Navigant Research Blog

Tesla and SolarCity: Is Financing a Bundled Clean Energy and Transportation Service on the Horizon?

— July 8, 2016

Electric Vehicle 2Tesla’s recent announcement that it intends to acquire SolarCity was an unprecedented Energy Cloud trifecta. It’s not easy for a single release by one company to stir the interests of three separate sets of passionate stakeholders tracking transformative clean energy and transportation technologies and business models. And rightly so, as the potential for Tesla to pair vehicle electrification with solar and advanced battery energy storage as integrated distributed energy resources (DER) is an eye-opener to say the least.

Tesla’s vehicle and battery manufacturing businesses are very different than SolarCity’s solar business, both technically and revenue model-wise. It will likely be a challenge for the company to explain these separate businesses to its investors and manage expectations. One could argue that Tesla might be better off focusing 100% of its efforts on building out the Model 3 and Nevada Gigafactory battery manufacturing capacities in the short term.

The DER Standpoint

But from a DER technical standpoint, it’s intriguing to consider the possibility of what the new Tesla could do. For example, the new Tesla could couple the energy capacity of plug-in electric vehicle (PEV) batteries with solar, PEV charging infrastructure, and virtual power plant (VPP) software all at the home of a single customer. It’s not hard to envision how this type of arrangement could serve both as DER and an overnight revenue source to utilities. The new Tesla indicated that it plans to continue to partner with utilities, which are increasingly interested in aggregated behind-the-meter demand response capacity. And SolarCity’s recent efforts to partner with utilities in New York on a new program to eliminate net metering along with the company’s recent hiring of former Federal Energy Regulatory Commission (FERC) Chairman Jon Wellinghoff as Chief Policy Officer demonstrates a willingness to pursue such new and innovative business models.

Going to Market

But how might the new Tesla take this sort of concept to market? A key aspect of technology innovation in renewable energy has been financing innovation. The development of power purchase agreement financing has been instrumental in the growth of solar PV. Navigant Research believes that financing innovation will also drive energy storage markets over time, as well.

But the new Tesla could be uniquely positioned to apply financing innovation to an integrated solar battery PEV-based VPP while also providing consumers with the use of the vehicle. Imagine a homeowner entering into a 15-year financing agreement for solar, energy storage, and use of a Tesla Model 3 under a single contract. In this scenario, the new Tesla/utility partner manages the VPP asset while the customer gets access to, but not ownership of, a Tesla Model 3. If the new Tesla/utility partner decides to extensively use a Model 3 battery as part of the VPP, then the homeowners get a new Tesla battery. In this scenario, the long-term assumptions on VPP revenue, replacement batteries, or even new vehicles and solar storage benefits are bundled under one customer-facing agreement.

This type of integrated financing innovation might sound challenging. But I can guarantee that a trifecta (or more) of interested Navigant Research teams will be closely tracking if and how the new Tesla comes together.

 

Breaking New Ground While Exploring Value of Energy Storage in Southern California

— June 7, 2016

Cloud ComputingThe closure of the 2,150 MW San Onofre Nuclear Generating Station (SONGS) has left a huge hole in the power supply portfolio that Southern California Edison (SCE) had traditionally relied upon to serve customers. On top of that, the massive leak of methane from the Aliso Canyon natural gas storage facility has further aggravated the electricity supply challenges facing Southern California.

The leak is the largest known leak of methane into the atmosphere in U.S. history. It continues to make headlines, but longer term impacts could still be felt this summer.

Filling the Gaps

“When full, Aliso Canyon has enough natural gas stored to supply fuel to 18 regional power plants located in the Los Angeles basin for 21 days. But it takes 2 to 3 days for that natural gas to get into the basin where it is needed. So when the sun goes down, we can’t get the gas fuel to power plants where it is needed in time,” said Susan Kennedy, CEO of Advanced Microgrid Solutions (AMS), a company that has won a contract with SCE to deploy up to 50 MW of distributed energy storage to help fill regional supply gaps via hybrid electric buildings such as those owned by the Irvine Company.

“One major heat wave this summer could have major impacts, leading to curtailment of electricity service,” a prospect recalling the power outages that plagued California in the 2000-2001 timeframe, when Kennedy, working on behalf of then-governor Gray Davis, had to resort to emergency measures seeking drastic demand reductions in order to keep the lights on. “Few people seem to make the connection between this natural gas supply and our reliable electricity system,” she noted. But Kennedy does. “What we clearly need to get through this summer and into the future is fully dispatchable demand response [DR], the ability to use customer load as a resource in the same way we use supply. Energy storage allows us to create such a resource that also provides economic value for customers, such as the Inland Empire Utility Agency [IEUA].”

Water-Energy Nexus

The agreement with IEUA is addressing the water-energy nexus in California, an issue that is also raising concerns in light of lingering droughts. IEUA has been leading on renewable energy since 2008, with solar, wind, and biogas resources already part of its electric resource portfolio. With the help of AMS and its partner Tesla, these energy storage devices will allow the agency to maximize value to reduce its energy costs by an estimated 10%, or as much as $230,000 annually.

IEUA did not have to pay any upfront capital costs under the terms of the unique contract with AMS. Yet the biggest surprise to emerge in this project was SCE’s flexibility in contracting. The investor-owned utility had to adjust the existing tariff with IEUA in order to bring the energy storage devices online. “There was no template of how to do this,” said Jesse Pompa, a senior engineer at IEUA. “Batteries had never been connected to a grid in this way before. This was indeed a risk for us, and the biggest surprise is that they accommodated us.”

“I have to say, SCE is the most open-minded of all California utilities in viewing energy storage as a grid resource,” added Audrey Lee, AMS’s VP of analytics and design. She noted that the artificial intelligence software that AMS provides enables the fleet of Tesla batteries to provide a firm, dispatchable DR resource to help SCE get through this summer.

 

Australia Leading Solar PV plus Storage Innovation

— May 23, 2016

Rooftop SolarImprovements in technology and cost have allowed solar PV plus storage systems to become an attractive investment in many parts of the world. However, what remains to be determined are the optimal business models to unlock the full value of these systems. Pairing solar PV directly with energy storage holds the potential to dramatically transform the electricity industry and provide customers with cleaner and more secure power at a predictable price. Despite the potential, there has been little consensus in the industry on the best way to deploy these systems on existing grids and on how to overcome the significant barriers that the required upfront investment presents. 

Although solar PV and energy storage systems (ESSs) have been paired up in microgrids and remote settings for decades, their integration into existing electrical grids presents new challenges. Innovative models for the ownership and operation of these systems are being explored around the world, driven in part by the increasing funding flowing into the distributed energy industry. Australia has been at the forefront in the development of distributed energy resources, and two recently announced projects in the country offer different paths forward.

Dueling Approaches

In early adopter markets around the world, two primary models for deploying solar PV plus storage systems are emerging. Many stakeholders in the industry believe the optimal way to deploy these systems is through incumbent utilities and electricity providers that can leverage technical experience and access to financing. The recently developed suburb of Alkimos Beach in Western Australia was seeking a community-scale solution to help manage an increasing number of distributed solar PV systems and limit the need for new infrastructure to serve its growing population. The neighborhood elected to work with local energy provider Synergy to deploy a 1.1 MWh lithium ion ESS that is being fed by over 100 solar PV systems located on rooftops throughout the area. In addition to reducing costs for customers, managing the intermittency of PV generation, and limiting the need for new infrastructure, the project provides Synergy an opportunity to use community engagement as a way of combating the threat of grid defection.

Alkimos Beach is not the only community in Western Australia exploring innovative ways to harness the power of the solar PV plus storage combination. The community of White Gum Valley has chosen a different path toward a sustainable, local energy system both in terms of ownership and technical design. Most homes in the community will have both solar PV and battery ESSs onsite that will be operated in concert. In addition to the physical distribution of energy storage in this model, systems in White Gum Valley will be owned by the company managing most of the community’s apartment buildings. The company will act as a utility by owning assets and retailing energy directly to customers, a rare situation in Australia’s regulated electricity markets.

The Path Ahead

These two projects may provide some unique insights into how solar PV plus storage solutions can be optimally developed. They provide clear examples of some of the major debates in the distributed energy storage industry, such as whether it is better for systems to be centrally located or distributed, or if they should be owned by utilities or by customers. While it may take several years for these projects to illuminate the merits of one approach versus the other, they may be a sign of things to come as the distributed energy industry takes shape.

 

Dyson and Sakti3 Move Toward Solid-State Deployments

— May 13, 2016

BatteriesAs power and energy requirements are proving to be increasingly sophisticated for large-scale grid energy storage and automotive applications, many companies and research institutions across the globe are looking for alternatives to the lithium ion (Li-ion) battery. U.K. company Dyson acquired the rights to battery startup Sakti3 last December for $90 million and announced that it will invest an additional $1.44 billion to develop new battery technologies over the next 5 years. A portion of the investment will go toward building a new battery factory and R&D center.

Sakti3 is a pre-commercial battery technology firm based in Ann Arbor, Michigan, specializing in lithium solid-state battery chemistries. The company was founded with a goal of bringing next-generation battery technology to electric vehicles (EVs) and consumer electronics, stating that it intends to double the energy density at lower costs than current commercially available Li-ion batteries. Historically, solid-state batteries have been plagued by the solid-solid interface’s high resistance to ion intercalation (resulting in low power density) and performance scalability; Sakti3 believes that it has reduced design cycles and is on track to find the critical mass to take its technology to market.

Solid-State Battery

Ian Blog Image

 (Source: Dyson)

A Start in Consumer Electronics

Li-ion batteries started in early consumer electronic markets in 1991 when they were first discovered and now are being deployed in complex applications globally. Navigant Research expects 93.1 GWh of Li-ion capacity will be deployed globally for EVs in 2025 alone, along with an additional 59.1 GWh deployed for grid storage. Dyson has been developing an in-house battery technology for its cordless appliances for the past several years and now plans on utilizing Sakti3’s prototype technology in existing and future products. The biggest questions to be answered will be how this acquisition affects Sakti3’s process of innovation—and what it could mean for battery industry stakeholders.

The complementary nature of the acquisition could help Dyson develop competency in cutting-edge aspects of solid-state batteries and commit to the reutilization of the technology as a whole. Starting in smaller consumer electronic markets and growing toward others could put Dyson in direct competition with battery giants Panasonic, LG Chem, and Samsung SDI. The company has not ruled out the option of licensing out Sakti3’s technology to other companies, further expanding its market reach. Dyson’s CEO says it is transitioning to become more of a technology company as opposed to a home appliance vendor and plans to develop a more sophisticated product catalog in the coming years.

Supporting the Investment

One challenge the company may face is how its R&D expertise and support teams support this investment. To push the technology forward, it is imperative that Dyson thoroughly understands how integrating Sakti3’s battery affects its existing product catalog. As a home appliance company, teaming with a battery company could make sense in the long run and translate to developing robust synergies down the supply chain. Focusing on niche applications, making deployment a priority over research, and rushing the development of R&D projects could potentially lead to failure. One of the biggest risks after mergers and acquisitions is the threat of organizational upheavals. Hiring and maintaining key employees that drive research forward will be important. Sakti3 founder Ann Marie Sastry will continue to lead the development of the technology as an executive for Dyson.

Can large battery companies and automotive OEMs learn something from this acquisition? Only time will tell. Dyson plans to get Sakti3’s technology to market within the next 2 years; it will be fascinating to see how it plans to overcome engineering issues faced by other companies that have attempted to bring solid-state batteries to market. How well-equipped is a home appliance company to accomplish such a feat? History says to remain skeptical while the technology says to remain optimistic.

 

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