Tesla’s Powerwall – A residential energy game changer?

With hindsight, this week’s announcement by Tesla that it would move into the home energy storage market was so obvious, that that the only question should have been why was there any surprise at all. For a while, Elon Musk, PayPal, Tesla, SpaceX tech entrepreneur had been saying that Tesla would unveil a new major product, and that it would not be a car. And so it turned out that Tesla will be launching a residential battery called PowerWall, in two variants with different storage capacities of 7 and 10 kilowatt-hours.

There are multiple reasons why this makes sense for Musk. Tesla has invested untold millions in the research into lithium-ion batteries, driving up their charge density (and hence the range of their cars), while at the same time making them safe and durable enough be used reliably over long periods of time. These advances in technology have been matched by a massive investment to increase the scale at which they are manufactured, through an enormous $5 billion investment in its Lithium-Ion factory in Nevada, rather superlatively named the Gigafactory, which is capable of producing enough batteries to power 500,000 Tesla cars each year by 2020, on its own exceeding global lithium ion battery production in 2013. Additionally, Musk is the principal investor in SolarCity, the largest solar panel installer in the US, controlling an estimated 39% of the residential solar market. SolarCity sources and manufactures (through a recent acquisition) photovoltaic cells and then installs and leases them over 10-20 year periods to customers who then purchase the electricity at a discounted price from Solar City. By offering the Powerwall to its customers (at a cost of $5,000 for a nine-year lease), SolarCity is effectively increasing the amount of electricity its customers can buy through the solar panels. The launch of a residential battery pack also creates an additional market for vast production capacity of its Gigafactory, and potentially one that will grow faster than that for electric vehicles. So a case of win-win-win for Musk.

So why is this a game-changer? Although the cost of renewable energy, be it produced in utility-scale generation plants or through micro-generation, is falling rapidly, its very nature makes it a highly variable and quite unpredictable energy source, fluctuating with the weather conditions. In addition, in the case of solar energy, the unit cost has fallen by more than 50% in the past four years and continues to do so, making it increasingly attractive to harvest as much of the captured energy as possible.

The diagram above provides a (perhaps idealised) example of the differences in photovoltaic generation and electricity demand patterns. Of course, both curves depend entirely upon factors latitude, climate, geography, household construction, the type of heating, cooling, hot water and cooking energy patterns, and the lifestyle of its residents. Nevertheless, in all but the most serendipitous scenarios, there will be a significant mismatch between the generation and consumption patterns.

Adding a large enough battery to a solar-power-equipped house can greatly reduce the dependency upon energy from the grid. Indeed, the 10 kiloWatt-hour Powerwall unit can supply the average American house with about one third of its daily energy use, going a long way towards supplying the house with the energy it needs when the sun is not shining. This is the market that Tesla is initially targeting, providing customers with the opportunity to buy and store energy when it’s cheapest.

So what are the key considerations impacting the outlook for Tesla and the wider residential energy storage market?

1. Mid-term success depends upon economics and regulation

Perhaps it is a case of stating the obvious, but the attractiveness to customers will ultimately depend upon how much money can be saved, and this is determined by a combination of the energy companies’ pricing strategy and the regulatory landscape. Factors will include any subsidies for solar and storage installations, the use of variable tariffs (i.e. cheaper in off-peak times) and the attractiveness of feed-in tariffs which determines the price at which energy companies buy excess energy from its customers. In the UK, for example, variable tariffs are not used, so there is little incentive to invest in home energy storage.

2. An opportunity for energy companies?

Taken to its extreme, the Powerwall could allow consumers to disconnect from the grid completely and become self-sufficient in energy terms. In most cases, however, it will simply reduce the dependence on power from the grid, and also offer opportunities to manage power consumption and demand more flexibly. Although Tesla’s proposition is aimed squarely at managing the fluctuating supply posed by micro-generation, utility-scale renewable energy also  experiences large variation in output. For example, the diagram below shows the fluctuation of wind power distributed by the UK National Grid in 2014, providing a range of instantaneous outputs of anything up to 8GW.

This variability is currently countered through the use of gas turbines and hydro electricity. Going forward, as the share of electricity from renewable sources is expected to increase from around 15% in 2013 to above 30% in 2015. This will further exacerbate the problem of dealing with this variability. An obvious solution would be to equip homes and industrial customers with energy storage facilities to smooth out discrepancies between supply and demand and Tesla’s solution fits the bill.

3. And back to electric cars

Lets not forget where we have started off – Tesla’s electric vehicles. Once the infrastructure is in place for homes and energy companies to make use of battery storage to manage residential consumption and demand, then it will become a minor step to extend any electric vehicle to the home energy system. Not only will you plug in your car to charge it, but the car’s battery can in turn provide energy to the home or grid as the situation demands it.

Concluding

Therefore, although some commentators believe that Tesla’s foray into domestic energy storage is a big threat to energy companies (see this article in The Verge), in time, with the right regulatory environment, we may well see energy companies becoming the biggest customers of home battery solutions – helping them better reconcile supply and demand closer to the home. In the meantime they will move away from a business model based on metered energy consumption, to one where energy is a managed service, whose profitability is governed by the most efficient matching of micro and macro generation, with homes automatically choosing when to store and return energy to the grid.

Therefore I strongly believe that Tesla is onto something important. Whether they actually end up being a major player will depend on (amongst other things), which battery technology will win out in the long term, and the investments other energy giants will make. Nevertheless, it is clear that they are leading the pack into a new and exciting era of energy management.