Tesla Energy “powerpacks” the evolution of Distributed Energy Systems. What does it mean for India?

“We have the handy fusion reactor in the sky called the sun. You don’t have to do anything. It shows up every day and produces ridiculous amounts of power…..

Combined with a relatively small number of solar panels, most on rooftops, battery systems could enable the world to eliminate its dependency on fossil fuel-generated electricity….

You can actually go completely off grid. You can take your solar panels, charge the battery packs and that’s all you use… With 160 million Powerpacks, we could power the United States and with 2 billion, the world”

This marked the entry of Tesla Energy into the stationary storage space, an event which promises to be a watershed in the adoption of renewable energy, especially the off-grid distributed solar energy systems. While the science has always been supportive, with the amount of solar energy falling on the earth’s surface in 40 minutes equaling the total annual global energy consumption, the costs of technology and storage have been the key impediments in Solar PVs grid parity thereby impacting its commercial deployment.

Solar PV accounts for a relatively small proportion of the total global capacity. Nonetheless, over the last decade, Solar PV has been the world’s fastest growing power generation technology driven by a combination of ongoing rapid reductions in solar technology costs aided by supportive government policy and regulatory support. Favorable regulations — Net-Metering, Feed-In Tariffs, Solar Renewable Energy Certificates (RECs), Investment Subsidies etc — have been the principal drivers of growth.

In this high growth phase, most solar installations have been in the grid-connected systems. Off grid decentralized energy installations have lagged the grid connected installations because the energy storage costs have been the principal constraint. Energy storage is a critical variable in the evolution of renewable energy as energy demand requires consistent energy supply but supply from renewable sources is intermittent and lacks consistency. For e.g. solar energy is not available at night or on cloudy days and wind energy is a function of the supply of wind. The grid has thus far been playing the part of the default storage mechanism for the grid connected installations with the net-metering and feed-in tariffs regulations aiding their growth.

As long as power from solar and wind is a small fraction of the overall grid power, the conventional generation techniques can adjust their output for variations in renewable energy production to maintain the grid balance. But, as the proportion of the variable renewable power grows in the overall energy mix, the grid-tied installations begin to pose challenges in the management of the grid. This challenge was demonstrated in Germany on May 11, 2014 when the quantum of renewable power supplied to the grid met ~75% of the energy demand thus forcing the conventional power producers into a fire-sale with energy charges briefly dipping into negative territory!

As the proportion of solar power in the overall energy mix increases with rapid growth in grid connected solar installations, it may necessitate a review in the net metering policies. As a result, caps could get introduced either on the prices of supplying solar energy or on the amount of solar energy that can be supplied or both. As this realization grows with the ramp up in solar installations, battery storage solutions begin to look attractive thus opening the market for it. However, opening of the market is a sufficient but not a necessary condition for the adoption of a technology. Cost of storage, specifically the Levelized Cost of Energy (LCoE), which factors in an energy system’s capital costs, operating & maintenance costs and the round-trip power efficiency over its useful life, will be the main variable that will swing the adoption of battery storage. Ramez Naam points out that we are on the verge of three significant developments which will feed off each other: 1. Price of energy storage technologies are plummeting 2. Cheaper storage will massively expand the market and 3. Expanding scale will further drive down the storage costs. According to Naam, currently there are 3 main storage technologies are being developed: Lithium Ion, Flow Batteries and Compressed Air Energy Storage.

The rise of Solar in the mix of the energy systems has been an underestimated phenomenons over the last 5–7 years. Rapidly falling Solar PV costs is increasingly leading to grid parity being achieved in many parts of the world and studies shows that “solar energy has become cheaper much more quickly than most experts had predicted and it will continue to do so”. But the other part of the renewable ecosystem — Storage — has been the missing link in the drive towards de-carbonizing the energy ecosystems globally. As this piece of the jigsaw puzzle falls in place, renewable energy can target higher reliability, fewer outages and lower costs. While lead acid storage battery systems is the dominant technology in the storage applications currently, this technology is on the wrong side of the technological evolution curve while Li-Ion battery technology is the emerging storage technology widely expected to dominate the storage systems. Powerpack and Powerwall positions Tesla Energy at the forefront in this race as a leading player.

Tesla Energy launched 2 stationary storage products — 1. Powerpack for utility, industrial and large commercial scale applications and 2. Powerwall for the residential and small business applications. The 100 kWh Powerpackfor utility scale systems grouped to scale from 500kWh to 10MWh+ are capable of 2-4hr continuous net discharge power using grid tied bi-directional inverters.” Powerwall is available in 10kWh ($3500) optimized for backup applications, or 7kWh ($3000) optimized for daily use applications. Both can be connected with solar or grid and both can provide backup power. The USP of Powerwall is that it is a wall-mounted storage system and buyers won’t need a separate battery room filled with storage batteries.

The biggest positive surprise for the industry and its observers came from the announcement of the cost of the batteries. Before the official announcement of the cost, the industry was abuzz with speculative estimates pegging the the price point upwards of $10,000. While the Powerwall could be used primarily for load shifting in the advanced markets, post the pricing announcement, there is a more visible excitement about the utility scale Powerpack.

A study of cost-benefit analysis conducted last year by Oncor Electric Delivery Co. on installing utility scale batteries on their Texas Grid concluded the break even point for Oncor’s battery installation would be at a capacity of $350kWh. The study predicted that $350kWh price point could reach by 2020 since the cheapest available utility scale batteries cost at least 2x of their break-even calculation for Oncor.

According to Elon Musk, the cost to utilities of Tesla Powerpack works out to $250kWh. While this should sufficiently please Oncor, for renewable energy companies it will be music to the ears, as having a cost effective storage capacity translates into overcoming the key hurdle of being an intermittent and unpredictable power source. While it is early to form an opinion on the sustainability of the initial early adopters driven sales numbers, Tesla Energy products will certainly enhance the energy storage awareness especially among the household residential quarters globally. Morgan Stanley Auto Analyst’s note is instructive in this regard — “We too easily forget that Tesla is much more than just the Model S. In the past week, I have been asked by more friends, colleagues, clients and relatives about the virtues of the residential Powerwall product for their own personal household use than I’ve been asked about any vehicle manufactured by any auto company I’ve covered in my 18 years as an auto analyst.”

But what about the costs? SolarCity blog highlights — Using Tesla’s suite of batteries for homes and businesses, SolarCity’s fully-installed battery and solar system costs are one-third of what they were a year ago. So has Tesla Energy cracked the cost curve to ensure mass adoption? Not yet! The blog further points out — We expect costs to continue to decline as manufacturing scales, and over the next 5–10 years, these cost reductions will make it feasible to deploy a battery by default with all of our solar power systems. During the just concluded earnings call Elon Musk elaborated — “For the Powerwall, it is true in the U.S., with rare exception, the economics is more expensive than utility. So if somebody wants to do a daily cycling, basically go off grid, then it’s going to be more expensive than being ongrid. The main target application for the daily cycling battery pack was actually were several markets, not in the Continental U.S., but particularly Germany and Australia are very strong markets where it does make economic sense today based on the feed in tariff and the electricity rate structures in those countries.”

With the average US household consuming around 20–30 kWh of energy daily, to meet the back up and for “going off-grid”, multiple batteries requirement will distort the economics in most US states where the grid connected energy rates are far cheaper. According to Musk, Tesla has received within a week, reservations for 38,000 Powerwalls (1.5 to 2 per installation)and 2,500 Powerpacks (at least 10 Powerpacks per installation).

The Powerpack reservations are typically from utilities or large industrial companies. Assuming these reservations convert to final orders, Tesla’s stationary storage productions facilities are booked for next 18 months, thus implying very limited annual production capacity. But there-in also lies the promise of a falling cost curve as production ramps up with other players too joining in Tesla’s “open source” battery technology. With Tesla’s Nevada 500,000 Gigafactory coming on stream in 2017, the stationary storage business scale is set to get a huge boost. According to George Washington University Solar Institute’s Amit Ronen, Li-ion will represent ~3/4th of the battery market within five years since it is a flexible technology that can power anything from an Apple Watch to a Corporate Data Center.

How severe is the threat of battery storage disruption to the conventional grids over the next 3–5 years? Until battery systems can scale up and become cost competitive for mass adoption, not much. Till such time, batteries will continue to complement the electricity grids. Near term residential applications of stationary storage will likely remain constrained to banking excess energy generated by solar panels for utilizing it during power outages or peak pricing hours.

Nonetheless, with industry wide costs of Li-ion battery packs falling at 14% CAGR (65% lower) over 2007–14, from $1000 kWh to $410 kWh, the implications for the energy markets, especially for the utilities, are immense. Assuming the 14% CAGR in cost reduction continues for next 2 years, by the time Gigafactory production commissions, Li-ion battery packs will already be 75% lower than 2007 cost. Unsurprisingly, German utilities like Eon have initiated the restructuring of their operations and business models. Simon Skillings, former Director of Strategy and Policy at Eon UK opines “The Eon restructuring recognizes the new industrial logic of a transformed energy system and it is inevitable that other utilities will need to respond accordingly.”

While the rationale of no-grid defection applies well for the advanced economies having robust grid connectivity and high energy consumption, can the Powerwall economics work for developing economies like India with inadequate grid connectivity, high T&D losses and inadequate power capacity leading to low energy consumption?

Among the leading world economies, India’s household energy consumption lacks the averages of developed economies by a wide margin with average daily consumption of 2.5 kWh compared to ~10+ kWh in the latter.

However, given that ~33% of overall households and 45% of rural households are not electrified, averages don’t accurately indicate potential energy requirement of electrified households.

Let us assume that, as electrification improves, the average annual household energy requirements (while not accounting for income disparities) would be ~450 kWh i.e ~15 kWh/ day. A 1 KW Solar Panel generates ~4–5 kWh energy daily, assuming 20% Solar Panel efficiency.

Solar panel efficiency will vary according to the geography and its associated solar insolation, the energy received on the surface area, but since India is naturally well bestowed with ample solar insolation, commercial solar panel efficiency ranges in 19%-22%.

Given the requirement of 15 kWh/day energy, a 3 KW solar plant should suffice the requirement of the household. The table below shows that the LCoE for a Solar Plant before the battery storage cost comes to ~Rs.5/kWh (Average expected life of a Solar Plant is at least 20–25 years while it can go up to 30 years in some cases). If we consider, the Tesla Powerwall Battery pack as the storage solution, the LCoE comes to ~Rs.8/kWh. (Lead acid battery storage solutions would cost lower)

Third party testing reports of Tesla Powerwall batteries have confirmed that the daily cycling capacity of Powerwall should last for at least 5000 cycles i.e. ~14 years. Tesla accordingly gives a warranty of 10 years on its products. With LCoE of ~Rs.5/ kWh, standalone Solar Power (ex storage) has already become quite competitive vis-a-vis conventional electricity.

The table below details the monthly final consumer electricity bill, assumed for 450 kWh, across the top 15 Indian cities. Effective Cost captures taxes, wheeling charges, various and differing state levies etc to arrive at the effective cost per unit (kWh) of energy for consumers.

Clearly Solar Energy (ex storage) is reasonably competitive. In Mumbai, solar energy has achieved grid parity independently on the energy costs. But given the low reliability score of solar power, for next few years Solar + Net Metering will be a more effective model for urban cities than the Solar + Battery Storage.

Current installed capacity of Solar Power in India stands at 2.6 GW (Jan-15), barely 1% of the total installed capacity of India of 259 GW (Jan-15). Hence, the grid connectivity challenges like those faced in Germany are still some years away. Additionally, grid-tied rooftop solar plants technology can be quickly scaled up and widely installed which can aid in achieving the target of 100 GW Solar by 2022, which is almost 38x of the current solar capacity.

For non urban areas, while the LCoE of Solar + Battery Storage at Rs.8/ kWh seems high, the relevant figure to compare is not the cost of Grid Power but the cost of using Diesel Generated energy through DG Sets. Depending on the cost of diesel, the cost of diesel generated power ranges from Rs.15–20/ kWh. It must be noted, that in this cost comparison, we are keeping the carbon costs outside the purview.

Much of the opposition for Solar comes from the quarters opposed to government incentivizing one energy technology over another and the costs associated with such policy, in the form of incentives and subsidies. While those arguments may or may not be valid in advanced economies given the weight of science behind the clean energy technologies, the reality in India is different.

As per the 2011 Census data, ~31.4% of Indian households use kerosene and/or diesel as their primary source of lighting/power. Since India subsidizes kerosene, and till very recently, was also subsidizing diesel, in effect, apart from subsidizing transportation costs, India was also subsidizing the lighting requirements of almost 1/3rd of the households across India and ~50% of the rural households. Following table illustrates the diesel/kerosene subsidies and under-recoveries in India through the last decade.

According to a study of Petroleum Planning & Analysis Cell and Nielsen, almost ~15–17% of the non-transportation diesel sales go towards power and lighting requirements — DG Sets, Telecom Towers, Agri Pump Sets etc, due to absence of electricity supply. Relevant data for kerosene sales though is not available since it is a PDS product and thus tracking its end use is challenging. However, given that ~31% of households are dependent on kerosene for lighting, it can be conservatively assumed that 5% of the total sales being diverted for lighting application.

In absence of sufficient electricity penetration and supply, diesel and kerosene substituted for electricity and on conservative estimates, India subsidized the power and lighting requirements to the tune of at-least Rs.750bn over the last decade. The subsidized energy source costs Rs.15–20/ kWh today. More importantly, these subsidies did not create any long term energy assets in India!

To put this conservative figure of ~Rs.750bn in perspective, let us assume a hypothetical “What-If” scenario whereby these tax funded subsidies are diverted to incentivize residential solar installations at the present day costs as illustrated in the Solar Plant + Battery Model illustration. Assume 30% capital subsidy which was offered at the utility & commercial level solar installations until recently was extended to residential installations whose energy requirements are assumed at 15kWh/day. The upfront capital subsidy for the capital expenditure (of a 3KW Solar Plant + First Powerwall battery) works out to ~Rs.0.15mn.

At one end, the capital subsidies reduce the LCoE of from ~Rs.8/kWh to Rs.6.8/ kWh, while on the other, it will incentivize the installation of ~15,247MW of “Off-Grid Solar capacity”, almost 5.8x the current installed Solar Capacity in India!

While the above analysis of India was centered around Tesla’s Powerwall, it is the Powerpack that is likely to be more disruptive for the energy ecosystem. Ramez Naam opines, “At utility scale, it’s deeply disruptive.” Perhaps the sharpest observation comes from Arnold Gundersen, “Both Solar and Batteries are not ‘fuels’ but rather technologies. The extraction cost of fuels continues to rise, while technology costs continue to fall.” Solar PV’s cost curve evolution has valuable valuable lessons for the skeptics.

Considering India’s quest of energy self-sufficiency, Tesla Energy’s stationary storage innovation comes just at the right time. In its quest for energy self-sufficiency, India should back “technologies” over “fuels” even if it entails incentivizing creation of long term domestic energy assets, as these will facilitate the re-engineering of the transfer of domestic wealth within India, rather than its transfer outside India to the oil producing nations.

Like what you read? Give Ani a round of applause.

From a quick cheer to a standing ovation, clap to show how much you enjoyed this story.