Image source: Tesla Motors.

When Tesla Motors (NASDAQ:TSLA) launched the Powerwall energy storage product last year, it was considered a product that would let people use electricity they generated and also have a stable backup source of power. Early indications are that the fast-cycling 7 kWh model is doing well (although volume details are scarce), with SolarCity and others starting to offer it along with their solar power systems. But the 10 kWh model that was meant as a backup energy source has been disappointing. And Tesla Motors has now quietly discontinued the product

Where the 10 kWh Powerwall went wrong
For people interested in renewable energy, the ability to store it for later use is a great concept. The sun doesn't shine 24 hours a day, so storing energy for nighttime use is attractive. And energy storage even brings the possibility of taking your home off the grid entirely.

The problem for energy storage is finding a business model that makes sense financially. Unless you have very high electricity rates and your utility pays very low rates for exported electricity -- as in Hawaii and Nevada -- there's no financial case to be made for energy storage. That limits the potential market for the 7 kWh Powerwall product until the regulatory dynamic changes.

Tesla Powerpack installation in California. Image source: Author.

The 10 kWh Powerwall had an even bigger uphill battle. The product was supposed to be for backup power in the case of emergencies. But with a $3,500 price tag, plus the price of an inverter and installation, the cost didn't make sense. Why not just buy a backup generator for a quarter the price if you're worried about losing power once or twice a year? 

Tesla refocuses on a less sexy business model
With the 10 kWh Powerwall now off the market and the 7 kWh Powerwall's market limited to a few states and countries, Tesla should be looking for the Powerpack to be its biggest seller in energy storage. This is a large energy storage system the company is selling to commercial customers and utilities. And there's a big potential in that market.

The energy storage market in the U.S. grew 243% in 2015, due in large part to commercial and utility customers seeing a value proposition for storage. Commercial customers use storage to lower demand charges, while utilities are using it to stabilize the grid.

You can see below that most of the market is in front of the meter, or in the utility's control right now. Most of the "behind the meter" you see is commercial installations. 

Image source: GTM Research/ESA U.S. Energy Storage Monitor.

As the market grows, we'll likely see this commercial and utility energy storage growth continue. And until the residential market has a viable economic value proposition, it will be limited.

Energy storage is growing, but not where you might expect
It's easy to get excited about the potential of energy storage in the home and potentially going off the grid. But there's a lot the industry needs to learn and develop before it's a large-scale opportunity. Elon Musk has said that Tesla will introduce a second-generation Powerwall this summer, presumably after learning more about what will and won't work for home energy storage.

Until the residential market is more financially viable, most energy storage growth will come from large-scale installations within commercial buildings or under the control of utilities. In those two applications, there's a business case to be made for energy storage.

For now, we at least know there's little interest in a battery for emergency backup in the home. If there were, Tesla Motors wouldn't have discontinued its 10 kWh battery product.

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.