Navigant Research Blog

Why It’s Still Too Early to Bet on Residential Energy Storage in the United States

— April 1, 2014

SolarCity announced recently that it is discontinuing the residential energy storage product that it rolled out in California 2 years ago.  The company put the blame on the shoulders of utilities, which SolarCity said were stalling permitting of its new units.  But, in fact, SolarCity has only itself to blame for the failure of its product.

That’s because the company never stopped to ask why a residential customer would want a battery storage system.  In some cases, such as with off-grid homeowners and homeowners (such as indoor horticulture enthusiasts) with very expensive equipment that needs reserve power, batteries are a requirement.  But the typical homeowner gets no financial advantage from shifting power from one point in the day to another.  Rates that would allow such an advantage, known as time-of-use rates, are rarely offered by utilities to residential ratepayers.  Because residential photovoltaic (PV) power is usually net-metered, meaning that homeowners can receive credit for putting energy back onto the grid, there’s no reason why a solar homeowner would receive a financial advantage from storing energy.

Diesel over Batteries

Meanwhile, SolarCity was trying to sell its residential storage units at an outrageous markup.  I have SolarCity panels on my house in Boulder, Colorado, and when I inquired about the cost of the battery backup system, I was quoted $25,000 for a 20 kilowatt-hour (kWh) system.  That’s despite the fact that Tesla Motors (which makes the battery packs for SolarCity) has told the world that it is able to build its battery packs for less than $300 per kWh.  It’s hard to understand why I should give SolarCity more than 3 times the money it cost the company to buy the battery pack for a system that doesn’t earn me one penny.  The only benefit that such a system could provide me is reserve power when the grid shuts down.  However, a far more reasonable solution to that problem would be an emergency diesel generator.  Yes, it’s dirty, but the carbon and pollutants produced by running a diesel genset during the few hours of a year that I would need it would be far less than that produced from the manufacture of 20 kWh of batteries.

Mind the Wiring

So, is there any merit to SolarCity’s claim that the California utilities are responsible for freezing out the battery system product?  It’s not very likely.  That’s because a battery pack that is situated behind the meter does not require any utility permitting, just as a diesel generator doesn’t.  What does require approval is the capability of an individual building to island itself from the grid (which means that it continues to operate as a nanogrid by itself and shuts itself off entirely from the distribution grid when it does so).  If that’s the case, then the electric utility has every right to deny permitting if it doesn’t feel comfortable with the system.  Improperly set up, islanding can cause a life-threatening situation for an electricity linesman.  The practice of islanding is governed by the IEEE 1547 protocol, which is an extremely complex, difficult to engineer, and expensive set of rules governing an islanded system.

There are ways to do residential energy storage well.  In our upcoming report on the topic, Navigant Research expects that almost 20,000 residential energy storage systems will be installed in Germany, Japan, and South Korea combined in 2014.  All three countries have made concerted efforts to standardize the specifications and permitting process for PV-integrated residential solar systems.  They have also introduced generous subsidies for such systems.  It’s an expensive and politically difficult process, but it’s getting results in those countries.


Utilities Enter the Era of Distributed Generation

— March 31, 2014

From the “Internet of energy” to the “utility death spiral,” the causes and effects related to the distributed generation (DG) transformation go by many names.  Faced with what is increasingly recognized as DG’s inevitability, utilities and the companies that supply DG technologies are faced with the difficult challenge of defining viable business models in a multi-dimensional technology landscape.

Former Energy Secretary Steven Chu and outspoken NRG CEO David Crane have loudly pointed out the futility of business-as-usual thinking in the face of DG’s advance.  It’s a mistake to think the power sector is oblivious to the changes enveloping it, though: most utilities do not actually have their heads in the sand, as recent headlines suggest.  According to Utility Dive’s 2014 State of the Electric Utility survey, 67% of U.S. utility professionals believe their company should take a direct role in supplying DG to their customers ‑ either by owning and leasing distributed assets or by partnering with established DG companies.  At the same time, key suppliers like GE, recognizing a dawning opportunity, are positioning themselves for growth.

Tip of the Iceberg

Although solar PV has provided a blueprint of sorts, a suite of technologies – collectively called distributed energy resources (DER) – is primed to usher in a reimagining of DG’s value proposition.  Composed of renewable and fossil-based generation, diverse fuel sources like the sun and biogas, power generation and storage assets, and applications from microgrids to combined heat and power (CHP), DG’s multi-dimensionality suggests that existing business models are just scratching the surface.  An estimated 37 million homes in the United States, for example, now have natural gas lines running directly to them, which opens up the possibility of micro-combined heat and power and fuel switching.

For utilities, the challenge is fairly straightforward.  Demand-side generation is leading to death by a thousand cuts, as the cost of maintaining and operating the grid is spread over a gradually declining revenue base due to eroding customer demand.

In its widely-cited Disruptive Challenges report, published in 2013, Edison Electric Institute lists the financial risks created by DG: declining utility revenues, increasing costs, and lower profitability potential.  Simply charging higher rates – one solution offered by the most entrenched utilities – risks accelerating the revenue ”death spiral,” as rising rates make it increasingly attractive to adopt otherwise expensive DG technologies.  Recent experiences across Europe have demonstrated that utilities must adapt (see RWE) or risk obsolescence, at least in the traditional revenue sense.

Transforming is Grand

On the supplier side, companies like GE are positioning for what is an inevitable expansion of DG globally.  The company announced last month the creation of a new business unit called GE Distributed Power, targeting the global distributed power opportunity.  Merging three existing business lines – Aeroderivative Gas Turbines, Jenbacher Gas Engines, and Waukesha Gas Engines – GE will invest $1.4 billion to combine formerly niche generation products into a cohesive distributed power offering.

The move coincides with the publication of a recent white paper, “The Rise of Distributed Power,” in which GE forecasts that distributed power will grow 40% faster than overall global electricity demand between now and 2020.  The trend, according to GE, is nothing short of a “grand transformation.”  The company estimates that globally, about 142 gigawatts (GW) of distributed power capacity was ordered and installed in 2012, compared to 218 GW of central power capacity.

Four key trends are driving the distributed power transformation, according to GE: the expansion of natural gas networks; the rise of transmission infrastructure constraints; the growth of digital technologies; and the need for grid resiliency in the face of natural disasters.  While these trends are playing out in the U.S., GE’s efforts are focused primarily on the fast-growing Asia Pacific market and the expansion of natural gas.

Big in Bangladesh

The momentum behind DG is especially strong in the developing world, where electricity demand outstrips the pace at which centralized power stations and transmission infrastructure can be financed and built.  The IEA estimates that in 2009, 1.3 billion people lacked access to electricity, representing around 20% of the global population.  A significant proportion of this population lives in Asia Pacific.

While the DG era represents a degree of complexity that has yet to be fully grasped, initiatives from both utilities and their suppliers point to increasing acceptance of its inevitability.


With A123 Buy, NEC Reveals Its Storage Strategy

— March 27, 2014

NEC has made a major play for a global energy storage system (ESS) business, specifically targeting the Chinese market and information technology (IT) and telecom sectors by acquiring A123 Energy Solutions to create a new company, NEC Energy Solutions.

NEC is no stranger to the grid storage market.  The company is using batteries from Automotive Energy Supply Corp. (AESC), similar to those installed in the Nissan LEAF, for both utility-scale storage (2 MW will be commissioned in Italy by Enel Distribuzione shortly) and the residential storage market.  It has also developed a residential system targeting the Japanese market with a 5.5 kWh home ESS.

There are three pieces to this transaction that will change the storage market going forward.  First, NEC is slated to establish a partnership with A123 Systems’ parent company Wanxiang to target the Chinese storage market.  Having a local partner will set NEC apart from other lithium ion (Li-ion) cell and system vendors targeting China.  Second, the acquisition includes A123 Energy Solutions’ ALM product line, a 12V Li-ion uninterruptible power supply (UPS) product housed in the same form factor as a traditional lead-acid battery.  This, coupled with NEC’s success and relationships in telecom and IT, will put the new company in a strong position to target the UPS market.

Finally, although A123 Energy Solutions has focused on the utility side of the meter using A123 Systems cells, NEC has experience on the customer side and also has its own Li-ion chemistry that’s manufactured in volume by AESC.

Storage Combinations

Navigant Research’s Advanced Batteries for Utility-Scale Energy Storage report forecasts that the market will reach $17 billion in 2023, with Li-ion taking a $7.8 billion share.  This estimate is strictly for the sale of ESSs to customers on the utility side of the meter, not on the customer side.  By definition, it excludes telcos, data centers, and other forms of commercial, industrial, and residential storage.  Navigant Research believes that the telecom market for Li-ion hit an inflection point last year, reaching $100 million in annual revenue, and is poised to grow quickly.  Regardless, NEC Energy Storage will have stiff competition in nearly all of these markets from major Li-ion cell manufacturers such as LG Chem and Samsung SDI.

What can we look forward to from NEC Energy Solutions?  A123 Energy Solutions will bring software, controls, and integration expertise, three facilities in the United States and China, a portfolio of existing installed storage assets, and any new orders to the table, whereas NEC’s strength lies with data, analytics, IT, and the cloud.  In fact, NEC’s original concept for the storage market revolved around the energy cloud.  It makes sense that NEC Energy Solutions would combine the two areas of expertise to deliver new product lines and cultivate new business models.

As a 114-year old company with 270 subsidiaries in its corporate umbrella and total annual sales in the last fiscal year of $30 billion, NEC has the resources and business relationships to use the A123 Energy Solutions acquisition as the platform for building a global business.


Six Questions Regarding Tesla’s Gigafactory

— February 27, 2014

This week, Tesla revealed the first details about its plan to build an enormous battery factory to provide cells for its future electric vehicles.  Among the revelations: the factory will be powered primarily by its own solar and wind power parks; it will produce more than 50 gigawatt-hours (GWh) of battery packs a year; and it will cost $6 billion to build.  To kick things off, Tesla also filed to sell $1.6 billion worth of convertible bonds today.

While these are intriguing details, there’s still a lot to determine about what this factory will actually look like.  Here are my questions about the Gigafactory:

Why isn’t California one of the states being considered for the plant?  The company named Nevada, New Mexico, Arizona, and Texas as potential host sites.  To build the batteries in a different state and then ship them to California, even by rail, will add considerable cost to the batteries.  Why not locate the factory at or near the company’s vehicle assembly plant in Fremont, California? My guess is that environmental regulations for such an enormous factory are one negative factor weighing against California.  That leads to a second question: Where will the cars be built?  The batteries coming from this factory will be going into Tesla’s next-gen passenger car, not the Model S or Model X.  That means that a car factory could also come along with the battery plant.

How much wind and solar will be needed to supply power to the plant? A battery factory making 50 GWh of batteries will require enormous amounts of electricity – some for the actual making of the batteries and some for the initial charging of the batteries that is the last step in the manufacturing process.  This could require as much as 1 GW of renewable energy projects.  Is the price of those installations factored into the stated $6 billion cost of the factory?

Where will the extra 15 GWh of batteries come from? In the slides that Tesla distributed, the manufacturing capacity of cells was stated as being 35 GWh.  But the manufacturing capacity of packs was stated as being 50 GWh.  So where will the extra 15 GWh of cells come from?  From other battery company factories throughout the world? From more Gigafactories?

Why is this factory so cheap? $6 billion doesn’t sound very cheap.  But it actually pencils out to a little more than two-thirds the cost, on a per GWh basis, of other large battery factories.  Clearly, the large scale of the factory will make equipment purchases cheaper.  Nevertheless, the estimated cost of the factory seems extremely low and brings into question whether Tesla and its battery partners have some new manufacturing innovations up their sleeves.

Why wasn’t Panasonic mentioned in the news release? Most observers assume that Tesla will build the factory with Panasonic, which makes all the cells for the Model S and the upcoming Model X.  However, the news release only stated that the car company’s “manufacturing partners” will help finance and build the factory.  Is it possible that another battery supplier is inserting itself in between Panasonic and Tesla?

How much will the cells cost once the factory is up to scale? Tesla CEO Elon Musk has stated in the past that Tesla buys its cells for between $200 and $300 per kilowatt-hour (kWh).  The slides distributed with the Gigafactory announcement claim that the facility will be able to cut the costs of the battery packs by 30%.  But how much of that comes out of cell costs versus price cuts in the other equipment in the pack?  Does this get Tesla down to $175 per kWh? To $100 per kWh?

There’s no denying that this is a bold venture.  If the company manages to follow through on these plans, it will construct the biggest factory in the world (not just for batteries, but for anything).  And it will yet again echo Henry Ford’s spirit with a 21st century version of the original megafactory, the River Rouge complex.


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