What Business Model Will Succeed in Energy Storage?
As the cost of batteries, fuel cells, and renewable energy more broadly come down, it’s becoming clear that energy storage will be a big business in the future. It can smooth out the variability inherent with wind and solar, provide valuable services to the grid, and move cheap renewable energy created during the day to hours when it’s most needed.
It’s becoming more clear that energy storage will be valuable, like wind and solar energy a decade ago. What’s not yet clear, though, is the answer as to how energy storage will generate value for investors. Creating a business model that can exploit the advantages of energy storage to make money will be key. And the industry may be perilous for those on the bleeding edge.
Where energy storage has value
Generally, we know where energy storage has value. Rocky Mountain Institute has defined 13 value drivers from energy storage, including self consumption of solar, backup power, and energy arbitrage (lowering electricity consumption during high cost times and moving it to low cost times). These are the items Tesla (NASDAQ:TSLA), Sunrun (NASDAQ:RUN), and SunPower (NASDAQ:SPWR) have used to justify a lot of the limited amount of energy storage that’s been installed today, but those businesses are essentially in pilot mode.
If the chart above is correct, the bigger sources of value may come from the utility side of the ledger. Transmission congestion relief and distribution investment deferral are two of the most valuable uses of energy storage, but they’re driven by utility needs and go through regulators. For developers, you can’t just build a battery and bid it into the open market without regulators driving the utility to buy services from you.
There’s value from energy storage for the entire grid, from utility to customer, that much is clear. The question is, who pays for this value and how? Here’s a few viable options.
Value to the home and businesses
Looking at energy storage from the customer side, the justification will be all about cost reductions. For homeowners, that may be energy arbitrage in states like Hawaii and now California. Commercial customers can justify energy storage through reducing demand charges, a fee the utility charges based on peak demand even if it’s only for 15 minutes per month. These are both ways to lower payments to the utility, which has caused utilities across the country to change rate structures to stem the loss of customer electricity demand.
A potential way forward would be utilities finding a way to build rate structures that allow customers to install solar and energy storage on site, but still incorporate into the grid. This would keep people tied to the grid and create a win-win situation. But finding a solution that works for everyone won’t be easy.
Utilities see energy storage differently
To understand how a utility sees energy storage you have to go back to a utility’s business model. A utility’s incentive is to grow electricity consumption and increase their asset base from which to charge customers. That means they have incentive to keep customers from owning energy storage and would rather own storage assets themselves.
The problem for utilities is if they push back too hard against customers owning energy storage, the more they’ll push companies to develop business models to make energy storage economical. This could even push residential customers to eventually leave the grid and commercial customers to find alternatives to buying electricity from the traditional utility, something that’s already taking place in Nevada. So, utilities will want to create rate structures that allow them to partner with renewables, energy storage, and customers. This may be easier said than done and there’s no easy answer to how utilities should react to energy storage.