What Does a Kilowatt-Hour Actually Cost?

Why ambiguous pricing is slowing the adoption of batteries

Much has been said about the great possibility of lithium-ion batteries as an energy storage technology. Tesla, AES, and other players have put into service both home-use and grid-scale batteries that are showing strong momentum for the viability of future projects. However, behind the curtain, these companies are moving heaven and earth for funding to initiate such projects. Why is such seemingly common sense technology still floundering for economic viability when prices are low, infrastructure investment is high, and societal embracement of green power is entrenched?


Energy Storage Success to Date

The most prevalent path to energy storage deployment appears to be private utilities paying for an up-front installation and making their money back through a mix of customer payments and efficiencies. This model works well because private utilities have access to capital, a captive customer base, and control of the rate structure.

For example, the utility AES—a nationwide operation with multiple sites in California—has begun investing heavily in batteries in order to satisfy a new law requiring investor-owned utilities to bring 1.3 GW of energy storage online by 2020. The staggering $1.5 billion investment, which includes batteries and an upgraded natural-gas system, is being funded internally and will be paid for over 20 years of electricity sales. Tesla, the luxury-carmaker-turned-battery-company-turned-solar-company, has also entered the utility arena by creating a combined battery and solar power plant for the Kauai Island Cooperative Utility.

Tesla will offer a fixed $0.139/kW-h — a 10% savings to consumers with 100% renewable sourcing — for the next twenty years. However, the co-op has essentially sold its customer base to Tesla, with Tesla retaining ownership of all the equipment and also collecting the revenue generated from electricity sales. While this approach is both innovative and exciting, it is not the most practical roadmap for smaller energy-storage providers or potential customers to follow. The market still needs access to external sources of capital for widespread adoption to propagate.

Tesla battery and solar farm in Kauai

What’s the Payback? It Depends…

There is currently no shortage of investment into energy companies and products. Large scale products like Bloom Energy and SolarCity, as well as consumer-centric products like Nest and Sense, have received ample venture funding. Some firms are also entering the market of funding the actual installation — as opposed to the development — of green-energy products like wind and solar with the promise of payback in future savings. Wunder Capital has even gone so far as to offer everyday consumers the opportunity to make piecemeal investments in solar installations with a similar promise of being paid a representative portion of the savings generated by the project. Frustratingly, these funding methods have been slow to make it into the energy storage market, particularly for residential energy storage. This is an issue of calculating return-on-investment, as the venture capitalists, business managers, and citizens expect these projects to provide a financial benefit.

The first struggle in an ROI assessment of energy storage projects is due to how a kilowatt-hour, the basic unit of energy from a billing standpoint, is valued. Utilities typically offer a tiered-rate structure based on whether the service is residential or commercial, and the overall usage on that service. That rate — heretofore — has not generally varied much monthly, much less daily or hourly. However, behind the scenes, utilities are trading in the energy market in increments as small as five minutes to buy or sell excess power based on actual demand.

A utility must be able to provide power at 5 o’clock on a July afternoon when many customers simultaneously return from work and crank the air conditioning and the dryer, as well as 6 o’clock on a temperate morning when most of the house is shut down during sleep. Should a utility fall short on supply at 5 o’clock, it must buy more power from someone else at a higher rate than what the customer is paying. Likewise, at 6 o’clock, the utility has less demand for power and thus can offer it at lower than that which is charged to the customer.

The rate at which a customer is billed is the best guess by a utility of energy supply and demand based on indicators like weather forecast, day of the week, and commercial versus residential mix. All of this modeling is hidden from consumers, meaning the customers of the utility will sometimes overpay and sometimes underpay for the service.


The rate at which a customer is billed is the best guess by a utility of energy supply and demand based on indicators like weather forecast, day of the week, and commercial versus residential mix.

Solar, which is essentially acting as a very localized power plant capable of selling back to the open market (though notably not at the will of the utility’s behest), has been deployed sufficiently that a value has been assigned to it by various utilities. In some states like Colorado the cost to pull a kilowatt-hour from the grid is the same as the savings from pushing it back. In other states like Utah, a tiered rate structure based on demand is being proposed for solar customers along with a fixed interconnection fee. Either way, investors have an established rate structure to use in return-on-investment calculations and can accurately assess it.

But energy storage, including batteries, has no such structure. To complicate matters further, energy storage devices do not inherently have a free power source like solar and wind do, so at some point may have to be replenished via the same system they are intended to relieve.

Coupled with the difficulty in price-setting for the utility is the reliability of batteries as a power source. In the case of utility-scale installations in which the utility owns both the traditional power plant and the energy storage system, it is easy to assess and control the availability and usage of a bank of batteries. The circumstance in which distributed energy storage is most often discussed is the mitigation of the so-called duck curve, which essentially shows a gap between solar production and grid demand.

Having batteries deployed throughout the grid can give utilities a ride-through capability that fills that gap without forcing the utility to buy power in the open market during peak periods. This problem is being boldly addressed by Elon Musk in a Twitter-fueled challenge to eliminate South Australia’s duck curve problem in 100 days or the battery is free.

Duck Curve - Showing Gap Between Demand and Solar Generation

Unlike utility-owned/operated batteries, units installed at a private commercial building or residence operate at the will of the owner and thus are not a source that utilities can rely upon to supplement the grid during a peak period. For example, a manufacturing facility may need to run an extra piece of large equipment or a home battery may be used to offset the afternoon dryer run.


No utility has published or adopted a comprehensive plan for integrating batteries into its capacity.

This above-average consumption could eat into the utility’s anticipated capacity of the battery, making it a sub-optimal power source and sending the utility right back to the open market. As of yet, no utility has published or adopted a comprehensive plan for integrating batteries into its capacity; until then, batteries will continue to have no inherent value in the ROI of investors.

Pulling Batteries Into the Market

To some extent, we are simply waiting for a progressive utility to do the math and set a precedent. Xcel Energy is underway with a pilot to assess how smaller batteries can affect the grid, but no data has been published yet. Other utilities, particularly in the rapidly growing southwestern states like Arizona and California, are actively bidding out projects that integrate energy storage.

Market forces are clearly shifting such that energy storage is feasible, scalable and economically viable. Consumers may not see a change in their monthly power bill, but companies are sure to market these initiatives as eco-conscious and innovative.

However, at the consumer level, we still have work to do. While companies like Sonnen and Iron Edison offer compelling battery solutions, they are complicated systems that require professional installation. Even when integrated with solar, both upfront cost and electrical barriers exist around DC (direct current) power — which is produced by solar panels and batteries — meshing with the existing AC (alternating current) power that already exists in a residence. As such, batteries continue to be something of a luxury item for green-minded homeowners rather than a practical tool for reducing energy costs.

Kickstarter and its brethren are full of interesting and well-backed battery projects, but the development cycle for such products to hit the market is easily three years. Nonetheless, continuing to support, request and discuss such products shows a pent-up demand to investors and creators and will serve to get more and better storage options into your home more quickly.


Emilie Stone is a mechanical engineer and business leader with a keen interest in our shared energy future. Over the last decade, she led the lithium-ion battery R&D division of Methode Electronics, worked in powertrain technologies for Toyota, and worked on the special-vehicle team for Ford.


Thank you for reading. If you have any questions or thoughts about this article, please reach out to me on Twitter or visit my site http://emilie.is/.