Reshaping the Energy Business

n April 30, 2015, Elon Musk, CEO of Tesla Motors introduced their new rechargeable lithium-ion battery systems for homes, businesses and utilities. Before looking into its technical merit and commercial viability, most in media went into a frenzy, on how this battery system will change the world. It will "kill the local power company", some said; it will "kill nuclear power", others said. In the context of this world altering event, some rational analysis of this new system is required to provide some perspective.

Tesla Energy (a part of Tesla Motors) introduced the Powerwall battery system for home applications which will be available in two configurations: a 10 kWh version, optimized for backup applications at a price of $3,500 and a 7 kWh version for daily use at a price of $3,000. The units measure about 3 feet by 4 feet by 6 inches and include an integrated heat management system and can fit either on the inside or outside of the wall of a home. The Powerwall units can be stacked to provide up to 90kWh of power. Tesla also introduced a higher power version, the Powerpack unit, for businesses that require 100kWh or higher power and offer infinite scalability for larger commercial facilities.

According to Tesla, there are three ways this battery system can be used to benefit its users:

First, by using it as a storage system for the excess energy developed by solar panels which would use this stored energy at night when solar energy is not available and is designed to be used in conjunction with rooftop solar. One of its main benefits offered is this application will reduce the need for utility power, especially if it is generated by polluting, non-renewable fossil fuel technology. This use will reduce the need for additional power plants, thus helping in the reduction of greenhouse gases. In short, the system is designed to keep the planet green. Elon Musk is also chairman of SolarCity, the largest provider of solar power is the US. Tesla battery and SolarCity's products will be complementary. A smart business move by Mr. Musk.

Second, by load shifting which involves charging the battery during off-peak hours when electricity rates are low, and then using this stored energy during day time, when the electricity rates are higher. Consumers would have significant savings, due to the rate differential. According to CNNMoney, in California, the peak day time rate is 35¢ per kWh and 8¢ during off peak hours. Kimbal Musk, Elon's brother and a Tesla board member, in an interview with CNNMoney's Cristina Alesci, mentioned that the new battery could slash consumers’ electricity bills by 25% by using it smartly. But some analysts see a "flaw" in this argument because of the way the rates are structured in the United States. Utilities already "buy" the excess electricity generated by solar panels during daytime at a higher price and then sell it back to the consumer at night at lower rates. The incentive that works for Tesla's business model has been already established by the utilities. Brian Warshay, an analyst for Bloomberg New Energy Finance, told HuffPost, "... It only makes sense for storage if it’s more expensive to buy electricity at night and sell it back during the day...”. However, such reversal of the established electricity rates, for the benefit of an industry, is not possible in the US. In addition, the renewable energy's business model is based on support from the respective governments' policies at the time, which can be whimsical and change their directions based on the political winds.

Third, the system would be used as backup during the electricity outage. This is a valid argument for installing Tesla batteries, but most industrial critical systems such as computers and other equipment can have relatively inexpensive UPSs as backups.

Now that this long awaited battery system is announced, will it be widely accepted? Though the battery system does work with utility power however, to be truly effective, it needs to be used in the context of solar energy. According to Solar Energy Industries Association (SEIA), there will be significant growth in solar installation in the next two years, mostly coming from residential and utility installations. But still, the overall solar power generation in the US accounted for less than 0.5% of the total electricity as of February 2015. So on one hand, Tesla Energy has some way to go before being a force in the market place, but on the other, significant opportunities exist due to the infancy of the marketplace. SEIA also states that, "...however, without congressional action, the upcoming expiration and reduction of the Investment Tax Credit is expected to lead a 57% decline of installed solar capacity in 2017..."

Tesla Battery System looks attractive because it will lower electricity bills, provide some back-up in the event of power failure and most important, reduce the dependence on the "hated", planet polluting utility. Though some wild-eyed people think that this system will "eliminate" the need for the utility power, a serious analysis suggests this to be not the case. In the US, electricity is fairly stable and inexpensive in most areas.

As usual, the overall price of the system will determine the success of this system after the initial enthusiasm has waned. Various types of cost-benefit analyses on these batteries are available, but a serious comparison is difficult due to assumptions and advocacy as well as their validity and purpose. In general, the benchmark in the US is an electricity rate of 12¢ per kWh on average. The system becomes economical for the individuals who pay higher rates and uneconomical who pay less. As Tesla gears up its gigantic battery factory in Nevada, known as Gigafactory, the prices for the battery are expected to decline.

The reason Tesla's new home battery will change the way we use electricity is "Elon Musk", the celebrity entrepreneur of Silicon Valley. Elon Musk is one of the most famous living entrepreneurs in the world today, as he has successfully launched companies as diverse as PayPal, Tesla Motors, SpaceX and now Tesla Energy. Elon Musk may not be the first person to make storage batteries and their connection to the solar power generation, but he is the most famous. Currently there are few other companies, including Samsung and Swiss-based Alevo, who have storage batteries for home use, but none have the starpower of Elon Musk. Most of the time it is not important who first developed the technology or the product, but who has the starpower of personality, charisma and sheer willpower to convince masses to adopt this new technology to make the world better. The late Steve Jobs was such person. He (or Apple) did not invent the Internet or the mobile phone, but made the iPhones ubiquitous and in the process, changed the way we communicate and access information. Like Steve Jobs, Elon Musk has brilliance, charisma and a strong personality. He has made it his mission to change the way we use electricity available reliably by the sun. He plans to reshape our thinking about electricity generation and its use with a combination of solar energy and a battery.

Time will tell.

Provided by Mohan Mankikar, President, Micro-Tech Consultants

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