In an exclusive interview with Stuff, Ricardo Reyes, Tesla Motors' vice president for communication, said, "We have discussed it with the X Prize guys and agreed to put a car in the demonstration division instead, so we can still participate in the Prize."
The X Prize now has a shortlist of 42 teams fielding over 50 cars, each hoping to take home a multi-million dollar cheque for winning a multi-stage race while achieving mileages of over 100mpg equivalent(120mpg for UK-sized gallons).
Competing cars include battery electric vehicles and hybrids, as well as cars running on biodiesel, compressed natural gas, ethanol and even topping up with solar power. All must be nearly ready for production, with plans in place to sell thousands should they win.
Tesla's Model S saloon - due to go into production in 2011 - was widely considered a front runner for the $5 million Mainstream category, not least because Tesla has already built and sold over 1000 electric Roadster sports cars.
X Prize officials were surprised at Tesla's decision to withdraw at such a late stage (the first 'shakedown' race stage starts in May), with Eric Cahill, Senior Director of the Prize, telling Stuff: "We're still trying to get clarification as to what's driving them for the shift."
However, Tesla insists there is no bad blood between them. Reyes said, "The competition division is amazingly good but the demonstration division is one that people shouldn't look past. It's more geared towards actual car manufacturers and it's a better fit for us."
While the $10 million X Prize is a significant amount of money, it's only a fraction of the funds a company would need to bring a new car to market. This summer, Tesla sold a 10% stake in the company to Daimler for a reported $50 million, and received $465 million in loans from the US Department of Energy's Advanced Technology Vehicles Manufacturing Loan Program.
The Model S might not even make it to the X Prize as a demonstration model, admits Reyes: "It's a little early to tell which car we'll use for the demonstration. We need to sit down with the X Prize people and decide what we want to do."