There are segments of society, primarily in regions dependent on oil and gas production, refining and distribution (or the financial largesse the industry bestows on those willing to publicly share their views), that simply refuse to discuss the subject of climate change or the need to explore alternative energy sources. As if that weren't troublesome enough, the private sector has been notably risk-averse for the past several years, largely refusing to commit to new projects whose return is not guaranteed.
So the only practical means of providing support for such research and innovation is by subsidizing the efforts of private sector entrepreneurs who can cloak their work in the currently unassailable rhetoric of the free market
The reality is that the oil and gas industry currently receives approximately $37 billion a year in subsidies. Musk is reported to have received $4.9 billion spread over a number of years. We should be thankful that someone is willing to explore - and fund - alternatives. JL
Jerry Hirsch reports in the Los Angeles Times:
"If I cared about subsidies I would have entered the oil and gas industry." Elon Musk
Los Angeles entrepreneur Elon Musk has built a multibillion-dollar fortune running companies that make electric cars, sell solar panels and launch rockets into space.
And he's built those companies with the help of billions in government subsidies.
Tesla Motors Inc., SolarCity Corp. and Space Exploration Technologies Corp., known as SpaceX, together have benefited from an estimated $4.9 billion in government support, according to data compiled by The Times. The figure underscores a common theme running through his emerging empire: a public-private financing model underpinning long-shot start-ups.
"He definitely goes where there is government money," said Dan Dolev, an analyst at Jefferies Equity Research. "That's a great strategy, but the government will cut you off one day."A looming question is whether the companies are moving toward self-sufficiency — as Dolev believes — and whether they can slash development costs before the public largesse ends.
Tesla and SolarCity continue to report net losses after a decade in business, but the stocks of both companies have soared on their potential; Musk's stake in the firms alone is worth about $10 billion. (SpaceX, a private company, does not publicly report financial performance.)
Musk and his companies' investors enjoy most of the financial upside of the government support, while taxpayers shoulder the cost.The payoff for the public would come in the form of major pollution reductions, but only if solar panels and electric cars break through as viable mass-market products. For now, both remain niche products for mostly well-heeled customers.
Musk declined repeated requests for an interview through Tesla spokespeople, and officials at all three companies declined to comment.
The subsidies have generally been disclosed in public records and company filings. But the full scope of the public assistance hasn't been tallied because it has been granted over time from different levels of government.
New York state is spending $750 million to build a solar panel factory in Buffalo for SolarCity. The San Mateo, Calif.-based company will lease the plant for $1 a year. It will not pay property taxes for a decade, which would otherwise total an estimated $260 million.
The federal government also provides grants or tax credits to cover 30% of the cost of solar installations. SolarCity reported receiving $497.5 million in direct grants from the Treasury Department.That figure, however, doesn't capture the full value of the government's support.
Since 2006, SolarCity has installed systems for 217,595 customers, according to a corporate filing. If each paid the current average price for a residential system — about $23,000, according to the Union of Concerned Scientists — the cost to the government would total about $1.5 billion, which would include the Treasury grants paid to SolarCity.
Nevada has agreed to provide Tesla with $1.3 billion in incentives to help build a massive battery factory near Reno.
The Palo Alto company has also collected more than $517 million from competing automakers by selling environmental credits. In a regulatory system pioneered by California and adopted by nine other states, automakers must buy the credits if they fail to sell enough zero-emissions cars to meet mandates. The tally also includes some federal environmental credits.
On a smaller scale, SpaceX, Musk's rocket company, cut a deal for about $20 million in economic development subsidies from Texas to construct a launch facility there. (Separate from incentives, SpaceX has won more than $5.5 billion in government contracts from NASA and the U.S. Air Force.)Subsidies are handed out in all kinds of industries, with U.S. corporations collecting tens of billions of dollars each year, according to Good Jobs First, a nonprofit that tracks government subsidies. And the incentives for solar panels and electric cars are available to all companies that sell them.
Musk and his investors have also put large sums of private capital into the companies.
But public subsidies for Musk's companies stand out both for the amount, relative to the size of the companies, and for their dependence on them.
Tesla stock has risen 157%, to $250.80 as of Friday's close, over the last two years.
Musk has proved so adept at landing incentives that states now compete to give him money, said Ashlee Vance, author of "Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future," a recently published biography.
"As his star has risen, every state wants a piece of Elon Musk," Vance said.
Before his current ventures, he made a substantial sum from EBay Inc.'s $1.5-billion purchase of PayPal, the electronic payment system in which Musk held an 11% stake.
Soon after, he founded SpaceX in 2002 with money from that sale, and he made major investments and took leadership posts at Tesla and Solar City.
Musk is now the chief executive of both Tesla and SpaceX and the chairman of SolarCity, and holds big stakes in all three, including 27% of Tesla and 23% of SolarCity, according to recent regulatory filings. The ventures employ about 23,000 people nationwide, and they operate or are building factories and facilities in California, Michigan, New York, Nevada and Texas.
Tense talks
The $1.3 billion in benefits for Tesla's Nevada battery factory resulted from a year of hardball negotiations.
Late in 2013, Tesla summoned economic development officials from seven states to its auto factory in Fremont, Calif. After a tour, they gathered in a conference room, where Tesla executives explained their plan to build the biggest lithium-ion battery factory in the world — then asked the states to bid for the project.
Nevada at first offered its standard package of incentives, in this case worth $600 million to $700 million, said Steve Hill, Nevada's executive director of the Governor's Office of Economic Development.
Tesla negotiators wanted far more. The automaker at first sought a $500-million upfront payment, among other enticements, Hill said. Nevada pushed back, in sometimes tense talks punctuated by raised voices."It would have amounted to Nevada writing a series of checks during the first couple of years," said Hill, calling it an unacceptable risk.
With the deal imperiled, Hill flew to Palo Alto in August to meet with Tesla's business development chief, Diarmuid O'Connell, a former State Department official who is the automaker's lead negotiator.
They shored up the deal with an agreement to give Tesla $195 million in transferable tax credits, which the automaker could sell for upfront cash. To make room in its budget, Nevada reduced incentives for filming in the state and killed a tax break for insurance companies.
Nevada Gov. Brian Sandoval and Musk sealed the agreement in a Labor Day phone conversation. Hill said it was worth it, pointing to the 6,000 jobs he expects the factory to eventually create.The state commissioned an analysis estimating the economic impact from the project at $100 billion over two decades, but some economists called that figure deeply flawed. It counted every Tesla employee as if they would otherwise have been unemployed, for instance, and it made no allowance for increased government spending to serve the influx of thousands of local residents.
A $750-million factory
Musk has similar success with getting subsidies for a SolarCity plant in Buffalo, N.Y. The company currently buys many of its solar panels from China, but it will soon become its own supplier with a new and heavily subsidized factory.
An affiliate of New York's College of Nanoscale Science and Engineering in Albany will spend $750 million to build a solar panel factory on state land. SolarCity estimated in a corporate filing that it will spend an additional $150 million to get the factory operating.When finished in 2017, the 1.2-million-square-foot facility will be the largest solar panel factory in the Western Hemisphere. New York officials see the subsidy as a worthy investment because they expect that it will create 3,000 jobs. The plant will replace a long-closed steel factory.
"The SolarCity facility will bring extensive benefits and value to this formerly dormant brownfield that provided zero benefit to the city and region," said Peter Cutler, spokesman for Empire State Development, New York's economic development agency.
SpaceX, though it depends far more on government contracts than subsidies, received an incentive package in Texas for a commercial rocket launch facility. The state put up more than $15 million in subsidies and infrastructure spending to help SpaceX build a launch pad in rural Cameron County at the southern tip of Texas. Local governments contributed an additional $5 million.
"That's $5 million more than we have ever seen from that property," said Dr. Lisa Garcia, superintendent of the Point Isabel Independent School District. "It is remote.... It is just sand dunes."
Crucial aid
The public money for Tesla and SolarCity factories is crucial to both companies' efforts to lower development and manufacturing costs.
The task is made more urgent by the impending expiration of some of their biggest subsidies. The federal government's 30% tax credit for solar installations gets slashed to 10% in 2017 for commercial customers and ends completely for homeowners.
Tesla buyers also get a $7,500 federal income tax credit and a $2,500 rebate from the state of California. The federal government has capped the $7,500 credit at a total of 200,000 vehicles per manufacturer; Tesla is about a quarter of the way to that limit. In all, Tesla buyers have qualified for an estimated $284 million in federal tax incentives and collected more than $38 million in California rebates.
California legislators recently passed a law, which has not yet taken effect, calling for income limits on electric car buyers seeking the state's $2,500 subsidy. Tesla owners have an average household income of about $320,000, according to Strategic Visions, an auto industry research firm.
Competition could also eat into Tesla's public support. If major automakers build more zero-emission cars, they won't have to buy as many government-awarded environmental credits from Tesla.In the big picture, the government supports electric cars and solar panels in the hope of promoting widespread adoption and, ultimately, slashing carbon emissions. In the early days at Tesla — when the company first produced an expensive electric sports car, which it no longer sells — Musk promised more rapid development of electric cars for the masses.
In a 2008 blog post, Musk laid out a plan: After the sports car, Tesla would produce a sedan costing "half the $89k price point of the Tesla Roadster and the third model will be even more affordable."
In fact, the second model now typically sells for $100,000, and the much-delayed third model, the Model X sport utility, is expected to sell for a similar price. Timing on a less expensive model — maybe $35,000 or $40,000, after subsidies — remains uncertain.
"Some may question whether this actually does any good for the world," Musk wrote in 2008. "Are we really in need of another high-performance sports car? Will it actually make a difference to global carbon emissions? Well, the answers are no and not much.... When someone buys the Tesla Roadster sports car, they are actually helping to pay for the development of the low-cost family car."
Next: Battery subsidies
Now Musk is moving into a new industry: energy storage. Last month, he starred in a typically dramatic announcement of Tesla Energy-branded batteries for homes and businesses. On a concert-like stage, backed by pulsating music, Musk declared that the batteries would someday render the world's energy grid obsolete.
"We are talking about trying to change the fundamental energy infrastructure of the world," he said.
Musk laid out a vision of affordable clean energy in the remote villages of underdeveloped countries and homeowners in industrial nations severing themselves from utility grids. The Nevada factory will churn out the batteries alongside those for Tesla cars.
What he didn't say: Tesla has already secured a commitment of $126 million in California subsidies to companies developing energy storage technology.
Elon Musk says his companies don't need the estimated $4.9 billion they enjoy in government support, but the money will help them move faster to transform the dirty business of energy.
"If I cared about subsidies, I would have entered the oil and gas industry," said Musk, the chief executive of Tesla Motors and SpaceX and the chairman of SolarCity.
Musk's remarks came in response to a Times story detailing his corporate strategy of incubating high-risk, high-tech companies with government money — estimating the total received or pledged so far at $4.9 billion, a figure Musk did not dispute. The story noted that his companies have seen a big financial upside from the incentives — helping them build billions in stock value — while taxpayers have shouldered the cost.The companies at first did not respond to repeated requests for comment about subsidies, but Musk on Monday granted The Times a wide-ranging interview on government money for his companies and their competitors; Tesla's struggle to produce an affordable electric car; and the reasons why his companies are not profitable.
The Times' estimate of government support comprises a variety of incentives, including grants, tax breaks, factory construction, discounted loans and environmental credits that Tesla can sell. It also includes tax credits and rebates to buyers of solar panels and electric cars. The companies have already received large sums and will get more over time as they meet milestones in deals with certain states."All three of these businesses get government subsidies and contracts, but none of them get much in the way of profit," said Mark Spiegel, a hedge fund manager for Stanphyl Capital Partners who is shorting Tesla's stock, a bet that pays off if Tesla shares fall. "He is going in to cutting-edge, fringe industries."
Musk said Tesla and SolarCity are tied together by their mission to help the environment. Tesla's electric cars and SolarCity's panels aim to accelerate the development of clean power, he said.
"Ultimately, humanity has no choice but to transition to renewable energy," he said. "It is just a question of when and how much damage occurs between now and that transition."
Government money for Tesla and SolarCity helps speed that transition, Musk said.
Musk called SpaceX an "insurance policy" in the case of an environmental catastrophe. Its rockets, he said, will help colonize new planets.
"We should become a multi-planet species," Musk said.
Musk said the subsidies for Tesla and SolarCity are "a pittance" compared with government support of the oil and gas industry."What is remarkable about my companies is that they have been successful despite having such a tiny incentive from the government relative to our competitors," Musk told The Times.
A report late last year by the International Energy Agency said that the fossil fuels industry collects $550 billion a year in global government subsidies. That compares with about $120 billion for renewable energy, including wind, solar and biofuels, according to the Paris-based institution.
Those figures don't account for the vast difference in size between the two sectors.
But they also don't include the costs to society caused by pollution from oil and gas, Musk said.
Another measure, the one cited by Musk, was released by the International Monetary Fund last month and takes a wider view. The IMF said global energy subsidies amount to $5.3 trillion, including an estimated cost of the damage caused by energy consumption.
SpaceX — which has been awarded billions of dollars in government rocket launch contracts, but relatively few subsidies — also competes against companies Musk says are subsidized. United Launch Alliance, a joint venture of Boeing and Lockheed Martin, receives an annual payment of about $1 billion for operational costs, even if it doesn't launch a rocket.Representatives of United Launch Alliance were not immediately available to comment late Monday.
Tesla, Musk said, competes with a mature auto industry that has seen massive federal bailouts for General Motors and Chrysler.
"Tesla and Ford are the only American auto companies not to have gone bankrupt," Musk said.
SolarCity, he said, is in a nascent industry that must fight entrenched oil and gas interests that have myriad subsidies.Many of the incentives for buyers of electric cars or solar panels are scheduled to disappear over the next several years. But Musk believes that his companies would be successful even without the government support.
"Tesla could be profitable right now if we went into low-growth mode and we just served premium buyers," he said. "The reason we are not profitable is because we are making massive investments to create an affordable long-range electric car."
Tesla's only current car, the Model S sport sedan, typically sells for about $100,000. Musk said the development of that high-end car, however, is teaching Tesla engineers how to slash costs for future models. Musk said Tesla is working on a car that will cost $35,000.
Some analysts agree that the companies are on a path to sustainability.
"Tesla doesn't need government subsidies to be successful," said Andrea James, an analyst with Dougherty & Co. "They have helped capitalize the company, but gross margins are better than industry average, even without credits."
Musk said Tesla should also get credit for the jobs it aims to create in exchange for its economic development subsidies, such as those for its Nevada battery factory. Although Tesla will benefit from up to $1.3 billion in incentives over time, the factory will create 6,000 jobs, the company has said.
Nevada and Musk have often cited a state-commissioned estimate of the economic effect from the factory at $100 billion over two decades, but some economists called that figure deeply flawed. It counted Tesla employees as if they would otherwise have been unemployed, for instance, and it made no allowance for increased government spending to serve the influx of thousands of local residents.
Musk's companies have plenty of company in winning economic development incentives from state and regional governments.
Washington is paying $8.7 billion to Boeing to ensure that the aerospace giant continues to build commercial jetliners in the state. Oregon gave Nike $2 billion to expand is sports apparel business. Michigan paid Chrysler $1.3 billion to invest in its Sterling Heights factory.Whether these tax breaks are good for the communities paying them is another question, said Richard Florida, director of the Martin Prosperity Institute at the University of Toronto, and global research professor at New York University.
His research has found almost no link between economic development incentives and improvement in economic measures such as per-capita wages or incomes, the number of college grads and highly educated workers in a community, or a state's unemployment rate.
The debate raises different questions for long-term investors — can Musk's companies bring down their costs before the government cash runs out?
The extent to which Tesla depends on incentives is a likely topic at Tesla's annual shareholder meeting June 9, said Dan Dolev, an analyst at Jefferies Equity Research.
"It's a debate between the bulls and the bears," he said. "The bears think Tesla is all about the subsidies. The bulls think the subsidies don't matter."
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