Tesla Energy for utilities

Size Matters

Let’s talk about batteries (Part II)

Until now, Tesla’s single-minded strategy for their batteries has been to utilize economies of scale to brute-force costs down (although they also have R&D from Panasonic).

But last month, Tesla launched a program with Vermont utility, Green Mountain Power, to allow homes to rent Powerwall batteries. This approach leverages Tesla’s strong position in established markets to enter into more difficult ones. This is a clearer go-to-market strategy.

Let’s first break down the battery industry. The industry can be broadly classified into four product categories — consumer electronics, residential storage, commercial storage, and utility storage (in increasing size order). There are non-negligible differences between these categories due to differences in market regulations, product margins, and intended operations. Just because a battery makes sense in one category doesn’t mean that it’ll be successful in others.

Despite what you may have been told, size does matter.

Consumer electronics: Tesla’s origins

Tesla started at the consumer electronics scale (in which I group phones, laptops, drones, etc.), developing batteries for their electric vehicles (EVs). I discussed this in one of my first pieces (check it out).

Tesla Model S battery modules

However, batteries for consumer electronics is the toughest market in the battery sector. Consumer electronics have many overseas competitors, and thus, are highly commoditized and have tight profit margins. If your name isn’t Samsung, Panasonic, or LG Chem, you better have a significantly better product, a strategy to scale quickly, or a war chest. Tesla had a strategy (called the Gigafactory) and a war chest (from investors and Elon Musk’s personal savings), but the company struggled — as recently as 2015, each Model S was costing Tesla $4000. Battery development for electric cars was never going to be a very profitable business for Tesla.

So Elon pivoted Tesla from a car company to an energy company. Large scale storage is a growing market without a real market leader. In 2015, Tesla released the Powerpack (targeting commercial storage) and the Powerwall (targeting residential storage).

Commercial storage: Veni, vidi, vici

The Powerpack, serving buildings, factories, and data centers, filled a real consumer need. To quote Elon himself, all other batteries “sucked. They’re expensive, unreliable, stinky, ugly, bad in every way.”

The electricity rate structure for commercial storage is based on demand charges (charge based on peak demand). Meaning, if companies can lower that peak even a little, that translates into a lot of savings. On the Q1 2017 conference call, Elon Musk predicted that stationary storage output would see a dramatic increase and grow more rapidly than their auto storage output.

Tesla immediately found a market providing Powerpack batteries for companies that consume a lot of electricity throughout the day, like Amazon, Target, Walmart, and many malls, breweries, and small islands.

…on the other hand, Tesla’s Powerwall didn’t make any economic sense.

Residential storage: Veni, vidi…Non vici

Residential batteries, in most areas, don’t make sense. You might think that batteries can take advantage of electricity arbitrage (charging when electricity is cheap and discharging when electricity is expensive), but time-of-use (TOU) pricing isn’t offered everywhere — less than 1% of US households have TOU pricing (read my article on utilities). Most states also still have a “net metering” policy, which means that solar customers can export electricity onto the grid at the price they pay for electricity and don’t necessarily need energy storage to save/make money. So even if homes had batteries, it was really just expensive furniture.

Additionally, for the last few years, gas prices have been at an all time low due to oversupply (read my article on gas/oil). So even if you live in an area with TOU charging, electricity arbitrage isn’t worth much. The biggest reason why distributed generation and storage is so big in Hawaii is that electricity prices are triple that of the rest of the US.

Today residential batteries only account for about 15% of the energy storage market but will account for 50% of the US storage market by 2021.

So in any case, when Elon released the Powerwall back in 2015 and slapped a price tag of $5000 (Powerwall + inverter), it never made financial sense. People bought it because they loved Elon, but the growth was never sustainable for a larger audience. According to Winfried Hoffman, former CTO of Applied Materials, the average cost of the electricity with the Powerwall ended up being around $0.15/kWh, compared to the average US retail electricity price of $0.12/kWh. The Powerwall only really made sense in places where electricity prices were very high (like Australia or Germany), or if the home was completely off-grid with solar.

As long as the system cost $5000, there’s no way you’d ever get a Powerwall. There’s no way. If it cost $5000.

We’ll come back to this.

Utility storage: Tesla saves the grid (twice)

Utility scale is the real market right now, and represents 91% of all energy storage deployments in 2017.

With applications like frequency regulation, grid reliability, and storage of renewable energy, the applications for batteries at this scale are numerous. Additionally, when batteries are this size, costs drop and lifetime value increases. According to a Rocky Mountain Institute study, “Energy storage can generate much more value when multiple, stacked services are provided.” This has been paralleled in the solar industry, where utility-scale solar is often significantly more efficient than residential-scale solar.

Tesla’s Mira Loma substation for Southern California Edison

Tesla proved themselves in this market in late 2015 with the Aliso Canyon natural gas leak (aging infrastructure led to one of the worst recorded gas leaks). This leak created severe constraints on the electric grid and threatened to cause power outages across Southern California. Tesla saved the day with a giant installation of Powerpacks, capable of powering 15,000 homes.

Elon Musk also offered to save South Australia from its energy problems within 100 days by using Tesla’s batteries.

Batteries are really amazing at the utility scale.

So with the Vermont utility deal, Tesla leveraged the favorable economics of the utility-scale battery market to present a more competitive product for the residential-scale battery market.

Borrowing a page from the solar industry’s Third Party Offering (TPO) book, Tesla launched a rental program with Green Mountain Power that will allow residential customers in Vermont to get a Powerwall for only $15/month for the next 10 years. This rental system is similar to the successful solar lease program that Solarcity (now a part of Tesla) pioneered in 2008, which allowed customers to lease solar for a fixed $/month.

So, why would Green Mountain Power give away Powerwalls?

The Powerwall batteries are a part of a larger strategy to allow homes to integrate with utilities, provide value to the grid by reducing peak demand, and fill supply gaps for Vermont. Vermont is currently ranked #2 in the US for renewable energy and has large solar and wind energy contributions, and has a goal to derive 90% of its energy from renewables by 2050. With large sources of intermittent energy, Vermont would eventually have needed to install large storage capability to support the grid, anyways.

This leasing program has promising implications for the future of residential storage, as it did for residential solar. Back when solar was still expensive, leases were used to make solar available outside the conventional commercial customers, opening up the market to smaller buyers. At one point, TPO solar even accounted for 72% of all new residential installations. But as the solar market developed, solar became cheap enough to be customer owned. In 2017, 55% of residential solar installed will be purchased by customers paying either in cash or with a loan. The battery industry will also likely embrace this strategy — battery leases will likely account for a significant part of the market until costs come down.

One chemistry to rule them all?

GTM Research expects the U.S. energy storage market to grow to 2.6 GW by 2022, a 12x increase from the size of the 2016 market. Tesla’s pivot into an energy company was a smart one.

But I think that as the size of the market grows, the energy storage pie will grow large enough to accommodate more than one chemistry (currently, all batteries compete with lithium-ion, which accounted for 97% of installations in 2016). After all, there’s no “one size fits all” battery chemistry, because all of the markets have different intended use cases—just as you wouldn’t power an electric car with a series of lead acid batteries, you wouldn’t want to provide grid-scale storage with lithium ion batteries at the end of the day.

As the industry matures, Tesla, with its lithium-ion chemistry, may not continue to find success in all of these battery markets. Lithium-ion isn’t the best chemistry for large scale storage — they’re expensive and have a limited cycle life. That’s fine for smartphones which people replace every 2 years and for EVs that only use a fraction of their driving range each day (which gives the battery a longer life), but this kind of application would be limiting for a large scale battery that will need to charge and discharge, completely, every day (or, would be very expensive, if you buy a huge battery and only use a fraction of it every day).

For large scales, we may see something like flow batteries become popular. Flow batteries are big, which is limiting for commercial electronics applications. But because large scale storage is normally left outside anyways, size isn’t that important. Flow batteries are generally cheap, easy to maintain, and last a long time. They’re also useful for long duration markets — lithium ion batteries aren’t the optimal solution at the 6-hour+ duration markets.

However, Tesla is resourceful, and will likely continue to introduce more options for cheap storage. For example, PG&E and BMW recently completed a successful 18-month pilot to see if EVs could be used as a flexible grid resource, which included delayed charging and second life battery applications (reusing EV batteries for residential/grid). If Tesla makes a play to use their established commercial EV batteries for the residential or grid scale markets, the cost of storage for these applications could be cut in half.

Tesla is now one of the tiny handful of companies that has been successful in all of the energy storage markets (to the best of my knowledge, this is currently limited to LG Chem and GE).

Let’s hope that Tesla can continue its momentum.

Read Part I on lithium-ion batteries

I write about energy during my free time. I’ve written about climate change,electric cars, Trump (Part I and Part II), Congress, oil, venture capital, solar,the electrical grid, batteries (Part I and Part II), nuclear, and energy efficiency. Check them out if you’re looking to learn more about the energy industry.