In order to bring to market its new series of ‘Solar Roof’ products, Tesla announced last year that they are bringing together a lot of technologies under one roof at their newly acquired factory in Buffalo, now known as ‘Gigafactory 2‘. It includes tech developed in-house by Tesla, some tech by Panasonic, and tech from SolarCity and its subsidiaries.

The deal is somewhat complicated with a lot of moving parts, which now clearly shows why Elon Musk wanted Tesla to acquire SolarCity since it will simplify the complicated partnership.

Through Tesla’s acquisition of SolarCity, they inherited an agreement with the Research Foundation for the State University of New York for the construction of an approximately 1 million square foot manufacturing facility, which is now mostly completed.

The deal is under a Build-to-Suit Lease model. Tesla explains the deal in a SEC filing released this week:

“The Foundation will cover (i) construction costs related to the manufacturing facility in an amount up to $350.0 million, (ii) the acquisition and commissioning of the manufacturing equipment in an amount up to $348.1 million and (iii) $51.9 million for additional specified scope costs, in cases (i) and (ii) only, subject to the maximum funding allocation from the State of New York, and we will be responsible for any construction and equipment costs in excess of such amounts. We will own the manufacturing facility and manufacturing equipment purchased by the Foundation. Following completion of the manufacturing facility, we will lease the manufacturing facility and the manufacturing equipment owned by the Foundation from the Foundation for an initial period of 10 years, with an option to renew, for $2 per year plus utilities.”

That’s a pretty sweet deal, but in return, Tesla has to achieve a series of milestone or otherwise it will have to pay penalities.

Here are the main milestones listed in the filing:

  • employing a certain number of employees at the facility, within western New York and within the State of New York.
  • spend or incur approximately $5.0 billion in combined capital, operational expenses and other costs in the State of New York over the 10 years following the achievement of full production.

What is full production at this new factory?

According to the same filing, Tesla expects “approximately 1 gigawatt annually beginning in 2019.” In the past, SolarCity has referred to the factory as having a 1 GW capacity with potential for up to 5 GW, but it looks like they are sticking to 1 GW for now.

The production of solar cells to make modules and tiles (for Tesla’s solar roof) will use technologies developed by Tesla (Glass), SolarCity’s Zep and Silevo (modules and connections), and Panasonic for the cells and the manufacturing.

Tesla explains the agreement in the filing:

“In December 2016, we entered into a Production Pricing Agreement: Phases 1-3 (the Phase 1-3 Agreement) with Panasonic Corporation, Panasonic Corporation of North America and Sanyo Electronic Co., Ltd (collectively, Panasonic).  This agreement provides that Panasonic will manufacture custom photovoltaic (PV) cells and modules for us, primarily at Gigafactory 2, and that we will purchase certain amounts of PV cells and modules from Panasonic during the 10-year term, with the intent to produce PV cells and modules totaling approximately 1 gigawatt annually beginning in 2019.”

Panasonic said that it plans to make a $250 million investment in the manufacturing effort.

This deal is somewhat similar to the deal Tesla and Panasonic have at the Gigafactory 1 where they collaborated on the development of a new battery cell, which Panasonic ultimately ends up being the manufacturer under a long-term agreement for Tesla to purchase the output.

In the case of Gigafactory 1, Tesla uses the cells to make its battery packs for cars, Powerwalls, and Powerpacks, while at Gigafactory 2, Tesla will use the cells to make solar roof tiles and modules.

Tesla still expects to start production of the solar roof at Gigafactory 2 in “summer 2017”. The expectations for the product are high since Musk said that Tesla’s solar roof will cost less than a regular roof – even before energy production.

 

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