The Companies That Are Trying to Solve the Energy Storage Riddle

The energy storage industry is positioned for some huge growth in the coming decade, but it's already starting to take off in some surprising places.

In this week's episode of Industry Focus: Energy, Sean O'Reilly talks with Motley Fool contributor Travis Hoium about the budding market for energy storage. Tune in to find out where the energy storage industry is the most active today, where it might grow in the future, a few companies that investors can look into if they want exposure to the space, how power pricing in the continental U.S. is affecting the growth of residential power storage, and more.

A full transcript follows the video.

This podcast was recorded on Feb. 23, 2017.

Sean O'Reilly: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, Feb. 23, 2017, so we're talking about energy, materials, and industrials. I'm your host, Sean O'Reilly, and joining me today via phone is Motley Fool energy and industrials contributor, Mr. Travis Hoium. What's up, Travis?

Travis Hoium: Hey, Sean! How are you?

O'Reilly: Very good! How's life in Fool Land for you?

Hoium: Going well, it's busy in solar and energy storage, as always. I'm excited to talk about this a little bit.

O'Reilly: We're not talking about it today, but what did you think of Tesla's (TSLA 2.36%) earnings release? Did they shed enough light on SolarCity for you?

Hoium: They didn't give us a lot of insight into SolarCity, and now they're bunching solar in with their energy storage business. Just a quick look at it, it looks like margins are pretty low, although they did say that the SolarCity side was cash positive. We're not getting a lot of information as to what they sold to generate that cash. It's a little bit murky right now. But we'll see how that plays out. Manufacturing will be really big in the next six months. If they get their Gigafactory 2 online, that'll be really big. We'll see how that plays out.

O'Reilly: Very good. I wanted to have you on the podcast today because you're kind of my solar guy. That lends itself, of course, to something we don't hear about a lot in the cultural nexus, even here at The Fool, because it's going to be a big deal, we think, but, it's energy storage. I wanted to talk to you about the companies that are trying to solve the riddle of energy storage. For the last 10 years, ever since renewables started their ramp up, I remember, even when I was in high school and Buffett started investing in those wind farms, and you realize that it sounds like a great idea to build a bunch wind turbines, to put them in the middle of nowhere and transport the power to the East Coast or the West Coast, but you lose a lot of energy. It's not terribly efficient. T. Boone Pickens had that Pickens plan, and you just lose all this energy. Really quick, can you give us a bit of background on how you view energy storage, and lead in what a listener might need to know at this point?

Hoium: Yeah. To put it into three different buckets, we have residential, commercial, and utility scale energy storage right now. Those are developing in different ways. Residential would be things like the Powerwall that Tesla introduced a couple years ago. That's going to be storing energy for your use at home. There's not really a financial justification yet. There's a lot of ways that could be used, but there's not a lot of them in the field yet. Commercial energy storage is something that would be at a commercial building, maybe a factory. What they're going to try to do is reduce their demand charges. Commercial buildings have a little bit different rate structure than the typical homeowner has. So, they're charged based on their peak demand. If they can lower that peak, they can save money, therefore justifying an energy storage system. Utilities is really the big market that's growing right now. They have a lot of justifications like grid reliability, frequency regulation, they can delay capital expenditures that they might have to put into place. So, that's a big one to watch right now. Everybody is pretty much using batteries as it stands right now. What you're talking about with transporting energy from the middle of the country to the coast may or may not be something that batteries would help with. That might be something that's a little bit longer term, like hydrogen. But, right now, batteries is pretty much dominating this market, and residential, commercial, and utility are really the three different places that I'm watching right now.

O'Reilly: So, with the commercial -- commercial/residential, I remember when Elon Musk did the big press conference about the Powerwall, and he came out on stage, and this whole thing? Then there was the surprise, they're like, "Oh, by the way, the building has been running on a bunch of Powerwalls." Is that what you're talking about with commercial? Or is that too small? That's what I'm wondering right now.

Hoium: You could do that on a limited basis. You would have to install a ton of batteries.

O'Reilly: There are a bunch of them behind them, as I recall.

Hoium: Yeah, and you can do it for a short amount of time. But it's very unlikely that the building they're in is running 24/7 on energy created just for that building. The idea would be, you combine solar with storage, you can cut your ties to the grid. That's not quite where we're at today. You may be able to, if you have a factory and you're running full bore between 12 and 4 every day, and that's when your peak electricity consumption is, that's when you might use energy storage. So, you might store some energy overnight, and use your energy during those hours to reduce your peak charge for your facilities. So, that's really, in the commercial space, the applications that we're looking at right now.

O'Reilly: Awesome. So, how big is this market? I was surprised when you said that utility energy storage is really where it's at right now.

Hoium: Yeah. According to GTM Research -- they do the best work in this space --

O'Reilly: That stands for Green Tech Media, right?

Hoium: Yeah, Green Tech Media. They said that in 2016, we put about 260 megawatts of energy storage into place. That's expected to grow to 478 megawatts in 2017. So, if we compare that to the solar industry, the solar industry put in about 14.6 gigawatts. So, this is a really small market. Most of what was installed in 2016 was really just a couple of very large project. The Aliso Canyon, remember that natural gas leak they had, they basically had energy storage come in, Tesla and a couple other companies were involved in putting in some energy storage that would be able to allow them to hit their peak demand times. But you take out that project and a couple other big ones, and the market almost doesn't exist anymore. So, it's really small, but it's expected to grow by almost 10X in the next five years. So, this is something that's really on the horizon, we know it's coming, it's just sort of undefined, what exactly it's going to look like. Like you said, utilities are the ones that are seeing the most financial justification today, but that'll be coming down the line with commercial and residential projects, as well.

O'Reilly: Got it. So, as things stand now, it's entirely utility-scale installations. Just for the layman, what does this look like? Is it a building with a bunch of batteries in it, and it's right behind a field of solar panels? What does it look like?

Hoium: That can be the case. Tesla has built, and I think is building another project in Hawaii where they're combining a large solar installation with energy storage so they can provide energy that looks a little bit more like a baseload energy source than the existing peaks and valleys that come out of solar or wind farms right now. What they're doing mostly at the utility scale is basically locating transformers at their bases of infrastructure. So, it's being tied into the grid, and then becomes part of the grid asset. I think that's really the way that utilities are going to look at this.

O'Reilly: You mentioned that it's not really being used for renewable?

Hoium: Yeah. Renewables aren't really directly justifying energy storage today. Utilities are really looking at this as a part of their energy mix. They don't really care, necessarily, if it's tied to a solar project or wind project. They're looking at this as, if we have a peak demand in the middle of the summer in the middle of the day, how are we going to provide that energy? Are we going to build a peaker plant? Are we going to install some energy storage and be able to provide that energy that way? So, it's really a more holistic approach that utilities are taking this energy storage look at, whereas with renewable energy companies, it's easy to tie those two together, but economically it doesn't really necessarily make a lot of sense for a power plant to also add energy storage. So utilities are kind of just -- not to mention, they would love to have another item they could rate and that regulators are going to approve. So, that's really the way that they're looking at this today. 

O'Reilly: Right. So, if I'm reading this right, just bring everything home, it's not so much what I originally said, which is, having a bunch of batteries in a building behind a bunch of solar panels. It's more industrial-scale storage, and then, you have all these wind turbines and solar panels that all your customers may or may not have, and you have this natural gas that's building electricity, and all that's happening during the day. And most people are home at night when they're using the electricity. So you want to have the power that you generated during the day for the system so it doesn't get overloaded, or cost a ton of money, or something like that?

Hoium: Yeah, exactly. Renewable energy has this weird impact on the grid. In California, they have this phenomenon known as the duck curve.

O'Reilly: The duck curve? Like the bird in the water?

Hoium: Yes, exactly. What the duck curve is is, it's basically what the utilities see as their electricity demand throughout the day. If you think about it, in the morning, the sun isn't out but you could get up and turn your lights on, do some things around the house, you go to work. The sun comes out, the rooftop solar you might have on your roof is creating energy, that's being sent to the grid. So, from the grid's perspective, demand actually goes down in the middle of the day. And at the end of the day, the sun goes down, you get home, turn on your lights again, maybe turn the air conditioning on, and demand spikes. So they have this real problem developing now that they need to accommodate those spikes. That may be a place where energy storage fits a need that fits with renewable energy, but you wouldn't necessarily have to have an energy storage system in your house or your garage. But they do, sort of, fit together. But utilities are really just trying to provide electricity and use energy storage as one of their tools.

O'Reilly: Awesome. So, Mr. Hoium, to recap, I'm surprised that this is more of utility-scale thing, as opposed to residential. I had pictured everybody going gangbusters and putting a Powerwall in the back of their garage. But everybody's disappointed, I guess. So, which of these markets do you think is going to grow the most quickly in the years ahead? And, this is The Motley Fool, we like investing occasionally. What should investors be watching?

Hoium: Like we talked about, I think utility makes the most sense right now. Actually, if you look at Tesla's energy-storage business, they're providing a lot of the batteries that are being put in place in the utility space. Another few companies to watch, that are at least dipping their toes into the business even if they don't have a big presence today are companies like ABB, GE [General Electric], BYD is another one that will be providing batteries. That's really going to be a big driver. The biggest benefit that utilities have is they have financial justification. So, they can justify some sort of cost savings and get regulators to rate base those assets. That's something that a homeowner might not have, or even a business might not have. So, we're seeing a little bit of traction in the commercial market, and it really depends on the jurisdiction. Stem built an interesting virtual power plant and a lot of commercial buildings recently in Hawaii.

O'Reilly: Who built that?

Hoium: Stem. They're a leader in the commercial space. But they're still private. But, they have some partnerships with SunPower (SPWR -8.64%) to work in that commercial space. So, there's starting to be some ties between these innovative, small companies and the public companies that are going to be providing services or products for them. So, yeah, I think those are some interesting markets. Residential is still probably years away from being a significant market. I know Elon Musk and Tesla like to talk about that being a really big market, but I just don't see that having a huge impact on them for a while. SunPower has put some work into that, and so has Sunrun. Those are a couple companies to watch in providing energy storage services. But, it's just going to be a small piece of their business that they're basically doing pilot programs on for now. We'll see how that develops, but it may not be the big impact that the headlines would like to make you believe.

O'Reilly: Yeah, I'm actually both surprised and disappointed. In your view, it's just not economical -- you picture a guy that has a little bit of extra disposable income, but, they own a model S, and they have some solar panels on their roof, they may or may not have a Powerwall in the back of the garage. Right now, it just doesn't make sense to have the solar panels on the roof charging up a Powerwall and then driving your Tesla home and charging it up with the free energy from your solar panels that are stored in the Powerwall?

Hoium: Right.

O'Reilly: That was a mouthful, by the way. [laughs] 

Hoium: [laughs] Yeah. But, if you think about it, energy investments have to have some sort of financial justification. I think that's something that, when you combine tech with energy, you sometimes lose sight of that. But the reason that solar took off, especially in the residential space, is that it provided a direct cost savings. So, when SolarCity was booming, they wouldn't sell their solar systems to people just because they were solar. They would go to them and say, "Hey, we can save you money on your electricity bill, and set your costs for the next 20 years." That's how they were selling their product. If you think about energy storage, there's no real way to do that. You could do some sort of energy arbitrage, if you have time of use pricing, but time of use pricing just started in California, Hawaii is moving to that, there's a little bit more justification for energy storage in Hawaii. But, there aren't a whole lot of places around the country where you can even do arbitrage. And then, residential homes don't have things like demand charges to justify cost savings with. So, really, your only justification is energy back ups, and I don't know, I'm not going to spend $7,000 on a Powerwall just to have back-up energy in case the lights go out.

O'Reilly: [laughs] So, what you're talking about with the arbitrage is, during the day when no one is home, my energy costs $0.10 or whatever, and then it cost $0.20 at night. And that's not the case right now, so why bother?

Hoium: Exactly. Even in the Continental U.S., energy prices are so low that's a potential arbitrage opportunity is still years, if not a decade, away. If you go to a place like Hawaii, where electricity prices are about triple what they are in the Continental U.S. -- they've changed their rates and such a way that if you're exporting solar electricity to the grid, they're going to pay you about $0.15 per kilowatt-hour. If you're buying energy from the grid, you're going to pay $0.30 per kilowatt-hour. These are ballpark numbers, not quite exact. But, that $0.15 arbitrage, it wouldn't, maybe, make sense, for you to store your solar energy during the day and use it at night because you're saving yourself $0.15 every day. But, that just doesn't exist in most states, because energy only costs about $0.12 per kilowatt-hour across the U.S.

O'Reilly: Got it. One of the other reasons, near as I can tell, that solar took off is, it got way more efficient and cheaper. Where is this energy storage technology headed in the future?

Hoium: That's probably the best analogy to energy storage today.

O'Reilly: Solar panels, you mean?

Hoium: There are a lot of opportunities that will open up as energy storage costs come down. We're just still not there. It's sort of the same thing with electric vehicles. If the cost of the battery in an electric vehicle was one-quarter of what it is today, we would probably have a lot more electric vehicles on the road. Now, that's coming. And I think if you look at investing in companies like Tesla, that's something that you're seeing on the horizon. The challenge with energy storage is, we have to have those costs come down before companies are able to build a business model. And we don't know quite how that's going to work out. I think of it like a snowball rolling downhill. We know it's going to get bigger, but we don't know how big it's going to get, and we don't know where it's going to land.

O'Reilly: Got it. So, before we head out of here, I want to give you the last word. Are you investing in energy storage in any way? How are you viewing the landscape right now?

Hoium: I'm invested in SunPower. I think they have, at least, an interesting strategy and energy storage. It's something that'll be basically adding to their portfolio. But they're technology-agnostic and supplier-agnostic right now. So, I think that's an advantage. If we learned anything in the solar industry over the last decade, it's that building out a ton of capacity to supply a market that you think is going to grow can end up backfiring, because technology changes, cost structures change. So, companies that are able to buy batteries from commodities suppliers are going to be in a really good position, because then they can build a business model on top of that. That's really the only investment I have that would be exposed to that space. But I'm keeping an eye on a lot of companies. Tesla will be really interesting to watch. They've taken a much more aggressive approach into energy storage than anybody else. So, I'm interested to see, is their cost structure competitive, are they able to generate a high margin, or are they just going to be competing with a commodity product with other companies? That's kind of undefined right now. It's a space that's developing very rapidly, there's a lot of innovation, a lot of it is happening at private companies right now. So, that's something I'm keeping an eye on, but we don't cover a lot at The Motley Fool. But, everybody should keep tuned, because this is coming, this is like solar was a decade ago. It's going to change a lot in the energy space, we just don't know quite how, or who's going to win.

O'Reilly: Awesome. All right, Travis, I can't thank you enough for your time and giving us a call in.

Hoium: Yeah, thanks a lot.

O'Reilly: That is it for us, folks. Be sure to tune in tomorrow for the technology show with Dylan Lewis. We also want to give a special shout-out to our special guest producer, Heather Horton. We can't thank you enough. If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at [email protected]. As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Travis Hoium, I am Sean O'Reilly, thanks for listening and Fool on!