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Tesla Motors Betting Big on Energy Storage -- But Is the World Ready?

By Travis Hoium - May 1, 2015 at 10:14AM

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Has Elon Musk bitten off more than he can chew in energy storage? We're about to find out.

The Powerwall next to a Model S. Image source: Tesla Motors

After a 49-minute delay, Elon Musk took the stage at 12:19 a.m. EDT last night to announce his much anticipated energy storage product.

It was an awkward presentation, at best, but Musk did introduced the long rumored 10 kWh Powerwall for residential customers and the 100 kWh Powerpack for commercial and utility scale systems that will cost $250 per kWh. Both can be tied together with other Powerwalls or Powerpacks to form bigger energy banks, depending on a customer's needs. 

The push into energy storage is a natural one, considering the scale of the 50 GWh Gigafactory, but it's also a risky bet by Musk. Energy storage is already a crowded space and it's difficult to justify the economics of storing energy in most locations today. Here's a look at the good and the bad in Tesla Motors' ( TSLA 1.35% ) new energy products.

The Powerwall is designed to be an elegant home utility item. Image source: Tesla Motors

A compelling price point
The shocking news from Tesla's energy announcement was the $3,500 sticker price for the 10 kWh Powerwall product. To put this in some perspective, industry sources have told me that they expect lithium-ion battery prices to be low $300s per kWh by early in 2016 and Tesla Motors itself is hoping to reduce costs to around $200 per kWh by 2020.

So, Tesla is already selling small systems for what the industry says its costs are. In all likelihood, Tesla Motors will have razor thin margins on the Powerwall and could even lose money on it early on. 

No matter the economics for Tesla Motors, the $3,500 sticker price is at least low enough for the environmentally concerned consumer to consider and may create a market where one doesn't exist today.

Whether or not it makes financial sense to buy one is another story entirely.

Who would buy a Tesla Motors Powerwall?
During his presentation, Musk said that the Powerwall would be perfect for those who live in cold climates or people who don't have electricity today. I don't know how often he thinks ice storms roll through cold climates but as someone who has lived in Minnesota almost all my life I can tell you that backup electricity generation isn't a hot topic of conversation here. I'm equally skeptical of how people who don't currently have electricity could afford a $3,500 energy storage system.

Where does energy storage make sense today? Here are a few justifications you can use for energy storage today:

  • Where reliability is a real issue -- If you're very concerned about the reliability of the grid or you live in a remote location, like a small island, energy storage may be a perfect solution. There are plenty of businesses that have backup generators and a battery system from Tesla Motors may be a perfect replacement for these customers. Whether or not homeowners put much value on reliability is questionable at this point. 
  • Freedom from the grid -- If you really want to be free from the grid or make your home 100% green an energy storage system can do that. There's little economic justification for doing so today (except maybe in Hawaii), but early adopters of solar energy didn't have much economic justification either and look at where they led us.
  • Avoiding time of use rates -- In locations where time of use rates are in effect it's possible to make an energy storage system pay for itself. Cheap energy could be stored at night and discharged during the day when electricity is expensive and solar energy can augment demand. Of course, there could be regulatory hurdles and it would probably make more sense for a utility to do this with a larger energy storage system like a Powerpack, but the concept would work.
  • Avoiding demand charges -- Early energy storage companies have justified their systems to commercial customers by selling them on demand charge reductions. Demand charges are utility charges based on peak electricity demand each month, no matter how long it lasts. If you can reduce a short-term spike in demand with energy storage the cost savings can be substantial. By the way, this is how dozens of companies are already selling commercial energy storage systems in the market today. 
  • Net metering -- Today, most residential solar systems are paid for using a concept called net metering. Basically, a customer will only pay for the net energy they use and they get free access to the grid to feed electricity while the sun is out and pull electricity when the home needs net energy. Some utilities are challenging this system because it doesn't pay for the infrastructure homeowners use, but if the price homeowners are paid for solar energy is reduced it could be cost effective to save that energy for later use within the home, justifying the cost of the energy storage system.

These are reasons why energy storage could make sense, but today there are really no good economic arguments for energy storage in the U.S. outside of demand charges, which most residential customers don't pay. If the rate structure changes the economics could change too, but for now early adopters of Tesla Motors' energy storage systems will be businesses, utilities, and homeowners willing to pay more to store their own electricity generation from the sun.

Competition is stronger than you think
For many people, Elon Musk's introduction of energy storage systems was the first time they've heard of energy storage. In fact, energy storage has been around for years and there are dozens, even hundreds of companies working on it today.

GTM Research recently did a report called the U.S. Energy Storage Monitor that outlined the competitive environment well. You can see below that there are about four dozen energy storage vendors who are using different battery or capacitor technology to get into this market.

Image source: GTM Research's U.S. Energy Storage Monitor report.

Move another level down the value chain to companies integrating energy storage with software and services for the different market segments -- many of whom are technology agnostic -- and you have even more players.

Image source: GTM Research's U.S. Energy Storage Monitor report.

Tesla Motors may be the biggest name in the energy storage business today, but it's definitely not the only one.

How big could this business be?
Elon Musk isn't one to understate a market's potential and his statement that 200,000 GWhr of energy storage from 2 billion power packs would be enough for the world's energy needs put his lofty vision into perspective.

But reality may be very different, at least for now. GTM Research says that just 62 MW (based on one-hour discharge for current utility requirements) of energy storage was installed in the U.S. in 2014 and only 220 MW will be installed in 2015. By 2019 their projection is just under 900 MW.

Image source: GTM Research's U.S. Energy Storage Monitor report.

That's hardly enough demand for the projected 15 GWh of Gigafactory production earmarked for the energy storage market when it's fully operational in 2020. This is the biggest question that I think faces Tesla Motors long term in energy storage. I completely agree with Musk that energy storage is something the world needs, but when the world needs it is another story. If Tesla Motors completes the Gigafactory five years before the market demands the energy storage product it's a recipe for disaster. After all, there's a long list of solar and battery manufacturer bankruptcies in the last few years alone. 

What about SolarCity?
I found it very interesting that SolarCity ( SCTY.DL ) was notably absent from Elon Musk's presentation last night. I'm sure this wasn't by accident because if Musk is going to sell 15 GWh of batteries to the energy storage market in 2020 he's going to need all the demand he can get.

But this also means that energy storage won't be a differentiator for SolarCity. It will offer the Powerwall to its customers, as will any other solar installer who wants to. I thought this was a big blow to SolarCity's chance for differentiation in the energy storage market. 

Is Musk's energy storage vision the future of a future flop?
As I mentioned above, I think energy storage will play a major role in the future of energy. It's a perfect compliment to intermittent energy sources like wind and solar, which are taking the world by storm.

But the reality is that even a $3,500-10 kWh energy storage system isn't economically justifiable and that's what will be required for long-term success. My concern is that the Gigafactory is too much too fast and the world won't need the amount of batteries Tesla Motors and the four dozen other manufacturers are going to produce in the next five to 10 years.

In this case, I think Musk has gotten ahead of himself. The Powerwall is cool and it'll change the conversation about energy storage, but it's too far ahead of its time to make financial sense for anyone other than the most environmentally concerned customers. 

If anyone can prove that theory wrong it's Elon Musk. Now is the time for the hype to become reality if he really wants to change the world.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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