Battery installations to supplement rooftop solar systems “behind the meter” are a growing market in the United States. They accounted for 20% of the annual US energy storage market in 2016 and are expected to reach 52% by 2022. Such batteries were not considered economic as recently as a couple years ago. What has changed? Where is the growth? Two energy storage leaders who are on the Global Cleantech 100 list for 2017, and a provider of behind-the-meter ice battery storage that has customers in more than 40 US utility service territories, discussed these and other questions at the Infocast Storage Week conference in Oakland, California in late February.
The panelists are Jon Fortune, senior director of product strategy and market development at Sunverge Energy, Mike Hopkins, CEO of Ice Energy, and Ryan Wartena, co-founder of Growing Energy Labs. The moderator is Shellka Arora with Chadbourne in New York.
MS. ARORA: How big is the residential-solar-plus-storage market in the United States, and how does that market compare to other countries, including Germany and Japan?
MR. FORTUNE: Residential energy storage is the fastest growing energy market segment in the United States. Greentech Media suggests the market will be 200 megawatts a year by 2019 and around 600 megawatts by 2021.
Demand for storage hinges on rate structures. A lot of places outside the United States do not have time-of-use rate structures for residential customers that are an inducement to add storage. Germany, for instance, uses battery storage predominately as a back-up solution. Each market is different.
MR. WARTENA: It is hard to talk about the numbers at this stage because the landscape is changing rapidly. We are starting to see governments in Japan, the Czech Republic and the United Kingdom allow energy storage to qualify for the same subsidies that apply to the solar systems when storage is added to solar.
Australia and New Zealand have hundreds of thousands of small solar systems that run $6,000 to $10,000 in cost on homes, but only hundreds of battery systems. There have not been that many hardware sets. Most were initially built for Germany. Now we are starting to see LG Chem, Tesla and others move into the market down under. While the equipment remains in relatively short supply, everything is converging at the same time.
I think 2017 will be a big year for residential solar and storage. We will see people who have existing solar systems adding batteries and people with lead-acid backup replacing those with lithium-ion.
MS. ARORA: Mike Hopkins, what do you say about the numbers?
MR. HOPKINS: The residential load, after commercial, has always been the largest part of load for pretty much every utility. The problems that the utilities have managing their grids are overwhelmingly residential load problems and not commercial. That is probably because residential load is not as well-managed as commercial load.
This means that the residential load is by far the biggest opportunity for solar, but when solar penetrates residential loads, it creates a new problem for the grids, one of which is the duck-curve problem.
We have reached the point in markets, like Hawaii, with high residential solar penetration where everything has come to a head and something has to give: either there will be a moratorium on new solar installations or there has to be a breakthrough of storage.
MS. ARORA: Is everyone in the residential market using lithium-ion batteries? Are flow batteries limited to industrial applications?
MR. WARTENA: We should see both lithium-ion and lead-acid batteries in the residential market. Flow batteries in the residential segment are a bit of a stretch. Safety is a big concern.
MR. FORTUNE: Let’s emphasize the last point. Customer safety at homes is a critical issue, especially where storage systems are being aggregated by utilities. The fire hazard is on everyone’s mind. Safety is critical.
MR. HOPKINS: I think one has to be creative when thinking about storage for residential use. It is naïve and unrealistic to think that we are going to have a single storage solution for an entire home and that the solution in every case is some kind of chemical battery. I am sure we will get there eventually, but we are not there today. We have chemical batteries, but they are very expensive. It makes no sense today to size them for the whole home given their cost.
We need to think today about taking advantage of different ways of storing energy, including thermal, and think on a portfolio basis. You see that in the commercial and industrial market where the most economic storage solutions are actually portfolios. There is more than one form of energy storage for the same building. The different forms of storage do different functions optimally. Flow batteries do not really compete with lithium-ion, and lithium-ion does not compete with thermal. They do storage in a different way for a different purpose. If you take that portfolio approach, then you get a much more realistic near-term solution that is cost effective and reliable.
MS. ARORA: Does a portfolio approach make sense for residential applications?
MR. HOPKINS: Generally speaking, no. Nevertheless, the portfolio approach is a great business for companies wanting to serve residential load, and I have seen it work in places. For example, in Hawaii, solar companies are interested in diversifying into multiple services for the home. A portfolio approach for the home — making the home not independent but an optimal load — is a good business in Hawaii.
MR. WARTENA: There are two sides to the residential solar equation. One is the residential load problem, and the other is the customer. The customer is usually focused on the experience and not the economics. You cannot go to a customer with just solar and storage. We are seeing a path forward where the customer first wants the ability to monitor its energy consumption, then take some easy efficiency measures, then maybe connect the hot water heater, and then do solar and storage and put in a charger for an electric vehicle, in that order. Both the energy efficiency companies and the solar companies are diversifying. They are doing hot water heaters and electric vehicle chargers and developing ways to wrap all this together for the customer.
MR. FORTUNE: The dominant delivery channel for residential customers varies from market to market.
In California, the dominant customer outreach comes from solar and other service companies, but in markets like Australia, you have retail utilities that are concerned not merely about supplying electricity, but also about broadening their reach into other services. There may be debate about how customers perceive monopoly service providers like the utilities. The bottom line is that homeowners really do not want to spend a lot of time thinking about this stuff. They want to save money on their electricity bills, and they want convenience. Capital investment is a huge problem for homeowners. The markets are evolving to attract homeowners to varying solutions. It will be interesting to see how the various types of service providers — regulated utilities, solar rooftop companies, roofers and energy efficiency specialists — vying to win over these customers with efficiency measures will fare in the competition.
MS. ARORA: How do customers distinguish Tesla’s Powerwall from Sunverge’s solutions to Geli’s solutions?
MR. FORTUNE: Let me start with this. I promise you I will not say Sunverge is the solution you want to select.
MR. WARTENA: You just did. [Laughter.]
MR. FORTUNE: Homeowners tend to fall into three buckets. The first is homeowners who want the fastest economic return. The second is homeowners with limited budgets looking for capital efficiency. The third is homeowners wanting to eliminate their electricity bills.
While there are a lot of ways to acquire customers, it is all about clean and concise marketing and financing packages. You need a clear offer to the customer, with an easy-to-follow description of savings and reliability, because homeowners could not care less about the mechanics and the math involved. The complications associated with programming batteries to optimize time-of-use rates and aggregation opportunities will happen behind the scenes.
MR. WARTENA: Half the value of residential solar plus storage over the first 10 years is in energy savings to homeowners, and the other half is in the relationship the homeowner has with its utility: in deferral, in demand response and in aggregation of systems. Nailing the utility half is key to getting into the residential market.
MR. HOPKINS: Marketing is a function of solar penetration. In Hawaii, where there is very high solar penetration, there is an extreme awareness of the need for energy storage that would not be true of residential customers elsewhere. Hawaiians are painfully aware because they are now under a self-supply regime instead of net metering, and they have lost 40% of the value in what they are generating. It is a different market than on the mainland, but I think it is the market of the future.
MS. ARORA: Is residential storage currently economic anywhere besides Hawaii, and is my assumption correct that it is already economic in Hawaii?
MR. HOPKINS: I can speak about Hawaii. Some types of storage are already economic in Hawaii. At $200 dollars a kilowatt hour, it is economic for a homeowner to add storage to a solar rooftop system, but we are talking thermal storage rather than lithium-ion batteries, as the latter do not pencil out in cost right now, plus the homeowner must view storage as a long-term investment rather than something that produces a quick payback.
MR. WARTENA: On that topic, anyone who has not seen a NOVA special on PBS called Search for the Superbattery should watch it. It is super cool. [Laughter.]
MR. FORTUNE: My view is the economics work currently in Hawaii. We have less than 10-year paybacks in Hawaii. You cannot fail to have good paybacks with electricity costing 45¢ a KWh.
The future, as we are seeing it evolve in California, is time-of-use rates and big price spreads between rates at different times of the day. In places where the price spread is 15¢ to 20¢ a KWh between peak and off peak rates, storage has a big effect on a customer’s utility bill.
The challenge in California is we have different winter and summer rates, and if your peak periods are any wider than four or five hours, then you start to accrue more cost because you are going to consume more energy during peak periods. The point is there are ideal cases for how time-of-use rates fit with energy storage, and such a wide band may not work.
There are also places where it is advantageous to have a larger storage system. For example, with one of the time-of-use rates in the Southern California Edison territory coupled with the new self-generation incentives, having a 20-KWh battery provides a better return on your investment than having a 12-KWh battery.
We are seeing positive return on investment within the warranted period of the product in a lot of markets: certainly in Australia, New York, California, Hawaii and Arizona.
This is a big year for storage, specifically in California where the new residential incentives are a game changer. In the past, incentives were available, but those incentives got sucked up by the commercial and industrial market, and now we have incentives carved out for energy storage projects smaller than 10 kilowatts. We are going to see higher storage adoption in California than we seen in other places.
In Hawaii, storage is a requirement if you want to go bigger than offsetting 20% of your energy with a small PV system.
Higher adoption rates for storage in California and Hawaii will increase customer and brand awareness, which Tesla proved is critically important to market viability. I think utilities are also becoming more aware and interested in residential storage.
MS. ARORA: Weren’t time-of-use rates optional until recently for residential customers in California?
MR. FORTUNE: Yes. I think customers across all states will see wider adoption of time-of use rates as technologies enable people to not to have think about them.
MR. HOPKINS: Rates and rebates are beginning to reflect the real world, and that is good for energy storage and solar. In the real world, energy does not have a flat value or a flat cost but, historically that is how ratemaking has been done with residential customers. As the market moves toward time-of-use rates, which is still not truly real world, they are more reflective of real world.
The self-generation incentive program in California — called SGIP — is a good program in terms of correctly capturing approximately the value that utility customers provide the rest of the grid when they invest in technologies that are good for the rest of the grid.
When you have both time-of-use rates and SGIP together, then you have utility customers being properly rewarded for good behavior or properly penalized for bad behavior.
I do not view them as subsidies or incentives. You are merely giving the right economic signals.
MR. WARTENA: Let us take rate structures to the limit. What is the limit? The limit would be exposing residential customers to real-time market prices. We are seeing that in Kentucky, Australia and New Zealand.
Utilities are figuring out how to get into distributed energy, and they are redefining the relationships with the customers.
MR. FORTUNE: Coming back to time-of-use rates, Hawaii lowered the value of solar during daytime periods in exchange for shifting the peak price. The off-peak price is higher than the daytime price because Hawaii has so much renewable capacity.
A static price structure that has high price periods from 2 pm to 8 pm is not a given under all circumstances in the future. There are places that are creating day-ahead dynamic hourly price signals for residential customers. San Diego Gas & Electric is enabling integration projects by providing locational price signals for electric vehicle charging. They are combining demand and distribution costs within a single energy price.
MS. ARORA: Does net metering discourage installation of batteries?
MR. HOPKINS: Net metering has been an important part of incentivizing adoption of solar, but it is a short-term phenomenon because, as solar adoption grows, you will lose net metering because the utility will not be able physically to handle the solar over generation. The utility will do what Hawaii has done. It will go from net metering, which is subsidization, to self-supply, which is recognition that once you have over generation, net metering does not have a positive value at all. It has a negative value.
MR. FORTUNE: Customers in Hawaii have time-of-use rates, but they do not have hourly residential customer profiles that one can download and determine the right system size. Smart meters are important. They provide hourly profiles for each homeowner. This is important to determining the economic value proposition with time-of-use rates. It is challenging, without smart meters, in Hawaii to determine the economic value proposition of installing a battery.
MS. ARORA: What are your thoughts about the approaches that different utilities are taking? Some are worried about grid defection while others, like Hawaii, which has the self-supply program, and Green Mountain Power, which is offering Tesla batteries for either leasing or owning, are trying to capture new opportunities?
MR. HOPKINS: Within the United States, there is a complete spectrum from attempts to prevent home solar installations, at least owned by the homeowner, all the way to strong encouragement and everything in between. Even where there are efforts to slow down solar, the declining cost and popularity of solar mean it spreads everywhere. Even in states that are not ideal in terms of sunlight, it is just going to happen, and all we are talking about is the rate at which it happens. Another reality is that, as solar gains greater market penetration, the continuation of net metering becomes unrealistic. Net metering is just a form of storage, and there will have to be local storage solutions.
MS. ARORA: Jon Fortune, can you speak about different business models?
MR. FORTUNE: In any given market, there is not going to be a single business model. The challenge today is that without utility ownership or involvement, market mechanisms have not matured enough to all small-scale resources to capture the full value streams. That will change over time. The different business models — from a partial-ownership structure to customers buying systems outright to solar providers providing financing with no ownership by customers — are designed mainly to get customers to sign. The models will co-exist but evolve over time as we get smarter about which business models work in which markets with which customers.
MS. ARORA: How are batteries being added to existing systems? How does it affect the economics for the solar companies?
MR. FORTUNE: The federal investment tax credit is important. Putting batteries in existing solar systems is economically challenging. We are seeing that solar companies are very interested in having storage as an asset, longer term, and having it be a separate asset from the solar system. It is easier from a bankability standpoint to treat the devices as separate and allow the storage device to charge from the solar and dispatch.
MR. HOPKINS: Utility procurements have changed. All of our contracts with utilities until two years ago were product purchases. Now all of our business is power purchase agreements, which is a good thing. There is a lot of appetite for investors to invest in projects with 10- to 20-year power purchase agreements with utility credit. Such contracts support the scale in which utilities are interested today.