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How Much Revenue Did Tesla Make From Regulatory Credits?

A Tesla Model S. Flickr Image.

Tesla makes most money from selling and leasing electric vehicles, solar energy systems and energy storage products. In addition, Tesla also makes money from selling electricity generated from its own solar energy systems. Best selling energy storage products such as the Powewall and Powepack are another line of Tesla’s revenue generators.

These are the typical money-making machines for Tesla. But what you may not know is that Tesla has another source of income that is contributing hundreds millions of dollars to the company’s coffers. And that revenue source comes from the so-called “Regulatory Credits”.

What is Regulatory Credits?

Regulatory Credits are literally credits or points given by the state and federal government for contributing zero pollution to the environment. Basically, in the state of California and some other states in the US, auto manufacturers such as Tesla, Ford, General Motors and so on are required by laws to meet certain minimum emission standard for all the vehicles they produce and sell. Otherwise they will face hefty fine or risk having their license revoked by the state government for failing to meet these emission standards.

In simple terms, auto manufacturers are required to meet these emission standard and the only way for them to be in compliance with the requirements is to either improve their own vehicles emission or switch to manufacturing emission free electric vehicle for 100% compliance or to purchase regulatory credits from other automakers that have excess credits such as Tesla.

The laws provide that automaker such as Tesla may keep the excess credits if they earn more credits than the minimum amount required. Auto manufacturers with a surplus of credits may sell their credits to other manufacturers, who can use the credits to comply with the laws.

ZEV and GHG Regulatory Credits

Since the vehicles produced by Tesla emit zero emission, over the years, Tesla has earned a substantial amount of “Regulatory Credits” or sometimes referred to as ZEV (Zero Emission Vehicles) credits under the state of California, which Tesla can sell to other auto manufactures. The GHG credit or Green House Gas credit is another regulatory credits similar to ZEV credit where it’s applicable at federal level requiring automakers to comply with the emission standard.

Based on the 2018 annual report, Tesla made about $418.6 million, $360.3 million, $302.3 million and $168.7 million for the years ended December 2018, 2017, 2016 and 2015 respectively from selling regulatory credits alone. That’s quite a lot of money from a “product” literally with zero cost to produce.

The good news is that the revenue from selling regulatory credits would most likely increase over time in the future and we have seen that it has been increasing by an average of 80% year over year since 2011 (results from the plots below).

Chart of Tesla Regulatory Credits Revenue

Tesla annual regulatory credits revenue

Tesla annual regulatory credits revenue

The chart above shows the revenue from regulatory credits for the past 7 years from 2012 to 2018.

The long-term trend of the plot shows that regulatory credits revenue has been increasing year over year. Regulatory credits revenue reached the highest value at $419 million in 2018, a record high for the company since the start of the sales.

Over the span of the 7-years period, regulatory credits revenue has grown from a mere $41 million in 2012 to as much as $419 million in 2018. That was almost a 10X increment! The compounded annual growth rate (CAGR) is around 47% per year.

Ratio of Tesla Regulatory Credits to Total Revenue

Tesla regulatory credits revenue to total revenue

Tesla regulatory credits revenue to total revenue

The chart above shows the ratio of regulatory credits revenue with respect to total revenue expressed in percentage.

From the chart, the percentage has dropped drastically from 10% in 2012 to just 2% in 2018. The decline of the number shows that the contribution of regulatory credit revenue to the company revenue growth is getting less impactful.

Even though Tesla achieved the highest sales of regulatory credits in 2018 at $419 million, the impact on Tesla revenue growth was insignificant.

In addition, the declining ratio above shows that other revenue sources such as automotive sales are growing at a much faster rate than sales of regulatory credits.

Tesla Regulatory Credits Revenue Growth Rate

Tesla regulatory credits revenue growth rate

Tesla regulatory credits revenue growth rate

The plot above shows the sequential growth rate of regulatory credits revenue from 2013 to 2018.

From the plot, sequential growth rate had been positive in all years except in 2015 when the growth rate was at negative value of -22%.

From a spreadsheet calculation of the average annual growth rate, regulatory credits revenue has been increasing at an average annual growth rate of about 80% from 2013 to 2018.

The double digit annual growth rate shows that Tesla regulatory credits revenue still has rooms to grow in future as the adoption of electric vehicle is still in its infancy.

Chart of Tesla Quarterly Regulatory Credits Revenue

Tesla quarterly regulatory credits revenue

Tesla quarterly regulatory credits revenue

The plot above shows the quarterly regulatory credits revenue since 2018.

I could only get the data starting from 2018 as Tesla did not break down the annual regulatory credits revenue into quarterly numbers in its financial reports in prior quarters.

The quarterly data shows that regulatory credits revenue could rise and fall significantly from quarter to quarter.

The year over year (yoy) growth rate of the quarterly revenue looks quite impressive. From the chart, I believe the figure should be in the double digit range.

Conclusion

  • The long-term trend of the revenue plot shows that regulatory credits revenue has been increasing at a CAGR of around 47% from 2012 to 2018. Year over year average growth rate is around 80% per annum.
  • Even though regulatory credits revenue has risen significantly over the past several years, its contribution to total revenue is getting less significant and was only 2% of total revenue in 2018.
  • Regulatory credits revenue should have years of growth to come since the adoption of electric vehicles has only just started.

References:

1. All information in this article was obtained from Tesla Update Letters and Presentations.

2. Featured image was obtained from Ian Kennedy and Lubomir Panak.

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