shareholders

This could be solid proof that the energy storage unit of Tesla Motors Inc TSLA is ramping up quickly. SolarCity Corp SCTY announced earlier this week that it would use batteries from electric car maker Tesla to power a solar project in Hawaiʻi.

The news sent Tesla stock up by 9 percent on Wednesday, while SolarCity investors were also rewarded.

The significance of the deal is immense as the proposed SolarCity/Tesla project for the Kaua'i Island Utility Cooperative (KIUC) is believed to be the first utility-scale system in the U.S. to provide dispatchable solar energy, meaning the unit can provide power even hours after the sun goes down.

What's It Mean?

The latest development implies that Tesla Energy, which was launched less than a year-ago, is shaping up well. In its recent shareholder letter, Tesla said demand for Tesla Energy products remains very strong. To accommodate this demand, it transitioned production to the Gigafactory in the fourth quarter.

The company noted that Tesla Energy's inbound sales leads are quickly exceeding vehicle sales leads in its first main markets, Australia and Germany. Even during this initial product launch, Tesla Energy achieved positive gross margins for the quarter.

"We are on track for a steady increase in gross margins throughout the year as volumes ramp up and costs reduce, allowing a positive cash contribution to Tesla overall even with rapid growth," Tesla said in a recent shareholder letter.

If successful, the proposed project could be a benchmark for similar orders in the future as utilities in the U.S. are looking for solar batteries to cut down fuel imports and manage effective use of expensive power plants.

What To Know About The Deal

The proposed array and battery storage facility will be built on 50 acres of land owned by Grove Farm Company, Inc. adjacent to KIUC's Kapaia power station.

The 52 MWh Tesla Powerpack lithium-ion battery storage system will feed up to 13 megawatts of electricity onto the grid to "shave" the amount of conventional power generation needed to meet peak demand in the evening from 5 p.m. to 10 p.m.

By using the solar energy stored in the battery instead of diesel generators, KIUC will reduce its use of imported fossil fuels and also cut its greenhouse gas emissions. Under the terms of the 20-year contract, KIUC will pay SolarCity 14.5 cents per kilowatt hour.

The project has already received most of its required state and county approvals and is now awaiting approval by the Hawai'i Public Utilities Commission. KIUC and SolarCity have requested an accelerated timetable for review of the project so that construction work can begin by April with a goal of being in commercial operation by the end of 2016.