When Elon Musk announced the Tesla Motors (NASDAQ:TSLA) Powerwall in April of 2015, it was supposed to be a transformational product for the company and the energy industry. Within a week, the company had announced 38,000 preorders for the Powerwall, calling demand "crazy off-the-hook." If completed, the orders would be at least $114 million in revenue for Tesla Motors.
A year later, the larger 10 kWh model of the Powerwall has vanished, and the 7 kWh model doesn't appear to be selling well to actual customers, and has already been undercut by competitors. In the 2015 annual report, the Powerwall was only mentioned in passing four times compared to 91 times for the Model S, and 98 times for the Model X. How could a product with such hype be so disappointing so quickly?
Energy storage has very little business model
In theory, an energy-storage product makes a lot of sense for Elon Musk. It could create demand for Gigafactory batteries, and folds nicely into SolarCity's (NASDAQ: SCTY) solar business. Today, most solar systems simply sell any extra energy they create during the day to the utility at a customer's full retail price, making energy storage unnecessary. But utilities are trying to reduce the compensation customers get for exporting electricity and something like the Powerwall may be a good hedge for SolarCity against net metering changes. At least, that's the theory.
The problem is, in most cases, there's no money to be made off energy storage. A single Powerwall system costs $3,000, plus you need an inverter that may cost another $5,000. Installation for such a device can be thousands more.
Greentech Media reports that SolarQuotes put the cost of a system at $9,265 with the inverter. The cost for each kWh of energy stored in the Powerwall was a whopping $0.58, more than four times the national average cost of a kWh of electricity.
Worse yet, there's no clear way to make money off the energy-storage system. In Hawaii, where net metering changes have passed, there's about a $0.15 gap between what homeowners may pay for electricity and the cost that they could sell electricity to the grid. That's the arbitrage opportunity, but that's well below the $0.58 cost GTM Media is quoting.
Even in Nevada, where net metering was eliminated for solar systems, the cost of buying electricity is less than $0.12 per kWh. There's no way to justify saving electricity for later use given that low cost.
Tesla Motors had a great product idea, but no business model behind it. Unlike solar energy, which SolarCity is selling as a way to save money, Tesla Motors is selling a luxury item with little economic value.
Competition is eating Tesla Motors' business
Meanwhile, competitors are already beating Tesla Motors to the energy-storage punch -- at least where there is a market. Sonnenbatterie launched its home energy-storage system in the U.S. in late 2015, ahead of Tesla, and has already installed 10,000 systems worldwide.
One advantage Sonnenbatterie has is a high-cycle system. The company says its 4 kWh system will last for 10,000 cycles, or more than 25 years, whereas Tesla's warranty covers 85% of its 6.4 kWh capacity for 740 cycles, 70% for up to 1,087 cycles, and 60% for 2,368 cycles -- or five years total.
What Sonnenbatterie offers is the full energy storage and software package needed to make a system economical. If the system lasts as long as advertised, it's a compelling product compared to a Powerwall.
This story isn't over
While Tesla Motors isn't going to give up on energy storage, it certainly hasn't been the massive product Musk hyped it to be in 2015. Out of 38,000 preorders after the Powerwall announcement, very few customers followed through -- although Tesla doesn't reveal exactly how many -- on orders once they figured out there was no way to make money off energy storage.
Until Tesla and SolarCity can find a way to make energy storage profitable, it will probably be a business relegated to utility and commercial building applications. Sorry, but going off-grid won't save you money anytime soon.
Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.