Tesla (NASDAQ:TSLA) was supposed to be the big name in solar and energy storage, leveraging the Powerwall for homes and Powerpack for businesses and using its SolarCity operations to push systems out into the wild. But Tesla is shrinking its solar ambitions and doesn't seem to have much interest in being a leader in anything but utility-scale energy storage.
That presents an opportunity for the rest of the industry, and SunPower (NASDAQ:SPWR) is taking a surprisingly aggressive approach to its energy storage ambitions. Long-term, it could be a huge differentiator for the company.
Rollout strategies matter in storage
It's easy for a company to say it has an energy storage product, but rolling it out to customers is easier said than done. Tesla's Powerwall was introduced in 2015, but there still haven't been a meaningful number of the systems installed worldwide.
What drives energy storage installations is economics, whic is a big reason the Powerwall has flopped. Outside of Hawaii, there hasn't been an economic case for home energy storage because customers with solar panels can just send their excess electricity to the grid and be paid the retail price for it, a practice known as net metering.
Where energy storage has been gaining traction for a few years is in commercial markets, where adoption is driven by economics. Commercial customers generally have bills split into usage and capacity components. The usage side of the bill is similar to residential bills, fluctuating based on how much electricity is used in a month. Capacity charges are based on the peak capacity used by a facility, even if it's only for 10 or 15 minutes during a month. If energy storage can shave the peaks from this part of the bill, it can justify the storage system financially. Any other value adders, like shifting solar energy produced on-site from peak hours to evening hours, are gravy for the system.
This is why SunPower is investing in energy storage for its commercial projects. Management says it currently has $60 million in storage pipeline, and in 2018 half of its commercial installations could include storage. That's a big statement for a company with the No. 1 position in the commercial market today.
Storage is a game changer for solar companies
This is no small development for SunPower: it will help widen the company's competitive moat. Installing a solar system with any number of commodity components is simple enough, which is why the residential and commercial solar markets are so competitive.
Once you bring energy storage into the equation, however, the dynamic changes. There are very low barriers to entry in solar installation, but there are very high barriers to entry in energy storage system controls. The brains behind the energy storage system need to use a building's electricity consumption history, matched with solar generation projections, utility prices, and other factors to maximize the value of an energy storage system. It's no small feat to build that algorithm and leading energy storage companies will update their algorithms constantly as rate structures change. Scale will be an absolute key -- once a company builds scale, it will have a competitive advantage that should drive higher margins than just installing solar panels.
SunPower said as much on its conference call, indicating that solar systems with storage will be sold at a higher margin than non-storage systems.
Commercial energy storage leadership will drive residential leadership
The fact that SunPower is taking a leadership position in combining commercial solar and storage will be important for residential solar too. The economics of residential energy storage don't make sense in most states yet, but that's changing as utilities attack net metering and add fixed charges to customers' bills. Management told me last week that residential solar is about a year behind commercial in terms of adoption.
SunPower will be able to take what it has learned, and some of its algorithms, from commercial energy storage into the residential market. It'll have the built-in scale, and already has the installation network to take energy storage nationwide.
SunPower has quietly built a formidable energy storage business and could be one of the leaders in solar plus storage, an energy advancement the renewable energy industry has been waiting for for years.