Editor's note: This article originally stated that San Diego Gas & Electric had a contract with Tesla. In fact, the contract is with AES. 

The impact Elon Musk and Tesla (NASDAQ:TSLA) will have on the energy industry may be larger in the power storage segment than anywhere else. Sure, his company is a leader in electric vehicles and residential solar, but in the worlds of automakers and solar energy more broadly, Tesla is a very small player. 

Energy storage is another matter: Tesla has been more aggressive in that space, and could take a leadership position very quickly. And its product could very well upend the electricity market as we know it.

Tesla Powerwall on a home.

Image source: Tesla.

Energy storage saves natural gas from itself

The future of energy can be seen in the emergency energy storage system built in Southern California after the Aliso Canyon natural gas storage field's massive leak late in 2015. Because of that blowout, which released close to 100,000 metric tons of methane into the atmosphere, operations at the facility were curtailed, and there was a chance the region wouldn't have enough natural gas to meet its energy needs at peak times in the summer, leading to brownouts or blackouts. 

Most of the time, the issues at the facility weren't a big deal relative to California's power supply, because there was still enough energy overall to meet demand. But there was the potential for a disparity during evening hours, when people get home and turn on their lights, that demand could exceed supply. And that was a concern for the grid operators. 

Their solution was to install a large array of batteries that could store energy when it was abundant and easily deploy it to the grid when needed. Sempra Energy's (NYSE:SRE) San Diego Gas & Electric contracted with AES Energy Storage to build 37.5 MW of energy storage and Edison International's SCE contracted with Tesla and Greensmith Energy to build two separate 20 MW energy storage facilities. In total, the projects have at least 280 MWh of capacity to offset the Aliso Canyon outage and just six months after being contracted the projects were complete. 

Energy storage added an incredible amount of value to Southern California's grid, and it did so in very little time. And proving out these capabilities will allow more energy storage growth in the future. 

Filling the needs of a changing power grid

The success of the three energy storage deployments in California is a milestone that shouldn't go unnoticed. They filled an urgent need for the grid, were rapidly deployed, and provide functionality that will allow more integration of renewable energy sources like wind and solar. 

As the cost of batteries comes down, applications beyond peak shaving will provide more value to the grid, and the energy storage market will continue to grow. Tesla is already pushing the idea of home energy storage, and companies like Stem, Con Ed, and SunPower are beginning to build virtual power plants that are a network of batteries working together. And with battery costs down at least 70% over the past two years to around $200 to $250 per kWh, batteries are becoming a more economic solution for challenges the electric grid faces everyday. 

Building 70 MW of energy storage may not seem like an earth-shattering project, but it's a big step forward for the grid of the future. If regulators are impressed with how the project works, we'll see more like it, and the energy storage ball will get rolling faster than you might think. 

Travis Hoium owns shares of SunPower. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.