Elon Musk has done something remarkable. He built a 220-pound battery to hang on the garage wall and convinced a huge number of people that owning one is a lifestyle choice—like having a compost bin in the garden and reusable diapers on the baby. His battery is personal, and it's going to change the world with your help.
If only it were so. While the pairing of home batteries with solar power makes deeply intuitive sense, the problem is that it doesn’t make financial sense. Not now, not anytime soon, and definitely not in the U.S. I first wrote about the issue just after the high-profile launch, arguing that interest in Tesla's consumer-oriented Powerwall batteries wouldn't be based on sound financial reasoning. When Musk was asked about my findings in his earnings call with analysts, the Tesla chief executive offered this reply: "That doesn't mean people won't buy it."
That's true. Initial interest, by all accounts, has been off the hook. All that attention is giving a boost to Tesla's more important, if less discussed, Powerpack batteries designed for businesses and utilities—a product with truly disruptive potential.
But if you care about Tesla because you care about the future of clean energy, then the question of whether a solution makes financial sense is the only one that matters. Wind and solar power are at a major turning point precisely because they're now as cheap or cheaper than fossil fuels in many areas of the world. Initial demand for Tesla’s home batteries—38,000 queries in the first week—may seem like a great start, but even in the best-case scenario those orders would take more than a year to fill and would amount to a fraction of power generated from a single fossil-fuel power plant. To “fundamentally change the way the world uses energy,” as Musk puts it, the scale must be much, much bigger.
The impediments are huge. In the U.S.—a power-hungry market with the most potential for impact—any homeowner hoping to use Musk’s batteries to gain independence from the grid is in for a surprise. For the average U.S. home to rely solely on solar panels and Tesla's new batteries, the complete system would cost roughly $98,000, according to analysis by Bloomberg New Energy Finance. Even that glum assessment assumes a house in a sunny region such as Southern California.
So defection from the electrical grid will remain well out of reach for most Americans, and even those who manage the feat will waste a lot of capacity thanks to solar panels and batteries that are rarely used to their full potential.
Why Waiting for Second-Generation Batteries Won't Help
Many observers have compared the introduction of the Tesla Powerwall to a sort of iPhone moment for home batteries. It doesn’t matter if the Powerwall makes financial sense this time around, the argument goes, the early adopters will be wealthy and immune to the weak economics. The next generation of even cheaper batteries will entice the masses.
There are two problems with this reasoning. First, for all its sleek tech beauty—and the Powerwall really is a piece of engineering art—a battery isn’t a gadget to fall in love with like an iPhone, Kindle, or car. Once you plug it in, if all goes well, you’ll never need to touch your home battery again. In the case of garage infrastructure, beautiful design isn't enough to drive massive consumer behavior.
The second problem is the way utilities are currently set up in the U.S. No matter how cheap prices get, batteries won't be the easiest or the cheapest way to take advantage of solar power. For the vast majority of customers, it’s better to use the electric grid as your battery: Consume the solar power you need as it’s being produced, and then sell the rest back to the grid.
“The battery-in-every-home idea—not only do I think it doesn’t make economic sense, I don’t think it’s necessary,” said Brian Warshay, an analyst at Bloomberg New Energy Finance. “Having a centralized grid is incredibly useful and incredibly efficient.”
The noble home battery user wants independence from the grid, but a more sensible approach would be to pair rooftop panels with batteries designed to extend some solar power into the peak evening hours of electricity demand. When the battery is depleted, the homeowner would switch over to grid power. That's an idea that Tesla has been promoting: Save money by modestly extending the benefits of solar power with help from a battery.
The problem is that this kind of energy "load shifting" doesn’t save a penny for most U.S. customers, regardless of the cost of the batteries. Blame a policy known as net metering, explained in more detail below. Even in more favorable markets like Germany, the total cost for buying and installing a home battery would have to drop by almost two-thirds before load shifting would be cheaper than running rooftop panels without any batteries, according to analysis by BNEF. Tesla sees Germany and Australia as the biggest initial markets for daily-use batteries.
Powerwalls in America Will Be a Sliver of Tesla's Battery Business
Here are the two biggest policies holding back the Powerwall:
1. Net metering is a double-edged sword
The biggest de facto subsidy for U.S. solar power comes from net metering policies, which allow people with rooftop solar to sell their excess electricity back to the grid at retail rates. That helps make solar power profitable at home while creating a huge disincentive for batteries. Why store excess power when it can be sold back to the grid?
As long as net metering exists, there's no financial case for batteries, even in places with very high electricity prices. The policy of net metering means just 3 percent of U.S. solar customers will buy batteries, according to Barclays analyst Brian Johnson. Net metering will be even more important to solar when U.S. tax credits are phased out at the end of 2016.
There are 44 states with net metering policies. At least 12 states are weighing legal disputes against the rules, according to BNEF. If net metering goes away in states with expensive electricity, such as Hawaii, the argument for pairing solar with home battery storage will improve. But that's a double-edged sword. Without the ability to sell the excess power, rooftop solar itself becomes significantly less attractive.
Net metering isn’t common outside the U.S. Most other countries prefer so-called feed-in tariffs, which often guarantee customers a rate for their solar power that's lower than the retail price of electricity. That makes batteries more cost-competitive, although not by enough.
2. Time-of-use pricing, great in theory
Tesla’s lithium-ion Powerwall batteries have some advantages over other forms of backup electricity for when the power goes out. They are quiet and clean, can be stored indoors or outside, and can be stacked together to provide uninterrupted power with less maintenance than cheaper lead-acid batteries.
But most of the buzz around the Powerwall has been about the economic and environmental benefits of batteries designed for daily use. Tesla’s website stresses “independence from the utility grid” and “solar powered day and night.” If those are the goals, the Powerwall is a very expensive option.
Here's Tesla's most prominent financial argument for the Powerwall:
This is known as “peak shaving,” another way to describe the load-shifting strategy discussed above. It makes great financial sense for companies in California, where extra charges during peak hours can account for as much as half of a company's electric bill. But less than 1 percent of U.S. households are charged by time of use, according to a BNEF analysis. Everyone else pays the same rate for electricity 24 hours a day, so batteries are irrelevant.
Even where time-of-use pricing is the norm—Italy and the Canadian province of Ontario, for example—the difference between peak rates and off-peak rates isn’t big enough to justify home batteries, according to BNEF's Warshay.
Some large U.S. utilities and state governments are expanding time-of-use charges, which could change consumer behavior and encourage greater use of home batteries. California, for example, passed a law that will allow utilities to mandate time-of-use pricing for their customers beginning in 2018.
Still, there are cheaper ways of shifting demand than buying batteries: delaying use of dishwashers and washing machines until later at night, or switching to smart thermostats that do things like pre-cooling the house during summer off-peak hours.
So Why Is Tesla Doing It?
The Powerwall doesn’t yet make economic sense for customers. That doesn’t mean it won’t be a winner for Tesla.
Since mid-2013, more than 16,000 home batteries have been purchased in Germany, according to BNEF research, and at prices higher than the Powerwall. Additional markets will emerge as electricity prices rise and battery prices fall. In the U.S., Tesla's batteries are likely to remain a plaything for the rich, but that too can be a considerable market. Deployment of home batteries also offers a bit of assurance to the rooftop solar industry in case net-metering policies are overturned.
Sales of the Powerwall to homeowners might prove less important than the branding boost the products can yield for Tesla’s larger Powerpack batteries for businesses and utilities. The commercial market makes financial sense and has the potential to improve the efficiency and reliability of the power grid. In the first week, Tesla reported “reservations” for its utility-scale Powerpack batteries valued at $625 million, although the company declined to provide details on what constitutes a “reservation.”
Finally, the batteries help justify Tesla's $5 billion battery factory under construction in Nevada. The new products lower the cost of car batteries through scale and buy Tesla time from investors who are anxious over Elon Musk's "eye-watering" spending on new projects. The flashy new Powerwall makes perfect economic sense for Tesla, even if it doesn't for the average consumer.
“The Powerwall is not a system, or a configuration, or a ‘storage solution,’ ” says BNEF analyst Nathaniel Bullard. “It is a product. Named, recognizable, iconic, attractive, desirable, unnecessary.”
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