Elon Musk's Companies Team Up To Tackle Solar Power's Biggest Flaw, and Utilities Should be Scared

Solar will never work until battery technology improves significantly.

That sentence right there has pretty much been the rallying cry for solar power doubters for quite some time, and to a certain degree, that adage has been correct. Recently, though, two companies owned by Elon Musk, Tesla (NASDAQ: TSLA  ) and SolarCity (NASDAQ: SCTY  ) , decided to tackle that idea head on. Let's take a look at what these two have up their sleeve and why it could be a major game changer for the utility space. 

Cooperation makes it happen

Just when Elon Musk's companies looked great on their own, they decided to team up and become unstoppable. (Photo source: commons.wikimedia.org/Eshanklin

For well over 30 years, solar power has tried to breakthrough into the mainstream as a viable power source. Over that time, it has been held back by two things. The first was the per watt costs were too high because either high efficiency panels were too expensive to mass produce or because less expensive alternatives have not produced at a high enough efficiency level to make them viable. The second has been that solar power doesn't have the ability to provide power 24 hours a day because of a lack of storage.

For the most part, the first problem has been dwindling away to the point that solar is starting to make sense even without subsidies, but an economical solution to provide adequate power storage has eluded solar panel makers and other alternative energy companies for quite some time.

This is what makes the recent announcement from SolarCity so significant. The company has announced that it will team up with Tesla and its advanced battery technology to offer commercial customers what it is calling the DemandLogic system. Think of it as an on site smart grid. By bundling on-site generated solar power with on-site energy storage, it provides extra power necessary during peak usage and can help provide power during the event of an outage. Like all of SolarCity's offerings to the public, there will be no up front costs and the company recovers the costs of the equipment and installation from long term power purchasing agreements and service contracts. 

In some ways, you couldn't ask for a better pairing for these two companies. SolarCity is starting to see much larger and better financed companies such as Sunpower (NASDAQ: SPWR  ) and NRG Energy (NYSE: NRG  ) starting to enter the distributed solar space, and this move will help to make their offerings that much stronger when compared to these competitors. Likewise, this also gives Tesla another revenue outlet outside the automotive space. According to SolarCity CEO Lyndon Rive, we could see as much as 50% of SolarCity's commerical installations using Tesla's batteries for storage in places where there are much higher costs for peak electricity demand such as California.

Before we all jump through the ceiling about this deal, let's put it into perspective. On SolarCity's most recent conference call, management stated that commercial customers only represented about 20% of its total installations are commercial clients, and the company expects installations next year to be in the 475-525 megawatt (MW) range. Based on those numbers and the expected clients to use Tesla battery backups, we're looking at about 50 MW.

So this deal is in its nascent stage and it may take a while before both companies realize significant revenie from the partnership. Looking down the road, though, SolarCity has major contracts with both the US Military and Wal-Mart. These major clients could be major outlets for both SolarCity and Tesla when it comes to bundled power systems. 

Fight or Flight
If this sounds like it could be a major headache for utility companies, you're right. The reason that utility companies have been able to live with distributed solar up until now is because they have changed their rate structures to put a premium on peak demand times. If energy storage were to be combined with on site generation, then it could allow customers to circumvent these peak demand times and further decline a utility company's customer base.

This is already starting to happen in one of the fastest growing solar markets; Arizona. This past quarter, distributed solar installations grow by 11%, and it has become such a threat to Arizona Public Service that the utility recently took the net metering laws to court. 

If distributed power generation/energy storage systems continue on their current trajectory, utilities will more than likely start to change their business models. NRG Energy has already started, and Exelon (NYSE: EXC  ) has also started to put together a solar power/energy storage option after so much demand following Hurricane Sandy. 

Distributed solar has made its mark, and utility companies can either choose to fight it or embrace it. I'll give you one guess which way is more likely to be successful.

What a Fool Believes
Obviously, solar power is not the end all solution to our energy needs, but in certain places this offering from SolarCity and Tesla could have an incredibly deep impact on the way we generate power. Furthermore, it could also put SolarCity on top of the distributed solar game. Combine a disruptive business model with a company that has the best offering in that space, and you could have a very potent investment on your hands. 

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Read/Post Comments (11) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 18, 2013, at 11:01 AM, snowcrave wrote:

    the smart utility companies are the ones providing solar panels the stupid ones that will fade and go out of business are the ones that will continue to fight solar a little investment by a company now will save it down the road to bad most of these people are stuck in the past and dont want things to change

  • Report this Comment On December 18, 2013, at 11:11 AM, willy325 wrote:

    Sorry but it will never work. Batteries are miniature toxic chemical plants with limited shelf use and high recycle costs.

  • Report this Comment On December 18, 2013, at 11:23 AM, larrylem wrote:

    Telsa's batteries are meant for cars and as such they are small, light and therefore expensive. Large storage capacity batteries for fixed ground applications need to be cheap. They don't have to be small and light. Tesla's batteries are the wrong solution for this application.

  • Report this Comment On December 18, 2013, at 11:44 AM, AnsgarJohn wrote:

    Isn't there a oversupply of electricity at night and high demand for electricity during hot sunny days for airconditioning? At least that is what Ice Energy says.

  • Report this Comment On December 18, 2013, at 1:21 PM, CrazyDocAl wrote:

    So Tesla motors is restrained because of a limited supply of lithium thinks that a good idea would be to strain supplies even further by trying to get the batteries also used in solar panel systems. The fact is that adding lithium to a solar system triples the cost.

    Homeowner solar panel and wind systems are starting to run into a backlash. There's two problems. First as more and more systems come on line it messes up the electrical grid. It's like having an unregulated generator tied into the system, the sun shines all the panels come on, clouds move in and they reduce the amount of electricity. That causes dips and spikes that damage electrical equipment at people's houses.

    The second is net metering. It was great when nobody had a system but now is discriminatory. If you have a house that has a roof that faces correctly or if you have enough unrestricted land you can install a solar system, if not you can't. if you can't you are forced to subsides the people who can. It's just a matter of time before a suit is brought.

    If the suit is successful then solar systems will no longer pay for themselves as the life expectancy is shorter plus the cost of the system will not pan out over the cost of buying electricity from a provider. If batteries were cheap that would offset the issues with net metering. but sadly that's not the case.

  • Report this Comment On December 19, 2013, at 2:08 AM, PeakOilBill wrote:

    I see this increase in solar generation eventually causing problems without careful nationwide planning. We will always need an electrical grid that can handle unexpected peak loads from freak weather events. Too much reliance on solar could lessen major generation to a point where the entire thing could collapse. Many uses, like large buildings, will always have to rely on the grid for their power. A grid failure might be difficult to restart with a lot of distributed power inputs going into it. A few weeks without electricity, and there won't be anymore USA.

  • Report this Comment On December 19, 2013, at 10:59 AM, PMTP wrote:

    The statement: "The reason that utility companies have been able to live with distributed solar up until now is because they have changed their rate structures to put a premium on peak demand times." is not correct.

    Electricity has always cost the utilities much more during peak times. Typically, industrial customers have had to pay more during peak times and residential customers have not. This was not a change` to deal with solar. It was in place long before solar.

    Base load (the amount that is needed all of the time) is provided by sources like coal and nuclear that are very efficient monetarily but cannot ramp up and down quickly. Peak load power is provided by power sources that are typically more expensive but can ramp up and down quickly. The cost disparity is diminishing due to the lower costs of natural gas (used frequently to meet peak demand).

    The real reason the cost is higher is that often the utilities use the spot power market to buy power to meet peak demand. This allows them to avoid having to build extra capacity that they only need a few hours a day during certain parts of the year. The spot market provides power in increments of time as short as one hour to the highest bidder. When demand is very high everywhere, the spot prices can be very high (many times what a residential customer pays).

    In most jurisdictions, net metering requires the utility to pay anyone that provides power to the grid the retail rate for power, not the wholesale rate. This is all controlled by tariffs set up by utility commissions. This isn't a big deal when there is not much power being provided through net metering. When the amount gets large, it impacts the ability of the utility to recover costs and make the profit the utility commission has agreed to allow them. Building power plants is very expensive and it takes decades to recover the costs.

    If distributed solar provided through net metering could be relied on to meet the peak demand all of the time, it would make things easier for utilities. The problem is that solar power drops immediately when there are clouds and air conditioning loads don't. That means that power provided by solar through net metering is very volatile which requires the power companies to purchase power on the spot market even if they end up not using it. So they can end up paying a lot for peak power on the spot market and then not using it if solar provided through net metering is high (no clouds). They get no revenue to help offset this cost because they have to pay retail for the power that came to the net via net metering.

    The net result is, net metering of solar power makes predicting the net amount of power utilities need to provide to the grid much more difficult (subject to the instantaneous results of cloud movements) and it impacts their financial ability to manage and recover their costs.

    As I said before, none of this really matters when there is a small amount of power coming into the net via net metering. It becomes unstable (both electrically and financially) as the fraction of power provided by net metering increases to a significant amount.

  • Report this Comment On December 19, 2013, at 11:12 AM, DrGripe wrote:

    Great idea .. my biggest concern is the life expectancy of the battery and the cost which translates to higher costs overall. When battery life gets to 20+ years.. THEN it is a super dupper idea.

  • Report this Comment On December 19, 2013, at 12:26 PM, rodgerolsen wrote:

    Again the author ignores the real problem. Solar is still far to expensive to be competitive in the real world. Any system that depends upon your neighbors giving you money, through the tax system, to operate is a dumb idea.

  • Report this Comment On December 19, 2013, at 1:27 PM, seanisbomb wrote:

    The customer doesn't have to worry about battery costs in the case of SolarCity. There is a monthly fee just like a traditional utility bill.

  • Report this Comment On December 20, 2013, at 1:45 AM, badkat7 wrote:

    As a domestic user, burdened by APS's tax on solar which successfully passed in Arizona recently, I plan on allowing my solar system to run the course of its life and will then shut it down. At best solar is good for around 25 years although inverters probably won't last more than 10 years apiece.

    However I will replace the system by solar water heaters, and a more efficient a/c using technology imported from England (equivalent to Seer 30). This will cost about the same as solar but earn me nearly twice as much as my 7.2kW solar system in annual energy savings. BTW, even in Arizona a 7.2kW system only saves me $940 a year on power so the system will conservatively take 26 years to pay for itself - put simply you'd get a better rate of return by investing the same capital in 401K.

    I may still invest in solar in the future, but by that time I expect we'll have domestic fuel cells and I will be using photo solar cracking of hydrogen to produce my own fuel. Long term I don't think the existing power companies have a future in domestic power consumption. As cars get converted to hydrogen fuel cell, houses will eventually be powered by local hydrogen fuel cell generators owned and run by local communities themselves.

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