A lot of people who look at Tesla Motors' (NASDAQ:TSLA) energy storage plans think it's just the latest genius move from Elon Musk. What's often misunderstood is Tesla Motors' real position in the energy storage industry and how they plan to make money long-term. Sure, making batteries is nice, but there's a complex world in energy to understand before those batteries will actually make money for a customer.
I recently visited one of Tesla Motors' first commercial energy storage installations and investors may be surprised to learn where the value in energy storage is really coming from.
Energy storage is more than batteries
The challenge with energy storage today is that it's a great concept with very little economic justification. There are places where it can be used for frequency regulation and commercial customers are using it to shave demand charges (which are fees based on the peak amount you consume, even if it's just for an hour each month), and even demand response may provide value for storage customers. But it's not the "no brainer" solar is and it takes a lot of work to figure out when to charge, when to discharge, and what that storage is worth.
That's the challenge facing Tesla Motors in energy storage. At Jackson Family Wines, which has 21 Tesla Motors energy storage systems with 4.2 megawatts (8.4 MW-hrs) of energy capacity, there's still experimentation going on. The system was initially used to shave the peaks off demand charge, but they're testing demand response as well in an effort to see how they can maximize energy savings/revenue.
EnerNOC (NASDAQ:ENOC) is leading the charge in demand response and that's long been the company's business model. But it's not what Tesla Motors does best. So, the question now is: What does Tesla Energy do with energy storage after the system is sold?
What will Tesla Energy look like
On my visit to the Tesla energy storage system I didn't get to see under the hood of how Tesla is building out energy storage capabilities. But I did learn that they are monitoring the system to see how it performs and they're testing different revenue models, primarily lowering demand charges and capturing demand response revenue. In reality, the revenue generators like demand response are really done through EnerNOC.
If Tesla is going to be any sort of dominant player as an energy storage company, making more than just batteries, it'll need to find a way to monitor and monetize thousands of these systems around the country, maximizing their revenue at each location. In my opinion, it's the control of when and how energy is stored and discharged that will create the most value in energy storage. The battery itself is a commodity.
Think about it this way: If you bought a Tesla Motors Powerwall and had it delivered to your home today, what would you do with it?
It would be a giant weight on the wall without the smart controls needed to make energy storage valuable. But is that the business Tesla Motors wants to be in? If so, why not just buy SolarCity (NASDAQ:SCTY.DL) and integrate its data into the energy storage business? After all, SolarCity already puts inverters necessary for a Powerwall in on its solar installations and it is building out controls for energy storage. Or buy EnerNOC and integrate its demand response business and energy intelligence solutions?
Building either infrastructure from the ground up wouldn't be impossible, but it's not a natural offshoot from Tesla Motors' other businesses.
More questions than answers about Tesla Energy
When I went to California to see Tesla's energy storage product first hand I thought I would come away with a better understanding of what their strategy is in this high potential market. Instead, I found myself more impressed with what the people on-site at Jackson Family Wines were doing and was surprised to hear that a powerful player like EnerNOC was actually the brains behind monetizing energy storage. Today, I have more questions about what Tesla Energy is and isn't going to do than I did a few weeks ago.
Energy storage is a massive potential market for Tesla Motors and I'm not surprised that Elon Musk is pursuing it. But there are dozens, if not hundreds, of battery manufacturers around the world eyeing this opportunity and I don't know what Tesla has over any of them besides a brand name. And what value does that add when only a handful of people will see a commercial energy storage installation's tag (see right)?
I also don't have any more clarity on how Tesla Motors plans to integrate its batteries with ways to actually make money off the batteries. A solar installation from SolarCity, for example, directly offsets energy bought from a utility. But very few homes or businesses have a problem with keeping the lights on. So, what value does energy storage add if you're not paying demand charges?
There are ways to monetize those batteries, but it's a hard business that will take millions of data points and integrated algorithms that Tesla Motors (up to now) hasn't talked about building itself.
Where does that leave Tesla Motors' energy storage business? Elon Musk & Co. have a lot to figure out if they're going to make energy storage a viable product for homeowners and businesses to spend thousands of dollars on. Customers know the payback for something like solar energy is there and the idea behind energy storage is great. But until energy storage is the same "no brainer" investment with little to effort by the end user as solar is it'll be a tough sell even for Elon Musk.