Who's Reserving All Those Tesla Batteries and What Do They Plan On Using Them For?
- Oct 8, 2015 12:30 pm GMT
- 650 views
When Tesla Motors CEO Elon Musk announced the advent of Tesla Energy’s new line of stationary batteries on April 30, you couldn’t actually buy them. The company is just gearing up to make the batteries and, according to news reports, the batteries won’t be available for shipping until later this year—but Tesla is taking reservations. In fact, Musk claimed that Tesla has taken nearly a billion dollars of reservations for batteries, which is more than it can deliver in all of 2016 (Figure 1). It’s currently unknowable how many of those reservations will turn into actual sales, but if most of them come through, the launch of the Tesla stationary battery line will rank as one of the leading product introductions in the history of American industry.
Undoubtedly, few new product introductions have been as extensively reported as the Tesla batteries’. Much of this reporting has focused on the potential of the batteries to be used for residential solar storage. That’s not surprising, given that the temporal nature of solar power combined with the lack of economic technologies to store it are two of the biggest obstacles to achieving widespread use of increasingly inexpensive photovoltaic technology. In some countries, such as Australia, Tesla is targeting the solar storage market in a big way. But in the US, the company isn’t targeting this market. Here, it’s unlikely that little more than a trivial number of homeowners will purchase batteries from Tesla, or its competitors, to store solar electricity. Indeed, I’ve written several times about why this application is so unattractive. For one example, see the E Source blog posting Utilities, Cheap Batteries Won’t Hurt You. You Have Much Worse Things to Worry About. For another, see the Utility Dive article Why Tesla Won’t Disrupt Utilities.
Another battery application that’s been widely discussed—the practice of storing inexpensive off-peak electric power and selling it to the utility during high-priced on-peak periods—also is unlikely to find many US customers. Time-of-use (TOU) arbitrage, as this practice is known, simply can’t produce enough revenue to pay for the batteries during their useful lifetime.
If the prospects for these two applications are so dismal, how is it possible that so many people are lining up to buy Tesla batteries? There are three additional major applications proposed for the Tesla stationary battery line, and they have excellent market potential. They are residential backup, commercial demand-charge management, and grid-scale storage. These applications are not limited to Tesla batteries; products from other manufacturers—such as LG Chem, BYD, and Samsung SDI—are also competitive in some of these markets. Look to these applications to drive lots of sales in the US for Tesla and its competitors for many years to come.
Don’t Invest in TOU Arbitrage
It’s widely hypothesized that utility customers who participate in TOU rate plans will use Tesla batteries to store off-peak power, either from the utility or from solar panels, and sell it to the utility during peak periods. The 7-kilowatt-hour (kWh) Tesla Powerwall battery, designed for daily charging and discharging, is a good choice for this application, at least in the residential and small commercial markets. Despite the widespread attention it’s gotten, this application—which is known as TOU arbitrage—is unlikely to be a big hit any time soon, for two reasons. First, few utilities allow it. Second, the revenue it can produce is minuscule compared to the cost of the battery.
One reason TOU arbitrage produces small benefits is that TOU pricing isn’t available from utilities every day. Utility TOU rate plans feature higher prices for on-peak power than they do for off-peak power, but on-peak power periods are restricted to nonholiday weekdays. As a result, TOU arbitragers can only produce revenue 260 days a year, at best.
But wait—it gets worse. Peak rates are often much lower during the winter than in the summer (in the utility TOU world, there are only two seasons: summer and winter). In the winter, the spread between on-peak and off-peak power is typically only a few cents per kWh. That’s not even enough to pay for the wear and tear on the battery for a charge-discharge cycle, which limits this application to the summer season, or about 130 days per year (Figure 2).
Summer TOU peak-period rates just aren’t high enough for potential arbitragers to make enough money on those few days. In the summer, some programs offer a spread between on-peak and off-peak prices of about $0.25 per kWh. For the 7-kWh Powerwall battery, that works out to $1.75 a day of revenue, or about $227 per year. Those benefits would then be diminished by numerous parasitic losses, including battery and inverter inefficiencies. This battery costs at least $5,000 installed, which yields a simple payback period greater than 20 years. That’s longer than the expected lifetime of the battery. Few people are likely to find this application attractive, at least at current battery prices or at current TOU pricing levels and rules.
Residential Backup Power Will Go Forward
Residential backup batteries store power, either from the utility or from solar panels, to be used when utility power is unavailable. The Tesla Energy 10-kWh Powerwall battery, which is designed to be discharged weekly, is a good choice for this application (Figure 3). Tesla sells the battery for $3,500, but SolarCity offers it installed retail—including inverter—for $7,140.
The market for residential backup power isn’t huge, but it’s big enough to interest Tesla, which excels at marketing products to early adopters. According to the Wall Street Journal article A Sales Surge for Generator Maker, in 2012, about 2.5 percent of US homes had backup generators. At the time, this market was growing rapidly in the aftermath of Hurricane Sandy, so it’s probably even bigger today. The dominant product line in this market is a variety of small natural gas generators manufactured by Generac, a 50-year-old company with a solid record of innovating in this sector. The 16-kilowatt (kW) Generac generator available from Home Depot is priced similarly to the Powerwall. It sells retail for about $3,700, but installation adds a few thousand dollars. At first glance, the Generac product has quite a few advantages over the Powerwall.
For one, the generator provides much more power. When the Powerwall was originally introduced, it was specified to exhibit 2 kW of power, but Elon Musk recently announced that its capacity had been boosted to 5 kW. Even at the higher level, the Powerwall provides less than a third of the power that the generator does. That difference in power is associated with far more convenience. In a home powered by the generator, occupants can pretty much use any electrical device they choose, whenever they want. They can run the air conditioner, blow-dry their hair, use the microwave, and turn up the volume on their large-screen TV. Powerwall users have to be much more careful. No simultaneous air conditioning, hair drying, microwaving, and TV watching for them.
Secondly, the generator can supply far more energy than the Powerwall. At full power, the Powerwall can energize a home for two hours. The generator can operate indefinitely, as long as it’s in good working order and has a natural gas supply.
Despite these two advantages, I can see lots of people choosing the Powerwall over the generator. The battery is quieter. It’s also more reliable and requires little attention. Maintaining a generator takes a lot of time and diligence. Few homeowners have the time or patience for it. If small generators aren’t rigorously tested and maintained, when the big catastrophe occurs and the grid goes down, there’s a good chance they won’t immediately start humming away. With no moving parts, the Powerwall is far more likely to be functional in an emergency.
The Powerwall is certainly more attractive than the Generac. More than that, the Tesla name carries cachet. After dinner parties, Powerwall owners can take their guests and their cognacs downstairs and show off their battery. They’re much less likely to take their guests out into the backyard to show them their generator. Lastly, for those homeowners with both solar panels and a backup battery, during a grid emergency, when all their neighbors’ homes are dark, they can light up their own home using solar electricity generated by their own panels, at least for a few hours. How cool is that?
The Tesla Powerwall offers simplicity, reliability, and prestige. I anticipate many people will find those attributes compelling enough to overlook the energy and power advantages of generators. Although backup batteries are certainly not going to become as ubiquitous as toasters, I do expect Tesla to become a major competitor in this sector. Even more so, I expect the company will expand this market.
Demand Grows for Demand-Charge Management
Tesla Energy’s Powerpack product is designed for large-scale commodity markets and features a capacity of 100 kWh. Demand-charge management is one application the Powerpack is well suited for, but there many other battery products that can be used in this application as well. To reduce monthly demand charges, these batteries charge up during times of low demand and discharge during peak times, when monthly demand levels are set. Demand charges vary widely, from just a few dollars to more than $20 per kW-month (one kW-month is the price per kW per month). In some markets, such as California, utilities offer rates with multiple demand-charge periods that can be effectively added together to reach as much as $50 per kW-month.
Reducing demand charges requires more than a battery and power electronics. A facility also needs predictive software that knows when the building is on a trajectory to hit peak demand, as well as when it should start and stop injecting power into the electrical system. A few vendors offer such combined battery and software systems, including Stem, CODA Energy, and Green Charge Networks (Figure 4). And Tesla offers such systems through its partnership with EnerNOC.
The economics of these systems are approaching the point of acceptance in markets with high demand charges. Assuming a relatively high demand charge of about $20 per kW-month, the potential savings would be equal to about $240 per kW of battery capacity annually. In reality, a facility is not going to get all of those savings. Battery energy capacity is limited (typically one or two hours of discharge energy at full peak load) and the demand-anticipating software doesn’t work perfectly. Usually, such systems get about half the potential demand savings. There are also parasitic losses that need to be adjusted for, including battery roundtrip energy losses and inverter inefficiencies. Customers on TOU rates can overcome those losses and then some by buying electricity during low-priced off-peak periods and discharging it during on-peak periods. Sometimes customers make a little money this way, but such gains are tiny compared to the savings achieved via demand-charge reduction.
Given that the installed cost of these systems runs from about $1,000 to $4,000 per kW, purchasers at the lower end of this spectrum, who manage to get about $120 per kW per year of savings, would see their systems pay for themselves in about eight years. Such economic calculations are likely to produce more-attractive results in places like California and New York, where state and local utilities collaborate to offer incentives. Realistically, the results will improve everywhere as the cost of batteries continues to decrease (see my blog posting Utilities, Cheap Batteries Won’t Hurt You. You Have Much Worse Things to Worry About. Part I: Assault and Battery for more on this subject). Also, some vendors are forging partnerships with auto manufacturers to give a second life to used electric vehicle power packs.
With its high demand charges and state incentives, California is an excellent market for demand-charge management systems. There, several battery manufacturers offer no-money-down financing. As battery prices decline, look for these vendors to expand their operations to other states.
Utilities Will Utilize the Most Batteries
Utilities use large-scale batteries for a wide variety of applications, such as shifting excess supply to times of higher demand, regulating frequency, supporting voltage, deferring transmission and distribution upgrades, and relieving congestion. Although many electric storage products are available to utilities, lithium-ion batteries are becoming more popular.
Well suited to being grouped into banks of tens or hundreds of units, the Tesla Powerpack battery is competitive for grid-scale markets. Tesla sells the Powerpack batteries for $250 per kW, but with associated power electronics and installation costs, the batteries will probably cost at least $500 to $1,000 per kW installed. According to Sandia National Laboratories, the least expensive technology for grid-scale storage is hot thermal storage, at about $110 to $300 per kW (Figure 5). One of the most popular technologies for grid-scale storage is pumped hydro, which comes in at $1,800 to $2,200 per kW. Cavern compressed air, another utility classic, is pegged by Sandia at $700 to $1,300 per kW. If Tesla can actually deliver batteries at an installed price of $1,000 per kW or less, it has a good chance of competing in this market.
Grid-scale storage is a commodity business, and Tesla, which until now has sold premium products to early adopters, will have to demonstrate that it can compete in this sphere. Judging from the partnerships the company has forged so far—including agreements with Southern California Edison, AES, and Oncor—it seems the company is well on its way to building the capabilities needed to compete for utility sales. Indeed, on a revenue basis, it appears that utilities are going to be Tesla’s biggest battery customers. Tesla chief technical officer JB Straubel estimates that about 70 percent of the billion dollars of battery reservations Tesla has taken so far are for the Powerpack industrial-sized battery that utilities will use for grid-scale systems.
As with so many things associated with Tesla, gearing up for this business is requiring the company to make huge investments. It remains to be seen whether Tesla can produce stationary batteries at a high volume and do so profitably.