Energy storage is coming to the market in a big way in 2015. Tesla Motors (NASDAQ:TSLA) says it's launching an energy storage product in the next few months that will presumably be paired with SolarCity's (NASDAQ:SCTY.DL) rooftop solar offerings. SunPower (NASDAQ:SPWR) has partnered with Sunverge to offer residential solar storage, something it hopes to expand this year.
Today, another big solar player joined the fray. SunEdison (NASDAQOTH:SUNEQ) announced the acquisition of Solar Grid Storage, a start-up that has targeted the commercial energy storage market. While this brings energy storage capabilities under SunEdison's umbrella, it doesn't answer how this business will make money for developers over the long term.
Shoot now, aim later
A common theme in the solar, wind, and energy storage businesses is that everyone knows energy storage is necessary and valuable, but no one really knows how to value it. A unit of electricity from a solar or wind farm (measured in kW-hrs) can be given a price and be bought through a power purchase agreement or other structure, but how do you value saving those units of energy for later?
Early in the development of the energy storage business the thought was that storage would save on demand charges. Commercial customers are charged not only for each unit of energy they use, but also the peak amount of electricity they use at one time. Think of this as the top speed you travel when driving to work. Your average speed might be 30 mph, but if your top speed is 70 mph the utility has a charge for the peak you hit.
If energy storage can reduce the top speed to 50 mph it will save the consumer money, and energy storage could be priced using those savings.
But not every customer will accrue demand charges, and utilities could easily adapt to the business model, making it a tough model to scale.
Other ideas for monetizing energy storage include performing energy arbitrage between peak times and low demand times. Solar Grid Storage's former CEO, Tom Leydon, said there is value in being able to control supply ramp rates from renewable energy systems. Companies are also selling energy backup for commercial and residential customers as a value add for energy storage.
It's easy to see that energy storage adds value to wind or solar energy projects, but exactly how much value is added and how to price it are problematic. So the industry is entering a phase in which it will try many different ways to monetize energy storage before it gets a business model right.
Like the solar industry of 2005
The energy storage business of today reminds me much of the residential solar business of a decade ago. Back then, you could see the value in going solar and that costs were coming down, but no one knew exactly how to price solar energy, finance it, or sell it to consumers.
Eventually, net metering, equity financing, and leases combined to form a business model that made solar affordable for consumers and profitable for installers. I think energy storage will reach the same state eventually, but how the business model develops is anyone's guess.
The players to watch
Right now, it seems SolarCity, SunEdison, and SunPower will be players to watch in energy storage because they can figure out a way to fold the product into their existing businesses. It might be in the form of higher-power purchase agreement rates with utilities or customers. It could be in the form of customers simply paying for the convenience of energy storage.
Over the next few years it will be interesting to see how these companies attack the energy storage market and how they make money off it. Energy storage is unquestionably valuable to the wind and solar industries, but it remains to be seen how valuable and how they will make money from it.