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Tuesday, July 7, 2015

Tesla Is Betting on Solar, Not Just Batteries 07-07

Tesla Is Betting on Solar, Not Just Batteries

Tesla’s Powerwall storage system is not a radical innovation, and it is not the first battery for energy storage on the market. But, as Elon Musk surely understands, it is not always the best technology that wins the innovation race. Rather, it’s often the one that best fits with existing dominant technologies, so that the success of the two becomes interrelated. And the Powerwall is the first battery on the market to provide a solution to solar energy storage that is simple to use, easy to install, relatively inexpensive to maintain, and more aesthetically appealing than existing home batteries and storage systems, such as small diesel generators. Powerwall therefore has all the characteristics needed to succeed in this market. At least as long as the technology it is tethering itself to – solar – succeeds as well.

The advantage of Powerwall will be greater for households and business customers who have already installed solar panels and perhaps own a Tesla electric vehicle. It would allow energy produced during the day to be stored for use in the evening and early morning (including for vehicle charging). This technical interdependence with solar is something that Elon Musk, the CEO of Tesla and chairperson of SolarCity, is trying to exploit by working in close collaboration with his cousin Lyndon Rive, CEO of SolarCity, the largest rooftop solar installer the US. In this way, Tesla’s batteries could become associated with an established technology (solar power) so that the two technologies start spreading together, ultimately becoming a new technical standard adopted by the majority of households and businesses.

To support this strategy and to encourage adoption, both companies have planned not only to work together but to scale up their activities in order to control costs and make solar more affordable to their customers: Tesla has announced the opening of a $5b Nevada plant, jointly with Panasonic, and SolarCity has announced the same strategy for the large scale production of solar panels in Buffalo, New York state. SolarCity’s effort, alongside the heavily subsidized production of rooftop solar from China, will help to make the energy source more affordable, meaning there will be more demand for storage solutions like the Powerwall.

Despite the potential benefits generated by the complementarities and the technological interdependency with solar power, Tesla’s Powerwall strategy includes risks. The company may become critically dependent on the successful development of solar power, but is solar worth the bet?

In recent years, solar has been part of an increasing trend together with other renewable sources such as wind, hydro, and nuclear. However, whether solar has won the battle against alternative clean energy technologies and against fossil fuel is still highly debatable. Despite the rapid price reduction of solar panels, newly available, increasingly affordable shale gas has reduced dependence on crude oil, leading to a significant drop in both demand and price of other fossil fuels such as coal. This might slow down the uptake of alternative energy sources. In short, the shale gas revolution has introduced significant uncertainty into the future energy scenario and the adoption of solar technology is not immune from it.

Of course, the success of solar is not the only factor that will determine the Powerwall’s success. Powerwall batteries are also subject to the uncertainty about their performance in comparison with other battery technologies, and it is also possible that technological advances that could make its components obsolete.

Tesla will also have to contend with government incentives designed to spur the adoption of solar power. Net metering policies in most US states let homeowners sell excess electricity back to the utilities. In the states that adopt such regulation, the advantage of using Powerwall for storage purposes will depend on the difference between the profit consumers can make by selling energy to the grid at subsidized prices during day time and the savings that come from avoiding having to buy from the grid at night time. If energy can be sold back to the grid at a high price, it will be more attractive than energy storage for homeowners with rooftop solar. That is the reason why the 7KWh battery (priced at $3000 by Tesla) is not going to be offered by SolarCity.

Still, there are clear advantages for Tesla in entering the market for batteries for domestic and commercial energy storage. It allows Tesla to further capitalize on its knowledge and competences developed in automotive batteries for electric vehicles.

The battle for the domestic storage market has only just started and Tesla has selected a powerful ally in the solar photovoltaic (PV) sector, but both technologies are vulnerable to threats from within and outside their industry, and the reliance on solar’s success might prove a risky bet for Powerwall’s future dominance of the market for storage systems.

Should solar not become the future, Tesla’s Powerwall line won’t necessarily be doomed. 
The company might just have to pay a conversion price to fit within new standards. 

However, should it be successful, Elon Musk would not only benefit from the sales of Powerwall (and indirectly from the sales of PV produced in Buffalo by the company he is chairman of) but also from increased sales of Tesla’s own electric vehicles, the company’s core product. The latter would benefit from an easy to use recharging facility, zero emissions, and possibly a cheaper alternative to the pump. As to the question whether solar is worth the bet, overall the answer for Musk seems to be at least in the short run that it is.