California and Tesla No Longer Best Friends?

NEW YORK (TheStreet) -- We generally think of California as Tesla's (TSLA) best friend. Most of Tesla's cars have been sold in California. Tesla is headquartered in California, which has been providing huge economic redistribution of dollars from other automakers into Tesla's coffers.

Tesla loves California. Tesla loves Jerry Brown. California loves Tesla. Jerry Brown loves Tesla.

Or so we thought. As it turns out, love is relative.

Somewhere along the line, something appears to have gone astray. No, I'm not talking about Tesla's well-documented sales decline in California over the last few quarters.

I'm not even talking about Tesla locating its battery factory joint-venture in Nevada, Arizona, New Mexico or Texas -- instead of California. That said, one wonders why California isn't the obvious location for this factory in order to minimize transport costs.

There are many potential reasons Tesla says its battery factory will not be in California. Geographic risk diversification is one. Proximity to natural resources (lithium) is another. Taxes are always a good reason. Perhaps California would even prohibit Tesla from making batteries in California, for environmental reasons? Wouldn't that be the ultimate irony?!

No, I'm talking about something else. I'm talking about California's shift to a giant legislative preference in favor of hydrogen fuel-cell cars.

You see, according to California's Air Resources Board, electric cars are good -- but not as good as hydrogen fuel cells. This is like the fight between the Bolsheviks and the Mensheviks, between Stalin and Trotsky: Who is the purest of them all?

For the last couple of years, the mighty force of political access tipped the Gladiator-style thumbs up/down scale in favor of battery-electric vehicles (BEVs), of which Tesla has the market's most impressive in terms of range and recharging time. As such, it's been getting the maximum de facto subsidy from the state of California.

Starting in the next few months, however, there is a new, even more pure environmental purist in town: Hydrogen fuel-cell cars are set to become California's new taxpayer subsidy darling.

Historically, hydrogen fuel-cell cars have not made it to the mass market for two reasons:

  1. The cars have been too expensive to manufacture. The cost could have been anywhere in the six figures, or three times to 30 times an average car.
  2. There are hardly any fueling stations. As of recently, California had nine.

What is happening right now is this: California's latest environmentalist jihad is against warm weather -- the state's only remaining comparative advantage -- so California must be made colder by having people buy cars with fewer CO2 emissions. By 2025, 15.4% of cars sold in California must be "zero emissions," and of those hydrogen fuel-cell cars are the most favored by the red-tape generators.

Having forced the auto industry to spend billions of dollars to develop these hydrogen fuel-cell cars, the cost of these cars has now come to approach the point where they are ready for the mass market. The first car to hit the market will be a Hyundai Tucson, which launches in the June 2014 quarter in Los Angeles.

The price of the Hyundai will be $3,000 upfront and then $500 per month for a three-year lease. Unlimited fuel is included. The car's range is expected to be 300 miles. Refueling time is three to eight minutes.

The Hyundai will be followed around the middle of 2015 by all-new cars from Toyota (TM) and Honda (HMC). After that, perhaps by 2020 we can expect others to join, such as General Motors (GM), BMW and Mercedes.

Here is where it gets interesting: California's weather jihadists have forced companies such as Hyundai, Toyota and Honda to spend billions of dollars developing cars that no car buyers are asking for, but they are going to get a door prize in 2015 and 2016: a $200 million de facto subsidy.

What am I talking about? I'm talking about building 100 hydrogen fueling stations in California, apparently to the cost of $2 million apiece. The first phase of building 68 of them could start within a year from now, and the second phase of 32 more could start closer to two years from now.

These hydrogen pumps would be located straightforwardly at existing gasoline/diesel fueling stations. You fuel hydrogen much the same way you fuel gasoline and diesel. It makes perfect sense.

The hydrogen stations would be mostly in the large Los Angeles and San Francisco Bay areas, but with a station halfway in Coalinga, connecting the south and north of California along the I-5 freeway. Let's hope that one charging station doesn't run dry or malfunction when you need it! That would be a very bad thing.

In any case, the comparison is this: Driving at 75 miles per hour, you should be able to go close to 300 miles in one of these hydrogen fuel-cell cars. In a Tesla Model S, at that speed, depending on temperature and age of car, you might be closer to 200 miles.

The hydrogen car refuels 300 miles in three to eight minutes, whereas the Tesla can often get you 150 miles in less than 30 minutes. In the future, you might also have the opportunity to swap your battery in as little as two minutes, which would then take you at least 200 miles and cost $80 (40 cents per mile). The cost of hydrogen has not yet been set, but unlimited use is included with Hyundai's $500/month lease.

It is important to understand that a hydrogen fuel-cell car is also an electric car. The hydrogen tanks and fuel cell replace the battery. Conceptually, the electric motor powering the wheels would be the same in both kinds of cars.

At least the first few hydrogen fuel-cell cars are not meant to compete with a Tesla in terms of sports car performance. They are, at best, comparable with a Nissan Leaf in terms of performance (0-60 MPH in close to 10 seconds). One advantage of the hydrogen car is cold weather performance, which should be much better than a battery car.

It shouldn't take a rocket scientist to figure out that we could see a hybrid hydrogen-battery car, sort of like a Chevrolet Volt except a fuel cell provides the range extender instead of a regular gasoline internal combustion engine. That kind of car would go, say, 30 to 40 miles on battery power and then another 300 miles on hydrogen. It seems like an obvious solution.

The message here is this: To date, Tesla has been the legislative darling in the auto industry, getting the biggest advantages at the expense of the competition. This now changes in the form of -- among other things -- $200 million of taxpayer money to build hydrogen fueling stations in California.

How this will play out over time is anyone's guess. Battery-electric cars are proven and customers tend to love them. Hydrogen fuel-cell cars look great on paper, and I have driven prototypes over the last couple of years. They drive similar to a modest electric car such as a Nissan Leaf.

Will the consumer want them? It is a big unknown.

The main advantages of fuel-cell hydrogen cars over battery-electric cars are:

  1. Fast refueling -- 300 miles in three to eight minutes.
  2. Excellent cold weather performance.
  3. The new subsidy darling status in California.

The hydrogen fuel-cell cars could cost perhaps $30,000 to $40,000 in 2015 and the first one in 2014 leases for $500 per month including unlimited fuel. Together with a $200 million freebie from the California taxpayer paying for 100 hydrogen fueling stations, it may prove to be the most attractive consumer proposition for the mass market.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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