There's never been a greater threat to the utility industry than solar energy. It allows for the transfer of power-generating assets from the utility to consumers, stretches the grid by making homes both demand sources and power suppliers, and may even allow consumers to cut ties to the grid altogether.
One key component challenging utilities is energy storage, because solar energy is an intermittent power source. It can be a threat to their business model if homeowners and businesses install storage to reduce their reliance on the grid. But it could also be a boon to utilities if they can make energy storage their new revenue-generating asset. That's exactly what Peter Rive, SolarCity's (NASDAQ:SCTY) chief technology officer, thinks will happen long-term, and it could be good for everyone involved.
The solar conundrum
To understand why energy storage is a big deal for utilities, you have to understand how utilities see an individual solar home. In the image below, I've shown an example supply-and-demand chart for a solar home. In the example, the home uses 2 kWh of energy 24 hours per day and has a 5 kW solar power system that provides varying levels of energy throughout the day.
In this example, the home requires no net power from the utility. Sometimes it's coming from a consumer, sometimes it's coming from a supplier, but at the end of the day the solar power system provided exactly enough energy to power the home's need. If this home were in a location where net metering is allowed (which is most of the U.S.), the electricity bill for this day would be $0.
You can see why utilities might not like this setup. They're providing a service to this household by providing energy at night and taking energy during the day, but getting nothing for it. So, utilities have started pushing back against net metering and begun proposing charges for solar households.
But these charges may eventually force households to make a choice. They could send the extra electricity they create during the day back to the grid and pay a fee or install energy storage and use the energy at a later time to avoid the fee.
Home energy storage is already a threat to utilities
SolarCity and SunPower (NASDAQ:SPWR) have already started experimenting with energy storage that would reduce solar charges or even make going off the grid possible. Pushing consumers off-grid isn't the plan for either of them with early systems, but you can see how it could be attractive for some homeowners, especially in Hawaii, where electricity costs are extremely high.
However, building an energy storage system big enough to store days' worth of energy would also be expensive. For example, Tesla Motors, which supplies SolarCity's energy storage systems, is reportedly targeting $100/kWh costs for batteries from the Gigafactory when it reaches full production. The home I outlined above uses 48 kWh of electricity per day, so to build three days' worth of energy storage it would cost $14,400.
That's expensive, and it's not likely every home would want to spend the money for energy storage on top of a solar power system. But there may be a way for utilities to get into storage and make everyone happy.
How utilities could get into storage
What Rive and others are suggesting is that it makes sense for utilities to get into the storage business. In the future, they could still serve consumers an energy service; it may just look different than what we see today.
To explain how this might work, let's use a residential neighborhood with homes similar to the home above as an example. Each home in the neighborhood is both a consumer and a supplier of energy to the grid at any moment in time, but where energy is flowing at any given moment is variable.
Instead of discouraging consumers to install solar energy production or inadvertently encouraging them to install energy storage in the home, the utility could install a large neighborhood energy system and provide energy storage as a service. Think of it as the center of a microgrid. At any moment, any home in the neighborhood may be feeding the storage system or drawing from it, but the utility-owned node would quickly be able to absorb or supply energy efficiently to the neighborhood.
This microgrid service could be offered to the neighborhood at a fixed fee or based on energy flow from each home, but it would allow the utility to own assets and charge a fee for the service provided while allowing innovations like solar energy to thrive.
The advantage for homeowners is that they could avoid the cost of building an energy storage system they would have to own and maintain themselves.
Upending the utility business model
This may change the way utilities look at themselves, but it's a model that could work and keep them in business long-term. The days of building huge power plants and generating guaranteed rates of return are long gone, and utilities are going to have to adapt to survive. This is one way to do that, and even SolarCity, which is threatening the utilities of today, thinks storage belongs in the hands of the utility.
Time will tell how this plays out, but energy storage could be key to utilities' survival.
Travis Hoium manages an account that owns shares of SunPower and is personally long shares and options of SunPower. The Motley Fool recommends and owns shares of SolarCity and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.