Elon Musk has investors convinced that he's going to generate enough demand for electric vehicles and energy storage by 2020 that he's been given free rein to build a $5 billion manufacturing plant with Panasonic that could make or break Tesla Motors (NASDAQ:TSLA). I have my doubts about whether EV demand will be as high as he thinks, but on the energy side there are even more questions.
In late March, Musk had the market abuzz after announcing a "major new Tesla product line" would be coming at a presentation on April 30. He more than alluded to the product being an energy storage product for SolarCity's (NASDAQ:SCTY.DL) residential solar installations. There's no doubt that energy storage is going to be an important part of the future of solar, but are Musk and Tesla getting ahead of themselves this time around?
What Musk has in mind for energy storage
It's expected that around 30% of the Gigafactory's 50 GW-hrs of production will be set aside for SolarCity's energy storage business. That's around 15 GW-hrs, which would be sold with solar systems at residential and commercial installations.
I certainly think the energy storage market will be big someday, but to assume that it will fill up any excess demand left once Tesla makes electric vehicles -- and in such a short time frame -- is a stretch.
Why energy storage is a reach today
So why do I think Musk is getting in over his head with energy storage? Let's put some numbers behind the business.
Tesla reportedly hopes to be making batteries for around $200 per kW-hr by 2020, similar to what I've heard from other industry sources. That's about half the cost of batteries today, and makes energy storage more compelling. But it still may not work, particularly in the residential space where SolarCity makes its bread and butter.
Consider that the average SolarCity residential installation is 5 kW at peak output. If each storage system were to have just 5 hours of production backup (25 kW-hrs), SolarCity would be installing $5,000 worth of batteries in a home. That's before any markup for Tesla Motors or SolarCity, so a storage system would probably cost closer to $10,000 for a consumer.
Now, consider that SolarCity's costs are already below $3 per watt of solar installed, and they hope to reach $2.50 per watt by 2017. By 2020, it's likely that costs will approach $2 per watt and sale prices may be $3 per watt or less, meaning that if a 5-hour storage system cost $10,000 it could increase the cost of a typical solar system by 66% or more.
Stack onto that additional cost the fact that there's not currently any way for homeowners to monetize energy storage and it becomes even harder to see people adding energy storage en mass.
The market would have to develop extremely quickly
When we take those challenges and add in the size of the Gigafactory the challenge becomes even greater. If Tesla indeed plans to produce 15 GW-hrs of energy storage batteries and the average home system is 25 kW-hrs, it would have to install 600,000 energy storage systems per year.
SolarCity installed just 97,000 systems in 2014, a record year for the solar industry. How could SolarCity possibly make the economics work for energy storage for 600,000 homes in just 5 years?
Energy storage is a reach
I have no doubt that energy storage is going to be an important piece of the grid and solar energy in the future, but it'll grow first in areas where the economics make sense. Right now, that's with commercial and industrial customers, who can lower demand charges by installing energy storage and can even make money with demand response. Residential storage systems don't have the same monetization platforms and probably won't for many years.
It's presumptive to assume that the residential energy storage market will be anything but a hobby for at least five years, and I don't see any way 15 GW-hrs a year could be installed. Even leading solar and energy companies are still trying to figure out how to monetize energy storage, and they're tiptoeing in rather than betting the farm like Tesla is doing.
When Tesla's residential energy storage system launches, SolarCity will be trying to sell it as a way to have backup power in emergencies. That seems like a tough sell to customers who would have to foot the bill for thousands of dollars of energy storage just for the possibility of using it once in a blue moon. Seems to me like a backup generator would be a cheaper backup power source in today's market, and that might be Tesla's biggest problem.
Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends SolarCity and Tesla Motors. The Motley Fool 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.