Tesla makes right choice with Reno for Gigafactory

Thursday afternoon it will be officially announced that a site near Reno, Nevada will be the home of Tesla's sought-after Gigafactory. It appears to be the right move for Tesla.

It will not be official until a news conference Thursday afternoon in Carson City, but all signs point to Tesla selecting Reno, Nevada for the location of its massive battery factory that could be the beginning of a seismic shift in the auto industry.

When the $5 billion Gigafactory is operational, currently slated for 2017, it will employ up to 6,500 people and occupy 10 million square feet. It is necessary for Tesla’s future plans to deploy a mass-market Model 3 vehicle in addition to the Model S sedan and Model X crossover, in volumes which will require construction of the largest battery factory in the world.

By the time the Gigafactory is running at full capacity in 2020 it will produce 50 GWh of batteries annually, enough to support 500,000 Tesla vehicles. The company expects battery cost reductions of 30% in its first year of operation alone, eventually dropping battery costs to just $100/kWh – at which point the economics of a new vehicle will overwhelmingly favor electric cars.

And the winner is...Reno

A source within the Nevada governor’s office told CNBC Wednesday that Nevada will be awarded the coveted Gigafactory. “That’s a go, but they are still negotiating the specifics of the contract,” the source said.

The news conference in Carson City will be held by Governor Brian Sandoval and will concern a “major economic development announcement.” Tesla officials will be at the event, indicating that it is all but certain that the news conference will be about the Gigafactory location.

Reno had been tentatively considered the front-runner since the news broke that Tesla was behind a massive earth-moving operation at the Tahoe Reno Industrial Center in Storey County, just east of the city. The project was clearly the groundbreaking for a potential Gigafactory that Tesla CEO Elon Musk had publicly alluded to numerous times.

Tesla had said multiple sites would undergo permitting and the preliminary stages of construction as an insurance policy, and that it would select the final site toward the end of the year. It appears that the company has finished its deliberations and that other finalists Arizona, California, New Mexico, and Texas will be disappointed.

The right choice

Tesla’s selection of Reno makes a lot of sense for the company for several reasons. Chief among them is close proximity and easy rail access – Reno sits very close to the California border just a few hours northeast of the Fremont assembly facility.

Nevada is also rich in solar and wind resources, and is dedicated to developing them. In particular the Nevada Renewable Energy Consortium, an alliance of the Desert Research Institute, University of Nevada, Las Vegas and University of Nevada, Reno, is a representation of the state’s commitment to building an economy with renewable energy sources.

The fact that Nevada shares Tesla’s values surely contributed to the decision and should make the state a relatively easy partner to work with, as Tesla plans to power much of the Gigafactory with nearby wind and solar power.

We can also be sure that Nevada has an attractive incentive package to offer. Tesla is asking for the partner state to contribute as much as 10% of the facility’s total cost (which could be $500 million) and all the states were competing with various tax breaks and other incentives, but clearly Nevada offered a satisfactory package. In the end, Musk is still a businessman.

Finally, given that the images of the preliminary construction site bear a striking resemblance to Tesla's rendered images of the proposed Gigafactory released back in February, it seems to be a very fitting location.

Are you a believer?

Of course, not everyone is predicting the Gigafactory will be wildly successful. A recent report by Lux Research, for example, claimed that Tesla will fall well short of its sales target and the resulting overcapacity could cripple the Gigafactory.

Other skeptics find it hard to believe that a relatively young company could undertake such a daunting project and execute flawlessly, which will have to happen for the facility to come online as scheduled and avoid delaying the Model 3 rollout.

There are a lot of reasons to believe in the Gigafactory, though, and EV advocates will have their fingers crossed at each milestone in the hope that the game-changing battery facility will succeed. Finalizing the right location this early is the first step.