Improvements in batteries -- and more broadly, energy storage -- could be the biggest disruption we've seen in the energy industry in over a century. Utilities, power plants, transportation, and even the design of homes could be altered by the rapidly falling cost of storing energy for later use.
In the U.S., cumulative energy storage installations hit 1,080 megawatt-hours in 2017 and another 1,233 MWh are expected to be added in 2018, according to GTM Research (a subsidiary of Verisk Analytics). To put the size of those installations into perspective, 1,080 MWh of energy storage could keep the lights on for an hour and 45 minutes for all retail customers in the state of Vermont. By the end of the year, those lights could be kept on for three and a half hours, and that's just the beginning of the industry's growth.
The ability to store that kind of electrical power hasn't been possible with technology as easily deployable as a battery, meaning it's an entirely new asset rattling the energy industry. As the economics of energy storage improves, it'll upend everything we know about the grid, power plants, the economics of utilities, and transportation. Is your portfolio ready for that kind of disruption?
Disruption on a grand scale
Utilities and power producers are going to be the first to feel the disruption of batteries and energy storage in a big way. Wholesale power markets are predicated on the idea that times of high demand will result in high prices for electricity, requiring peaking power plants to operate the grid. Energy storage could make peaker plants obsolete, and could also add value to the grid by filling gaps in renewable-power plant production, providing voltage support, deferring distribution and transmission, and backing up power.
Calpine, Dynegy (NYSE: DYN), and NRG Energy (NYSE: NRG) are three of the largest power plant owners in the country and they've all sold or avoided investing in next-generation assets like energy storage. As a result, they could all could see significant disruption to the wholesale power markets that drive their businesses.
To put the gravity of the situation into perspective, according to investment bank Lazard, new wind or solar power plants with energy storage attached are now cheaper than coal power plants, and in some cases beat natural gas. That's a massive change in the utility industry.
Here's a look at some winners and losers in the utility-scale energy storage business.
Winners: Developers willing to build and finance innovative energy storage solutions with solid long-term economics.
For example, Southern California Edison is a subsidiary of Edison International (NYSE:EIX) and owns the 80 MWh energy storage system in Southern California that Tesla (NASDAQ:TSLA) completed in 2017. This kind of project should be a model for utilities in the future, especially if they can convince regulators to rate-base their cost. Another winner could be Fluence, an energy storage company formed by Siemens and AES Corp. (NYSE:AES). The company will develop and finance energy storage projects, hoping to upend the electricity industry before someone else does.
Losers: The competitive electricity market, where disruption will be hard to overcome.
Some utilities and power producers own unregulated power plants relying on market demand, particularly peak-energy pricing, to make money, and they could be in trouble. Natural gas peaker plants, for example, may not be built after 2025 if industry expert Shayle Kann is correct; this is a troubling prediction for any power producer.
Energy storage could push wholesale power prices lower than they are today. When you consider that hundreds of power plants have been shut down, and large wholesale power producers have been forced into bankruptcy or sales at extremely low prices, this looks like a part of the electricity industry with dire prospects -- and energy storage will only make them worse.
Energy customers have more power than ever
Long term, the biggest disruption taking place in energy may be consumers having the ability to create and control their own energy usage. Rooftop solar makes it possible for customers to generate electricity, and now energy storage systems are giving them the ability to store that daytime energy for nighttime use, perform arbitrage on variable electricity rates, and even cut ties to the grid altogether. Here's a look at which companies are leading that charge and what they're disrupting.
Winners: Developers building solutions that incorporate energy storage. SunPower, Sunrun, Tesla, and Vivint Solar are four leaders in this space, and they will likely leverage energy storage to power growth.
Losers: Every regulated utility in the U.S. Reduced demand means, ultimately, that they'll need fewer assets to rate-base to serve consumers and utilities may have to support customers adopting their own energy production to avoid regulatory backlash. An example of what can happen is Hawaii, where regulators have rejected Hawaiian Electric's grid modernization plans and also a takeover bid from NextEra Energy. Regulators required the utility to update the grid to allow more customer-sited energy assets and even lowered its requested return on equity proposal, which combined are the disruptions utilities fear most. As the state with the highest adoption of rooftop solar, Hawaiian Electric's customers being allowed to produce and store more of their own energy are a warning sign for the regulated utility industry long-term.
Big oil is facing a big threat
According to Bloomberg New Energy Finance, 35% to 47% of new cars sold globally in 2040 will be electric. Total (NYSE:TOT) has said it thinks one-third of all new cars will be electric by 2030. Royal Dutch Shell (NYSE:RDS.A) CEO Ben van Beurden has also said that he thinks oil demand will peak late next decade.
The price of oil is based on the marginal barrel -- the last one produced -- so the growth of electric vehicles is problematic for the oil industry. Even a small reduction in demand could send oil prices plummeting, and if EV sales start to be one-third or more of all new vehicle sales, the industry will be in real trouble.
Winners: Utilities, most likely. More EVs on the road will mean more demand for electricity if people aren't charging their cars with solar energy at home. I say that utilities will be the winner with the caveat that they need to make sure they aren't pre-empted by other providers adding charging stations and their own energy production, foregoing the grid. For now, most of the upside in EV charging should accrue to utilities, but that's not a guaranteed win long-term.
Losers: All oil producers. Falling oil prices will be bad for everyone in the industry.
Batteries and energy storage will change everything
Nearly every part of the energy industry will be affected by the growth of batteries and energy storage across the world. Power plants, regulated utilities, and oil companies are some of the biggest industries that will see an impact. If you're an energy investor, make sure your portfolio is prepared for the disruption.